Parties gear up for two-stage Budget in election year

Shadow chancellor George Osborne

The next Chancellor?

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

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.


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.

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