UK's Darling Expected To Postpone Difficult Decisions On Tax

by Robert Lee, Tax-News.com, London

29 October 2009

With this year's pre-budget report (PBR) to be the last before the general election, which must be called by mid-2010, it has been suggested that Chancellor Alistair Darling is likely to defer any tough decisions on tax, partly in an attempt to goad the opposition Conservatives into either condemning or supporting higher taxes on the wealthy as Britain faces a fiscal crisis of historic proportions.

While the Labour government is likely to reject calls for windfall taxes on the newly profitable banking sector, Darling could sting the banking sector by announcing in the upcoming PBR a limit on the time that trading losses can be carried forward to offset against future profits, according to accountancy firm MacIntyre Hudson.

“The critical policy challenge of how to curb the public deficit without choking off the fragile recovery will be given little more than lip-service in the pre-budget report," observed Nigel May, Tax Principal at MacIntyre Hudson.

"The Chancellor has made it clear he does not intend to announce the significant further tax measures that may ultimately be needed to help balance the books."

May added: "The government may have a lot to lose economically, but it has everything to gain politically –- with the spotlight likely to be turned partly on the financial sector and partly on the wealthy. The Chancellor will see little point in announcing serious, unpopular increases during its last-ditch attempt to convince the electorate to grant it a fourth term."

"Instead, we are likely to see further attacks on the better-off, the cautious widening of the tax base, and a few business measures that will enable the government to trumpet its success in helping along the recovery whilst simultaneously talking tough over the banks.”

MacIntyre Hudson predicts that the Chancellor will introduce a limit on how far businesses can carry losses forward against future tax bills to a period of 6 years.

This will prevent the financial sector in particular from offsetting future healthy profits against losses made during the financial crisis. Under current UK tax law, there is no restriction on the number of years that trading losses can be carried forward to offset future profits.

However, the firm expects that Darling will extend the temporary 3-year loss carry-back rule for losses of up to GBP50,000 for another year to help smaller companies which are continuing to struggle amid the unfavourable economic climate. Prior to the introduction of this concession, companies could only carry back losses for one year.

The firm also believes that there is a strong possibility that Darling may raise the main rate of individual capital gains tax to 25% from 18%, and increase the bite of the 50% top tax rate, due to kick in from April next year, by reducing the threshold to annual income of GBP110,000 from GBP150,000 (although the Chancellor could restore the personal tax allowance for those earning over GBP100,000, which is due to be withdrawn next year alongside the introduction of the 50% tax band).

The announcement of a new wealth tax on personal fortunes over GBP1m, probably at a rate of 0.5%, is another good bet for this year's PBR, the accounting firm further suggested.

On the plus side, there is a good chance that Darling could extend the GBP175,000 stamp duty freeze for one year, postpone the restoration of value-added tax back to its full rate of 17.5% (from 15%), although only for one month, and delay the next rise in fuel duty, at least until after the general election, the firm predicted.

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