Experts are predicting that Wednesday's pre-Budget report will be dominated by a return to traditional Labour values.
With the economy yet to formally emerge from recession and the 2010 General Election months away, the Chancellor will be obliged to set out tax and fiscal policies that differentiate Labour from the other parties – which is likely to mean the wealthiest are hit the hardest, according to accountant PKF.
Meanwhile, another accountant has warned that the public may have to pay for the MPs’ expenses scandal when Alistair Darling makes his statement.
Sarah Moss, PKF tax director in Birmingham, said: “Most economists agree that taxes will have to rise in the future so we may well see some eye catching traditional Labour moves to increase the tax burden on the wealthiest mixed in with more modest efforts to support business.”
Last year’s £12 billion per annum cut in VAT is to be reversed on January 1, 2010, when the VAT rate returns to 17.5 per cent.
Alistair Darling will also press ahead with the 50 per cent higher rate tax for those with incomes of more than £150,000 per annum from April, though it is unclear whether this will raise the hoped for amount of revenue.
Ms Moss predicts:
* The Chancellor may choose to cut some costs by reducing the upper income limits for means tested benefits such as the Child and Working Tax Credits – currently families with annual income of up to £66,000 can benefit from Child Tax Credits.
* A tightening of IHT allowances and exemptions for wealthier estates could allow a clear difference to be seen between Government and certain opposition proposals; for example, 100 per cent Business Property Relief might be limited to businesses worth £5m or less, with a lower exemption applying to more valuable businesses.
* The Chancellor may also propose substantial increases in environmental taxes over the course of the next Parliament. An increase in the current climate change levy is likely to be one option, with specific taxes targeting goods and services creating high emissions and further high taxes on cars also likely to be on the menu. Naturally, with the General Election in mind, any consultation document on such issues is not likely to be specific and leave the tough decisions until the new parliament.
* There may be an increase in the rate of capital gains tax to 25 per cent from next April, though with a lower rate for the disposal of business assets. The difference between income and capital gains tax rates is significant and is already starting to influence taxpayer behaviour, as individuals seek capital gains rather than income returns.
Meanwhile, David Thomas, of accountant Spencer Gardner Dickins, fears that people with two homes could be hit by new legislation after the practice of “flipping” – where MPs could financially benefit from re-designating which of their homes was their main residence – came in for widespread condemnation.
Mr Thomas said: “At present anyone with a holiday or second home can choose which is designated as their main residence and thereby avoid capital gains tax when they sell the property.
“That is viewed as a perfectly legitimate practice outside Parliament – when people are not having their housing costs met from the public purse – but it has now very much come into the limelight because of the MPs’ expenses saga.
“There is a concern, particularly given the Chancellor’s need to increase taxation, that he might try to crack down on flipping in all cases which would mean people dipping out just because of the actions of MPs – including Darling himself.”