Tax bombshell

It is no surprise the issue that dominated the political party conference
season was the £175bn government fiscal deficit. While the Liberal Democrats,
Labour and the Conservatives made bold declarations on government finances and
policies in advance of 2010’s General Election, all three parties were less
forthcoming about how they would actually tackle the burgeoning debt.

Political commentary and debate has so far focused on likely cuts in public
spending, yet it has remained surprisingly timid on the equally likely
possibility of extra revenue being raised from taxes: a situation which Stephen
Herring, senior tax Partner at BDO, strongly believes needs to be addressed.

“There’s a lot of talk in the party conferences about public spending,” he
says. “But there isn’t really the same level of debate that there should be
about where, if tax increases become essential, they will be collected from.”

Definite pronouncements on tax raises have certainly been thin on the ground
in conference speeches. Prime minister Gordon Brown’s rallying cry to the Labour
faithful mentioned only in passing that the party “will raise tax at the very
top” and “raise National Insurance (NI) by 0.5%” from 2011. Herring doubts
whether both measures would raise enough revenue.

“Labour have a history of increasing NI. I think if Labour were re-elected,
both employers’ and employees’ NI would go up by at least 1%,” he says. Treasury
figures released last year indicate such a move would boost tax revenues by
around £10bn. Herring further warns that “you can’t avoid a tax on the many by
dramatically increasing tax on the few; you can’t attack that top end without it
having severe collateral damage to the less well-off and the middle-income
groups”.

Indeed, in the BDO report ‘Time to Break the Silence?’ ­ which calls for
greater clarity in the taxation policies of the UK’s three main political
parties ­ the 50% tax rate on those earning over £150,000 a year is expected to
raise “less than £2bn” by the Treasury’s forecasts, although due to, he says,
“tremendous behavioural changes at that level”, particularly for owner-managed
businesses extracting funds through dividends, the report estimates the real
figure would be much lower.

However, he believes Labour would resist any VAT increases. “I think they
will look more to direct taxation, such as NI and income tax.” The
Conservatives, on the other hand, might “look more to indirect taxes”. He adds:
“They might be tempted to remove some of the VAT zero-ratings and exemptions.
They have a history of increasing the rate of VAT; they raised it twice in their
last government.”

Other EU countries provide some argument for a Conservative rate hike.
“Germany and France have higher rates and Denmark [has the highest] on 25%. Even
Ireland’s is 21.5%. You might say there’s scope to increase the VAT rate quite a
lot. And it collects a lot of money.”

And so it does. The 2009 Budget estimated VAT receipts for 2008/2009 at
£78bn, behind NI (£96bn) and income tax (£147bn), but far ahead of corporation
tax (£43bn). Might the Conservatives want to harvest additional revenue from the
other taxes?
Herring suggests tinkering with income tax rates might not be a priority. “I
think the Conservatives will be keen not to have additional taxes at the bottom
end, so that people do get more money moving from being recipients of benefits
to being in low-paid jobs.”

He believes that “there is a good prognosis that corporation tax will be cut
to 25%”, a key Tory pledge, but one that may be implemented regardless of the
election outcome: “I really don’t think there is much [any of the parties] can
do about corporation tax because, at 28% we have a higher headline rate than
most of our competitors.

“Gordon Brown has decreased the rate, so it’s been moving in that direction
even with a more left-of-centre government. I think that will continue. I can
see other particular reliefs being reduced as businesses benefit from [a reduced
headline corporation tax rate]… The problem with corporation tax at the moment
is that businesses aren’t making the profits, particularly from the banking
sector. We’re still getting good tax revenues from utilities, food retailing and
telecoms though.”

Kicking off political party conference season were the Liberal Democrats, who
controversially announced plans for an annual levy on homes worth over £1m ­
dubbed the “mansion tax” by hacks ­ while leader Nick Clegg vowed to “raise the
income tax threshold to £10,000, funded by closing loopholes that the wealthy
exploit”. Herring disagrees that such a move is possible in the present economic
circumstances. “The mansion tax [is estimated to] collect £1.2bn, but… it is
incredibly expensive to increase the personal allowance to £10,000 ­ you’re
talking about a cost of £21bn to £22bn,” he notes. “I cannot believe it could be
done, because [whichever party is elected] will need tax increases to raise
revenue, not to finance the increase in other reliefs.”

So what could the Liberal Democrats, if elected, feasibly implement?

“They have made some noise that they’d fund certain things by abolishing the
likes of VCTs and EIS schemes,” Herring says. “The Lib Dems would claim to be
the most focused on environmental issues, so we can see how they’d put together
different environmental [tax policies].”

