Gordon Brown is expected to use his 17 March Budget to recommend a merger of the Inland Revenue with Customs & Excise, as well as launch a number of proposals intended to close the gap between government spending and income.
Permanent secretary to the Treasury Gus O’Donnell has been investigating the potential of a merger since he was commissioned to look into the efficiency of both departments by the chancellor last July.
Current Revenue chairman, Sir Nick Montagu, will retire on 19 March and be succeeded on a temporary basis by Anne Chant, deputy chairman and director general for strategic service delivery.
One of Chant’s first jobs will be to deal with the likely fallout from Brown’s Budget speech. Top of the list will be paragraph 5.91 of the pre-Budget report, where he promised to ensure the ‘right amount of tax is paid by owner managers on the profits extracted from their companies’.
Hundreds of thousands of small companies will be affected by the changes, widely believed to be a national insurance levy on dividends.
Some experts have predicted that the chancellor will also increase the standard rate of VAT from 17.5%. Frank Haskew of the ICAEW tax faculty said doing so would be a ‘quick and easy way of raising money’.
A single percentage rise in VAT would raise more than £3.5bn for the government. But many are predicting a rise to 20%, to bring us more into line with Europe, which would produce a massive £9.5bn income.
‘It’s a perfectly feasible way to collect much needed revenue,’ said Mark Lee, director of tax services at WJB Chiltern. But Lee warned that any rise in VAT would have the adverse effect of an inflation rise.
‘It depends which is more important to the chancellor,’ he said.
Lee added that tax advantages introduced by Brown would be closed, because they have become far more expensive than he predicted.
‘I think we’ll see a number of examples of the chancellor moving into reverse gear and cancelling tax advantages introduced since 1997, because the cost of the original changes were far greater than he thought,’ said Lee. He pointed to a limiting of the zero rate of corporation tax on the first £10,000 of profits and the reining in of capital gains tax relief.
Stamp duty rates will also be raised, according to James Welch, a tax partner at PKF. ‘Now we have the new rules. The chancellor will push up rates, but only on the larger transactions.’
This year’s Budget promises to be one of the most interesting of recent times. ‘There’s going to be a heck of a lot in it,’ said Lee.
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