Change in political leadership means inevitable tax policy review

As the general populace warms to the possibility of a change in political leadership, the UK’s taxation system has become a central plank of the leading parties’ manifestos. So far, though, inspired policies remain as elusive as the gritty detail on how they really plan to use tax levers to plug the fiscal deficit: old policies have simply been microwaved and served up with some new rhetoric.

The Conservatives insist that tax rises can be prevented by slashing public waste; Labour counters that the rich must pay their share to drive economic recovery. Both options are the lowest of low-hanging fruit.

In its manifesto, Labour lays claim to having made “tough choices on tax” as it looks to halve the public deficit, citing the bankers’ bonus tax, reduced tax relief on pensions for the wealthiest, a new 50p tax rate on earnings over £150,000 and 1p on National Insurance contributions as its main moves on taxation.

“Our National Insurance (NI) changes will mean that no one earning under £20,000, or any pensioner, will pay more,” the Labour manifesto says. “It is fairer than alternative options like [increasing] VAT – which we have not increased since 1997.”

Achingly similar, the Tories simply focused on the message that the next government must set out a “clear and robust plan” for restoring public finances. However, the party adds that it will raise the NI threshold for employers and staff, neutralising some of Labour’s one percent rise. But the policy does seem to accept that extra revenue needs to be raised using NI.

“The current deficit must be balanced earlier than Labour’s proposals. This is crucial for Britain’s economic future,” the Tories say.

And what of the Liberal Democrats? Its manifesto focuses on a crackdown on tax avoidance, which it would use to generate the £16.7bn needed to pay for the scrapping of income tax below a £10,000 threshold. It set out plans to restrict tax relief on pensions to the basic rate so that everyone would get the same tax relief on their contribution – which it says would bring in more than £5bn. It adds that a clampdown on the aviation sector would align it with income tax, putting £1.9bn into the UK’s coffers; anti-avoidance measures relating to income tax, NI and corporation tax would claw back some £6.95bn; and colectively, the Lib Dems think this will bring in a total of over £17bn.

To rise or not to rise?
Despite Labour’s VAT rhetoric, all three of the major parties are reluctant to officially rule out a rise, while estimates of £12bn to be generated by VAT rising to 20 percent abound.

In its manifesto, the Lib Dems hint that they would reverse the proposed NI rise – though only when the funds were in place to do so. Labour has said it will not raise the basic, higher and new top rates of tax – and it renewed a pledge not to extend VAT to food, children’s clothes, books, newspapers or public transport fares.

“As we more than halve the fiscal deficit over the next four years, we will ensure that we do so in a fair way with a combination of a return to economic growth, cuts to lower priority programmes and fair tax rises,” says Labour.

Taxing the rich
Unsurprisingly, the Conservatives are playing on Labour as the “taxing the rich and businesses” party. That approach has brought many influential business people onside, but that advantage that would be moot if a hung Parliament became a reality.

That, however, could open up the intriguing possibility of seeing Vince Cable in No 11, frustrating the other leading parties and potentially further affecting clarity in the overall system. And some advisers suggest the Conservative Party missed a trick by not appointing Ken Clarke as its stopgap chancellor-in-waiting, as the idea that George Osbourne lacks experiece in government muddies the water.

“Clarke could have come in as an ‘enforcer type’ and done all the dirty work that would be needed if the Tories do get in,” says one adviser, who wishes to remain anonymous. “They simply can’t completely rule out tax rises in the future.”

Meanwhile, the accounting profession has reiterated calls for new political management to use this most pivotal of elections as a chance to iron out the kinks in the UK’s tax system.

The Institute of Chartered Accountants in England and Wales has said that it believes the UK needs to develop “a much more straightforward and stable tax system” in the next Parliament and has called for review of the way tax law is formulated in order to encourage “clarity, fairness, effectiveness and certainty”. It has also warned that the structural problems with the UK tax system – such as the length of the tax code – have to be met head on if the UK is to compete with other jurisdictions on having the right environment in which businesses can grow and create wealth.

Business groups have weighed in by calling for the business framework to be tweaked – making the UK more competitive by reducing the corporate tax burden. But as it looks ever more likely, a hung parliament may simply put on hold the chance of any change.

A version of this article first appeared in our sister title, Accountancy Age