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PBR 2007: Darling hunts for extra cash. By Alan Shipman

10th Oct 2007

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Pre-planned reductions in main income and corporate tax rates have left the Chancellor, like his predecessor, looking for clever ways to raise other revenue, under guise of ‘simplification.’

Even with no immediate election to fight, the Chancellor does not want to be accused of immediately changing his predecessor’s plans. These include a reduction in the standard rate of income tax to 20% (from 22%) from April 2008 (partly offset by the removal of the 10% starting rate for people on low incomes); and a reduction in the main rate of corporation tax to 28% (from 30%) from April 2008. This is partially offset by the concessional small business rate rising to 22% (from 19%) in stages to 2010.

Given the pressure to find new revenue sources to ease the restraint on public spending, the new Chancellor has found it hard to resist an unusually larger crop of apparently popular tax increases. The concessional 10% capital gains tax rate on corporate assets sold after two years has been criticised even by some of the private equity investors who have benefited from it. Darling has, unsurprisingly, sought to close the loophole by lengthening the qualifying period and restricting the definition of ‘carried interest’ which enabled leveraged buyers to make gains even on assets they hadn’t paid for, except with debt.

However, Darling has also yielded to party pressure to concede tax reductions in two areas – inheritance tax and stamp duty - where the popularity of doing so was demonstrated by the recent electoral ‘bounce’ they appear to have given the Opposition. Just as in 1979 the Conservatives realised they could appeal to Labour-voting households whose income tax burden had risen because of the failure to raise brackets with inflation, in 2007 they realised the same swing might be achievable by appealing over an IHT burden that had been similarly spread by ‘fiscal drag.’ Having declined to call an election, partly because of this realisation, Labour has responded with its own upward adjustment to the threshold.

To make good the resultant shortfall, Darling has used the label of ‘simplification’ to tackle a number of initiatives that are likely to tighten loopholes, and launched a number of reviews likely to open the way for new ‘green’ taxes, expected to fall heavily on fuel-heavy cars and air travel. Unlike Brown, who was so effective at presenting his early budgets as tax-reducing that the newly independent Bank of England half-believed it and kept interest rates higher than many considered appropriate, Darling’s need to raise tax for some of his expenditure pledges has already been detected, with around £1.5bn of extra revenue in 2007/8 from the measures announced on Tuesday. But the weight of increases, if they occur at all, will arrive after the election and after 2010, as the £2bn of borrowing added yesterday has to be reined in.