Green issues have been high on the political agenda in recent years and
Herring suggests all three parties could adopt a raft of other policies in their
claims to be “the greenest of the three”: a 3% increase in fuel duties, for
example, could yield an extra £1bn. There is also the prospect of stealth
taxation, for example, as per BDO’s report, a 4% increase in the rate of
insurance premium tax ­ “one that… people really haven’t noticed” ­ could yield
an extra £2bn, a “useful sort of amount”.

Herring concludes: “Other than that, I think NI, income tax and VAT are where
you’ll be looking for the big numbers.”

CONFERENCE SEASON: LIB DEM

? Vince Cable announced plans to impose a new tax on homes worth more than
£1m – the so-called “mansion tax”. He also wants a 0.5% annual levy to raise
£1bn to help low-paid workers.

? The immediate plan to scrap university tuition fees could be temporarily
abandoned if there is not enough public funding to support the initiative.

? Nick Clegg endorsed ‘A Fresh Start for Britain’, described as the
pre-manifesto ahead of next year’s general election. This document sets out
three broad principles – to create a sustainable economy, a fairer society and a
cleaner political system.

? Create a national infrastructure bank, modelled on the European Investment
Bank, to fund large-scale projects like high-speed rail.

? Reform the banking sector by outlawing the bonus culture and breaking up
failed banks in public ownership to turn them into “an effective and diverse
local lending infrastructure”.

? No tax on the first £10,000 of income. Recoup more public money by closing
tax loopholes for multi-national companies and non-domiciles.

? Link the state pension to average earnings or prices, whichever is higher,
and create a citizen’s pension based on residency not National Insurance
contributions.

? Offer pensioners risk-free, tax-free, guaranteed savings on government
bonds.

? Create new jobs through capital spending on projects like new affordable
homes. Fund such projects by shifting money from low priorities, selling assets
and recouping “unjustified subsidies” to utility companies.

? Invest in green infrastructure using “imaginative new financing mechanisms”
such as auctioning airport landing rights.

? Scrap council tax and replace it with a fairer local income tax, which
takes into account ability to pay.

? Reduce fuel tax and cut road tax by 50% in remote and rural areas where a
car is a necessity.

? No expansion of Heathrow. Replace air passenger duty with aviation duty,
based on total flight emissions, and add a domestic supplement to discourage the
use of internal flights.

CONFERENCE SEASON: LABOUR

? Gordon Brown’s pledge to deliver 10 hours of free nursery care per week for
a third of toddlers, – quarter of a million two-year-olds – from low-income
families within five years will set back higher earners nearly £1,200 a year by
abolishing tax breaks. Basic rate taxpayers earning less than £43,000 could lose
£962 annually following the scrapping of tax relief in the Employer Supported
Childcare programme.

? A £1bn “innovation fund” to boost industry.

? Plans were announced to allow voters to sack MPs guilty of financial
misconduct. If more than 25% of voters in their constituency demand a recall,
there will be a by-election.

? The prime minister set out Labour’s spending priorities. He said he would
invest more in schools but not the education budget overall and promised to
continue annual increases in the minimum wage, child tax credits and child
benefits.

? Approximately £1bn will be spent on new scanners and other diagnostic
equipment to ensure that the NHS has the capacity to fulfil new health pledges.
The move is expected to save up to 10,000 more lives a year in England.

CONFERENCE SEASON: CONSERVATIVE

? A pay freeze of over 4m public sector workers in 2011/2012, which the
Tories say will save £3.2bn, assuming their wages would have increased by 2.4%.
Those earning less than £18,000 a year will be exempt, as will armed forces
serving overseas.

? Saving £3bn a year over the course of the next Parliament by cutting the
cost of Whitehall bureaucracy.

? Stopping tax credits for those on incomes over £50,000, a move Osborne said
would save £400m a year, or £2bn over the entire Parliament.

? Cut benefits by £25 a week for anyone on incapacity benefit who is deemed
fit to work using a new medical test, saving £1bn over five years, although
£600,000 of this will be spent on new back-to-work schemes.

? Saving £1.5bn in the next Parliament by not contributing to the Child Trust
funds of better-off families.

? Raising the retirement age from 65 to 66 from 2016 for men and 2020 for
women, which the Tories said would save £13bn a year once implemented.

? Mentioned the possibility of reversing Brown’s tax on pension fund,
although this would cost well in excess of £5bn a year.

? Will keep in place the 50p tax rate for the time being.

? Hinted that a Tory government could introduce a windfall tax on bonuses if
banks increase remuneration instead of using profits to increase their capital
levels.

? Publication of a policy paper on better regulation which features a ‘Star
Chamber’ with a stringent one-in-one-out requirement, where any new law must
include cuts on old laws and reform for Quangos.