PBR 09: Will there be season’s greetings from Darling?

As we approach the festive season, speculation is heightening about what
presents taxpayers, business and their advisers may expect.

But can chancellor Alistair Darling afford to fill their stockings with
goodies in today’s pre-Budget report?

Labour has been clawing back vital ground on the Tories in the opinion polls
and in today’s statement to the Commons the chancellor will attempt to ensure
that the gap does not widen.

Darling cannot significantly slash public spending to fund any proposed tax
cuts because he must keep the UK economy afloat, seemingly at no matter what the
cost. Multi-billion-pound banking bail-outs and billions in deferrals on company
VAT payments have taken a heavy toll on the UK’s coffers.

Advisers say Darling is unlikely to hand out generous tax benefits but will
be more focused on tax efficiencies. He is expected to shy away from broad,
harsh, tax-raising measures with a general election due in the spring.

But he could come down even harder on high-net worth individuals without
losing swathes of potential voters. An easy move for the chancellor would be to
hike the 18% flat rate of capital gains tax to bridge the gap between capital
and income tax rates.

“Any change in rate will have a huge impact on the entrepreneurial community
in the UK who have already been hit hard by the introduction of the 50p income
tax rate from next year,” Grant Thornton warned.

Wealthy individuals face the new rate from next April and those who hold
undeclared income in offshore centres have also been put on notice to come clean
and pay what they owe to the taxman.

Richard Mannion, Smith & Williamson’s national tax director, warned that
a beefing-up of tax avoidance rules focused on “everyday” tax planning rather
than “heavily contrived avoidance” could also be on the cards.

However, David Kilshaw, private client partner at KPMG, is hoping a general
rash of new rules will be avoided. “In view of the difficult economic climate we
hope that the chancellor will announce a commitment to minimise changes to the
tax system as well as to a limited finance bill in 2010. Hastily developed tax
measures often have serious unintended consequences and we very much hope that
this time the chancellor opts for an autumn statement light on tax changes.

“But with an election around the corner some voter-friendly
rabbit-out-the-hat style tax measures are a distinct possibility.”

A reduction in corporation tax from the current 28% to 25% could be one way
to keep powerful multinationals on side. If they remained in the UK it might
also convince others to locate their headquarters to the UK rather than other
European countries. But this is also a Tory policy, so Darling would run the
risk of looking like he had stolen the idea.

Although unlikely, a further increase to VAT past the 17.5% threshold it
returns to on 1 January is another option that advisers have not ruled out.

Back on the home front, smaller companies could find themselves under the
cosh while their bigger siblings are kept happy. An increase in corporation tax
for small businesses from the current 21% to 22% was announced a couple of years
ago, bringing it closer to the rate for larger companies, but this was delayed
because of the recession.

Given that any business making a loss during the downturn will not have paid
corporation tax, there is a feeling the government could bring in the increase
this time around for when companies are more likely to be in a tax paying
position. National Insurance may also be ratcheted up to target those on very
high earnings and the salary sacrifice regime could also come under attack.

“This could add up to some painful tax increases, but the chancellor should
recognise the fragility of the economy,” added Tim Lyford, head of corporate
tax, at Smith & Williamson.

“No one can be sure we have reached recovery mode and he should moderate any
revenue-raising ambitions accordingly.”

With speculation rising that HMRC is looking to set up a similar association
to its Liechtenstein facility, the chancellor may even reinforce the stated aim
of foiling tax evasion with an announcement.

The taxman has five or six offshore destinations on its wish list, advisers
say.

On Wednesday, the speculation will be over and Darling will have made further
changes to the UK’s tax system which he hopes will provide shelter from the
financial storm. But with the ferocity of the global crisis, and the massive
public deficit, it remains to be seen whether he will succeed.

Further reading:

Comment – Darling’s last
chance