SHOW US THE MONEY!
By Esther Armstrong from Interactive Investors.
Friday, December 04, 2009.
Alistair Darling is expected to unveil a 20% rate of VAT in his pre-Budget report (PBR) on the 9 December.
According to independent commentators, the chancellor is likely to use the report to unveil plans to hike VAT in incremental stages, a move that would generate greater revenue for the Treasury and tackle the country's monumental budget deficit. VAT is currently 15%, but will return to 17.5% on 1 January.
Malcolm Cuthbert, head of financial planning at Killik & Co, believes VAT will continue to climb beyond this point, eventually reaching 20% by February next year.
Others say the rise could be greater. "There has been some speculation that the anticipated increase in VAT from January may be revised so that it goes beyond a return to the previous 17.5%, with fears that it may be increased to 19% or even as much as 22%," says Tim Gregory, a partner at Saffery Champness Chartered Accountants.
Impact on households
The implication of increasing VAT will be a squeeze on disposable income. Research published by Capital Economics calculates a 20% rate of VAT could knock 1.5% off annual consumer spending, and therefore cause the economy to contract further.
Due to take place on 9 December, the pre-Budget report will be the last before the general election and is one of chancellor Alistair Darling's last chances to show how his government intends to fix Britain's struggling economy.
In previous years, the pre-Budget has been held in November and immediately following the Queen's speech. George Bull, head of tax at accountancy firm Baker Tilly, believes Darling has delayed the report this year in order to allow time for the next set of economic data.
In the 2009 Budget, Darling predicted the economy would return to positive growth before the end of the year. However, the most recent data shows the economy contracted by 0.4% between June and September.
Darling is probably hoping that new data released before 9 December will show an improvement in the country's economic fortunes, says Bull.
Taking to the stage having finally crawled out of recession would certainly give Darling a better platform to announce more unpalatable policies - including inevitable tax hikes.
Experts suggest Darling might increase capital gains tax and confirm Gordon Brown's controversial plans to scrap the tax relief on childcare vouchers.
Hanging in the balance
"There are some issues where the chancellor will wake up in the morning and say which way is this one going to go? The decision on childcare vouchers is one of those," says Bull. "Some decisions are made within hours of the pre-Budget report and give the Treasury team just long enough to make sure the leader of the opposition gets a copy of the speech."
However, in light of the pending election, Darling will also need to include some 'sweeteners' to get the public onside.
While the chances of an income tax cut are slim, many think one of his less punitive measures could be to extend the stamp duty holiday. In September 2008, the Treasury announced that all properties sold for less than £175,000 would be temporarily free from stamp duty, up from the previous threshold of £125,000.
Due to end on 31 December 2009, stamp duty relief for buyers has fallen £428 million short of the government forecast according to property website zoopla.co.uk. It was originally predicted to save buyers £600 million but in reality, the website says savings have only amounted to £173 million.
"A further extension of this holiday, and perhaps including higher value homes, could get this market moving again without any significant loss to the exchequer," says Gregory.
However, one issue concerning commentators is whether any measures announced in the pre-Budget report will ever actually see the light of day. The general election is expected to be held in May next year, and must take place before 3 June.
Stephen Herring, senior tax partner of accountancy firm BDO Seidman, believes the majority of the measures announced are likely to be deferred until after these dates. And Bull agrees, pointing out that the government has already used delaying strategies.
An example of this includes changes to pension relief, which Darling put into motion at his 2009 Budget in April. At the time, the proposal to decrease tax relief on pensions for top earners from 50% to 40% was an extremely controversial move but since it is not set to kick in until April 2011, many expect the furore will have died down, limiting the political fall-out.
Despite this, Gregory says the chancellor should not be afraid to reconsider the move: "With a proposed increase in the top rate of tax to 50%, top earners and entrepreneurs are going to shoulder a large burden of tax increases in the coming years, which will inevitably discourage some from putting 100% into helping to rebuild the economy."
Meanwhile, Martin Bodenham, founding partner of private equity firm Advantage Capital, says that the expected legislation to crackdown on banker's bonuses could drive "large swathes of the financial services industry" away, leading to an overall reduction in tax revenue.
This idea seems to have struck a chord with the New Party who called for a simple flat rate of income tax for all. "Voters now face the depressing reality that no matter which major party secures power, they are going to face tax hikes," says Richard Vass, national spokesperson for the party.
"Taxes in the UK have already reached saturation point. The UK does not look like an attractive place to work, or invest in a business, at present and this needs to change if we are to surface from the recession with an economy that is fit-for-purpose," he continued.