As Labour Government Wins General Election, The UK Speculates On Future Taxation Issues

by Jason Gorringe, Tax-news.com, London

12 June 2001

Francesca Lagerberg and Frank Haskew from the Tax Faculty department of the Institute of Chartered Accountants in England and Wales (ICAEW) have published an article representing the Tax Faculty's perspective on the changes that may be in store for Britain's tax system now that Labour have clinched a second term of office. They state that, with another huge majority, Labour has a 'sufficiently large mandate to push through tax changes if they so desire and they certainly aren't running out of ideas.'

As far as income tax is concerned, the Labour Party has promised not to raise the basic or top rate of income tax but it will extend the 10p starting rate band within the next two years. According to Ms Lagerberg and Mr Haskew, National Insurance Contributions (NIC) have become a 'hoary old chestnut' in that the limits for NICs have been increasing at a rate above inflation.

'For example,' state the authors, 'the upper earnings limit increased to £29,000 in April 2001 but was just over £26,000 when Labour came to power in 1997. The idea of maintaining some form of cap on the upper earnings limit over which NICs cease to be payable has stayed firmly in place, although Gordon Brown refused to state categorically that the ceiling would remain. This has caused considerable concern particularly to those in so-called Middle England who would be most affected. By abolishing the upper earnings limit, approximately an extra £1,000 would have to be paid in NICs for every £10,000 earned in excess of the current limit.'

Further increases above the rate of inflation to the upper earnings limit can not be ruled out just yet, but any significant changes made by the Chancellor could backfire on him and and it is likely that he will tread with caution on this one.

During the election campaign Labour steered well away from the controversial IR35 legislation which treats contractors working for large companies as employees and, argue the contractors, prevents them from receiving the tax benefits enjoyed by larger firms doing the same work. While the Tories were quite vocal in their insistence that they would scrap the law, Labour effectively kept quiet. The Tax Faculty authors stated: 'The only two real hopes of change on this issue would appear to be time - as the dust settles it may be easier for some of the impracticalities of the rules to be addressed - and for the incumbent Minister who steered IR35 through (Dawn Primarolo) to move on to another post within Government allowing for fresh eyes to look at this difficult area.'

As far as the EU is concerned, Labour says it supports 'fair tax competition' but it is early days and difficult to assess what the likely scenario will be, particularly in view of the widely differing rates of tax applying to such consumer goodies as alcohol, tobacco and fuel.

On corporation tax, Labour is considering extending the 10 and 20 per cent starting rates of tax but has given no indication of when this will be implemented. Two major changes were introduced to the capital gains tax system with the introduction of the taper relief process and Ms Lagerberg and Mr Haskew wrote: 'We have now an extremely favourable regime for those who qualify for business asset taper relief, although not for those who hold non-business assets. The hints pre-Election were that the four year holding period for full business asset taper relief (which gives a higher rate taxpayer a 10% CGT charge) could be reduced to two or three years, although again this was not mentioned in the Labour Party's Manifesto for Business.'

They added: 'There must surely also be a chance that the taper relief rules will be extended to companies, although this is likely to form part of an on-going review of the operation of corporation tax.'

Finally, the issue of stamp duty. Labour has raised the rate of stamp duty considerably - property sales in excess of £500,000 are now charged 4 per cent duty compared to 1 per cent when they first came to power in 1997, and the receipts from stamp duty now exceed the receipts of both capital gains tax and inheritance tax combined. Although Gordon Brown has given no indication as to whether or not he will increase stamp duty even further, the Tax Faculty considers the tax must be ' a tempting target,' and points to Ireland where rates are up to 9 per cent, 'so the Chancellor is unlikely to think that this particular mine is exhausted.'

The article penned by Ms Lagerberg and Mr Haskew covered a whole raft of tax issues, the full text of the article entitled: 'What Does The Election Result Mean For The Tax System' can be found at: http://www.taxfac.co.uk

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