Parties gear up for two-stage Budget in election year

The next Chancellor?

The 24 March Budget statement may be the first of two this year, advisers warn.

The Chancellor's speech is expected to be used as a political soapbox by the Labour government before imposing tax rises in a post-election Budget.

Should there be a power shift after the general election, expected in early May, an emergency Budget may be called in July by an incoming government to address any booby-traps left by the current Labour administration.

The Conservatives are marginally in pole position, but advisers agree whichever party is elected, tax rises are inevitable in the second Budget.

The next government will need to shrink the national deficit and the obvious
solution, alongside cutting public spending, is to raise the tax take.

Stephen Herring, BDO’s Senior Tax Partner said: "I fear that the March 2010 Budget is bound to be more about ‘Punch ‘n’ Judy’ politics rather than important fiscal reforms.

"Sadly, it is almost unavoidable that taxes will rise after the election, in addition to cuts in government spending, irrespective of the outcome."

PwC said this week that additional tax hikes of £20bn, over and above current plans, would be required by 2013/14 to close the fiscal gap, in effect accusing the Treasury of looking through rose-tinted spectacles. An increase in VAT to 20% would raise £12bn a year, according to George Bull, national head of tax at Baker Tilly.

The 50% top rate of tax is introduced next month and advisers have said the gulf between the 18% flat rate of capital gains tax may be shortened. “CGT could go to 25%,” said Mike Warburton tax partner at Grant Thornton.

Bull expects that CGT was “most unlikely” to go all the way to 50%. He does, however, believe anti-avoidance measures will be introduced as a deterrent. But the government’s Targeted Anti-Avoidance rules, despite their name, were more of a “scattergun than a sniper’s rifle”, Bull warned.

In the wake of the Arctic Systems case, new income shifting rules – set to be unveiled in 2009 – were put on ice because of the recession. HMRC failed to convince judges that dividends from a spouse’s company were taxable as part of their income. However this may be revisited.

“If we are out of the ­recession will AIS (Anti-Income Shifting) raise its
head again?” said Baker Tilly.

On the corporate side, HMRC has enjoyed major dispute wins in and out of the courts. It closed one loophole retrospectively, a move which put £1bn into its coffers, and more anti-avoidance measures are forecast.

The Franked Investment Income case saw judges side with the taxman and not with major businesses on how dividends to UK companies from overseas businesses are taxed, saving HMRC a reported £7bn.

HMRC raked in £525m from AstraZeneca in a transfer pricing settlement, which led some to predict further crackdowns could be on the list.

A second Budget following a hung parliament and involving a coalition could see a huge bunfight for control. The Liberal Democrats say: “Our aim is to simplify the corporate tax system by removing avoidance schemes, in order to reduce the headline rate of corporation tax.”

Meanwhile, shadow chancellor George Osborne wants to create “the most competitive corporate tax environment in the G20”.

A Conservative Budget would set out a five-year road map for the direction of corporate tax reform, providing “greater certainty and stability to businesses”.

Whatever the outcome, the Budget will this year be keenly watched by advisers, business and the taxpayer.

IN OUR VIEW

The Budget is usually seen as a damp squib where the chancellor trots out a never-ending table of facts and figures, which most of the public take no interest in. But in an election year, two possible Budgets will have everyone on tenterhooks and whoever triumphs at the polls will find themselves with a massive workload on their plates.

Further reading:

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