Chancellor faces taxing issues over pre-election Budget

Published on Friday 19 March 2010 19:13

TAX increases are on the cards in next week's Budget, despite predictions of a pre-election package light on new measures.

With an election just weeks away, next Wednesday's speech was at first forecast to be a short and sharp affair with little depth, but it now appears that Chancellor Alistair Darling will deliver close to a full Budget, despite the possibility of another soon after the election should the Conservatives take power.

Tax experts believe the Chancellor is considering an increase in the capital gains tax (CGT) rate that would come into force next April. The measure failed to materialise in December's Pre-Budget Report, but the stark disparity between the CGT rate of 18 per cent and the top rate of income tax means higher tax on gains from disposals remains a logical target.

From 6 April, those earning more than 150,000 a year will pay income tax at a new upper rate of 50 per cent, while personal tax allowances for those earning more than 100,000 will be tapered until people on more than 112,950 lose their allowances altogether.

John Lawson, head of pensions policy at Standard Life, predicted that CGT would rise to 40 per cent. "Given that switching income-producing investments to gains is a great way to avoid the 50 per cent tax rate, the 130,000 limit for pension tax relief restrictions and the loss of personal allowances above 100,000, this must be a top target on the Treasury list."

Neil Whyte, tax partner at PKF in Edinburgh, believes the Chancellor may resist a broad CGT hike and instead target tax avoidance measures – such as where taxpayers switch investments to generate capital gains instead of income – by introducing a higher CGT rate on assets held for only for a short period.

"CGT is meant to be for people holding assets for a period of time, not just the short term, so there is the prospect of a tax on the gains made over a short period as income," said Whyte.

For example, while CGT on traditional disposals would remain at 18 per cent, gains on some assets held for less than, say, two years could attract a rate of 40 per cent.

There has been speculation also of a rise in VAT to 20 per cent, aligning the rate with that in most European countries and raising about 10 billion.

But while VAT – restored to 17.5 per cent in January after a temporary 15 per cent rate – is in line for an increase in the near future, the fragility of consumer confidence means there is unlikely to be any announcement to that affect this time around, according to Whyte. "The UK VAT is lower than the European average and an increase is required, but I cannot see him doing it next week."

More likely is that the Chancellor will announce tax amnesties, Whyte believes. Earlier this year HM Revenue and Customs launched an amnesty to persuade doctors, dentists and other medical professionals to declare any understated or undisclosed tax liabilities. Now the tax office is expected to focus on other professions, with accountants, lawyers and barristers in its sights.