We all know that in the current economical conditions that in addition to reducing spending, taxes will have to increase.
Richard Mannion, national tax director at Smith & Williamson, had this to say:
“The reality is that the Government - whoever wins the election - will need to fill its fiscal bucket.
“A VAT rise must be top of the agenda, but perhaps not introduced until later in the year. Every one per cent increase in VAT brings in just under £5billion pa, making this a tempting option. The downside is that it has the immediate effect of adding to inflation.”
“Capital gains tax is almost inevitably set to rise - possibly from as early as April 6 - since the current rate of 18 per cent is much less than the higher rates of income tax, which encourages people to seek ways of converting income into capital.”
“The big earners for the government are income tax, national insurance and VAT. Together, these taxes typically represent around 75 per cent of the government’s annual revenue. So unless there are tax rises in one or more of these areas in the not too distant future, the government will have very little chance of balancing the books.”
“For example, the current 40 per cent higher rate of income tax could rise to, say, 43 or 45 per cent - although I would not expect to see this in the March 2010 Budget.”
On the subject of tax avoidance, he had this to say:
“We can be certain of an increasingly hard-line approach from the authorities to complicated tax planning and a renewed emphasis on rooting out tax avoidance.”
“I anticipate the Chancellor will make few - if any - unappealing announcements in the Budget. The majority of tax increases, however, will emerge later this year or next year once the election has come and gone.”
“While the Chancellor needs to be realistic, it is important that we don’t stamp out nascent green shoots. Fiscal-raisers are necessary, but businesses and individuals need the Government to take a measured approach.”
Smith & Williamson’s round-up of possible changes to be included in the Budget are:
CGT - up, perhaps from April 6, 2010
It is only right that gains on long-term capital investments are taxed at a lower rate than income. However the decision to move to a flat-rate of CGT at 18 per cent in 2008 now looks at odds with a top rate of income tax of 50 per cent. This differential is encouraging taxpayers to seek out ways of re-designating income as capital.
Consequently the CGT rate on short-term gains could be increased from its current flat rate of 18% to make it less attractive to reclassify income.
There have been rumours that the generous treatment of second homes could be restricted following the unfortunate attention regarding MP’s arrangements, but a recent debate in the House of Commons indicates that no action is planned at this stage.
VAT - up, later this year
Although the standard VAT rate returned to 17.5% on 1 January 2010, there are likely to be further increases in the pipeline. As the average rate of VAT in the EU is almost 20%, and each 1% increase brings in just under £5billion, the Chancellor must be sorely tempted. However, any VAT rise will have an immediate impact on inflation.
Income tax - increases to 40 per cent rate, but not yet
We already know that a new 50% top rate of income tax will apply from April 6 2010 on taxable income over £150,000. The 40 per cent rate, which currently applies on earnings over £43,875 could be increased to 42% or even 45% but it would hit the mass affluent so would be unattractive politically just before an election.
Tax on transactions - possible introduction
Recent EU discussions have considered a levy on financial transactions or ‘tobin tax’. This could be a significant money-raiser for the government but success would require agreement across different jurisdictions to make sure that all countries apply the tax equally. Without a multi-lateral approach, markets could be severely distorted causing a loss of business to those financial centres that do apply the tax. Given that London accounts for around a third of all foreign exchange trading in the world, the UK economy could be suffer significantly.
Tax anti-avoidance, stricter application of existing rules
A harsher approach from HMRC is already evident, with rules and penalties strictly applied. Moreover, HMRC has improved powers of inspection and more information at its disposal, giving greater scope to pinpoint tax evasion.
We do not anticipate major rule changes in terms of tax avoidance, rather implementation of existing legislation. However, the Human Rights Act means that any penalties must be proportionate putting HMRC under pressure with regard to some of the current penalties which are charged irrespective of the gravity of the offence.