Analysis: Where is he going to find all that money?

UNTIL the Chancellor gets to his feet next Wednesday, we must treat this story of plans to scrap the 50p tax rate as little more than speculation, writes Peter Young

However, if it does transpire, it will be a significant and, in terms of the timing, perhaps a somewhat surprising development, notwithstanding recent press speculation and comments made by Business Secretary Vince Cable.

The Chancellor has always indicated that the 50p rate, which was introduced by Alistair Darling in the last Labour government, should be regarded as “temporary”.

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Given the state of the nation’s finances, the question has been, on the one hand, whether a rate cut could be afforded and, on the other, whether a cut would necessarily reduce the overall tax take significantly. The business community, amongst others, argues that the 50p rate actually results in lower overall tax revenues for the Treasury.

The arguments are that it encourages higher earners to emigrate, engage more robustly in tax planning and avoidance measures, and, for those that can, simply defer drawing income until this “temporary” tax is abolished.

It has also been argued that it is a general disincentive in promoting economic activity, all of which, it is argued, has a detrimental impact on the overall amount of tax collected.

Mr Cable has talked recently about dropping opposition to the abolition of the 50p tax rate where alternative means of revenue generation targeted at high net worth individuals, such as a so-called “mansion tax”, is introduced.

Furthermore, the Liberal Democrats’ long-term aim is to increase the personal allowance to £10,000 to benefit the less well-off.

Personal allowances are set to be raised by £630 in 2012-13 to £8,105.

This will benefit the lower paid, as higher earners will see the level at which they are required to pay higher-rate tax will drop by 5,000 to £34,371.

Assuming this pre-Budget leak turns out to be accurate, what are the implications for public finances?

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Firstly, it would put a squeeze on Treasury revenues, having a reduction of tax takings at both the higher and lower end.

Given the coalition government’s commitment to balancing the books, this could result in tax rises elsewhere.

There is also potential for greater resources to go towards tax avoidance, an agenda which the Liberal Democrats have been strongly promoting.

The government could introduce a general anti-avoidance rule, reducing the ability to utilise planning strategies to cut tax liabilities.

I feel it’s more likely we will see a consultation to encourage wider discussion from the business community on the issue.

We will find out for certain next Wednesday if the 50p top rate is to go.

If it is abolished, with a further rise in personal allowance levels put in place, one thing is certain: the Chancellor will need to conjure up some clever revenue-raising measures elsewhere if his government is to stick to its pledge to reduce the UK’s deficit.

• Peter Young is the director of tax at chartered accountant and business adviser Johnston Carmichael.

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