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About turn

Speculation is rife as to whether the Tories, if successful in the general election, will reverse recent tax legislation.

At the various events at which Technical Connection has been presenting on the imminent (and those already with us) tax changes, we are often asked for our views on whether there is likely to be any substantial change to the current and forthcoming tax landscape if we should experience a change of Government after the general election.

Underpinning the tax increases are some pretty heavyweight economics about which much has been written. One of the most telling facts is that, in 2007, Alastair Darling predicted net Government borrowing would fall to £30bn by 2010. The current prediction for net Government borrowing for 2010 is £178bn.

As we have all read, the natural consequence of such an enormous increase in borrowing is for the Government to embark on a rigorous programme of reducing expenditure and increasing revenue.

There is much debate – and electoral relevance – over public expenditure cuts and where they could or should be made. On the revenue-raising side of the equation, of course, tax looms large. As a result, there has been a focus on future increases in income tax and National Insurance, the removal of the standard personal allowance for high-income individuals and the withdrawal of pension higher-rate tax relief for (even) higher-income individuals.

In addition, we have seen continued increases in antiavoidance activities, with attacks on particular targets such as offshore depositors and are led to expect further sector-focused attacks. We have also seen greater willingness to litigate and the establishment of a special High Net Worth Unit at HM Revenue & Customs.

Not only all of that but we have also seen the inheritance tax nil-rate band frozen at £325,000 for 2010/11.

And there’s a feeling that this could be just the thin end of the wedge, with the fat end to follow soon after the election, that is, early in the term of the new Government, to give the electorate time to forgive and forget before being asked to vote again.

Going back to the question of how likely it is that the main changes introduced or announced would be reversed by a Tory Government if elected, the Financial Times carried an interesting article addressing this very subject on January 18.

The leader to the article is the pressure being put on Shadow Chancellor George Osborne over his plans to cut capital allowances to fund proposed cuts in corporation tax. There has also been much publicity given to the Shadow Prime Minister’s plan to further “tax-incentivise” marriage.

There is a feeling that the fat end of the tax wedge will follow soon after the election to give the electorate time to forgive and forget before being asked to vote again

In relation to the capital allowance proposals, Labour claims this would amount to a £1.3bn annual increase in tax, despite the fact the capital allowance cuts would pave the way for a 3p cut in the main corporation tax rate to 25 per cent and cut the rate for small companies to 20 per cent.

This estimate of overall increase is, predictably, disputed. But regardless of this argument, there is validity to the point that manufacturers would be detrimentally treated, being able to benefit more from capital allowances.

This begs the question as to whether they are currently favoured by capital allowances when compared with knowledge-based businesses with less need for capital equipment.

On the broader issue of the likelihood of reversals, the FT set out what it believes to be the likelihood of the main changes being reversed. It notes that for some changes there is an outright Conservative pledge to take action and for others there is no formal pledge, merely an aim or general objective. Since the FT analysis, the Conservative Party has published a document entitled, A New Economic Model-Eight benchmarks or Britain. Within this are proposals for a revised tax system and specific commentary on Tory aspiration for changing some
of the tax changes introduced by the current Government. There is the promise of a Budget within 50 days of taking office to set out a credible plan to eliminate a large part of the structural current Budget deficit over the life of a Parliament.

As well as pay cuts and freezes on MP and minister remuneration, there is also reference to encouraging saving for retirement, ending compulsory annuitisation at the age of 75, reversing the effects on savers of the abolition of the dividend tax credit reclaim for pensions, reversing the 50 per cent additional rate of tax, business tax stability and a £1m nil-rate band for inheritance tax. I will look at these and the likelihood of change in other areas of tax next week.

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