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Professional advisers are preparing themselves for a damp squib of a Budget, as the date for one of the most political Chancellor speeches in recent years rapidly approaches.
 
Regardless of whether Labour stay in power or if there is a power shift after the general election, widely expected to take place on 6 May, the money’s on an emergency Budget being called in June/July by the incoming (or incumbent) government. And it’s this ‘real’ Budget that advisers believe will have more in the way of teeth – and more importantly for business -- tax rises.
 
PwC said this week that additional tax hikes of £20bn, over and above current plans, would be essential by 2013/14 to close the fiscal gap. Meanwhile George Bull, national head of tax at Baker Tilly, said in a briefing that an increase in VAT to 20% would raise £12bn a year.
 
Francesca Lagerberg, head of tax at Grant Thornton, told Finance Week, that 24 March would be a ‘don’t scare the horses’ Budget, where Chancellor Alistair Darling would be at pains to portray himself as a careful custodian of the UK economy hell-bent on making sure that the small shoots of recovery were given a chance to grow.
 
“The Tories have been quite sparce on details but have talked about cutting corporation tax. Labour could potentially look to steal their thunder but the only way they could fund that would be to remove some relief from exemption. I think they’re more likely to rubbish is,” Lagerberg said.
 
Recently finance chiefs at two of the UK’s most powerful companies called for corporation tax to be slashed to 15% in what would represent one of the most sweeping changes to the UK tax system since VAT was introduced 30 years ago.
 
As more and more business giants turn their backs on the UK or threaten to move offshore, Julian Heslop, CFO of GlaxoSmithKline, and John Connors, tax strategy director at Vodafone, pushed for the tax to be almost halved. They said a cut would not only stem the flow of companies leaving the UK but also attract overseas investment.
 
Stephen Herring, tax partner BDO, told Finance Week: “It’s a bit of a tradition for this government to steal policies from the opposition and corporation tax is the biggest opportunity. A few years ago it used to collect £50 billion. Now that figure is down to £30 billion.” Herring predicted a staggered reduction, by 1% a year down to 25%, as the most likely announcement.
 
“This pre-election Budget really is more of a positioning statement rather than an action plan,” she said. "It will focus entirely on what the Chancellor did to maintain market stability during the recent economic crisis. It is unlikely that he will set out further bold tax rises as every vote will count in the run up to the formal election campaign,” Lagerberg said.
 
Another big push on tax planning is seen as a easy vote-get, although Lagerberg said it was unlikely there would be much in the way of detail about targeted anti-avoidance measures on 24 March.
 
HMRC has been on a winning streak, with some significant dispute successes both in and out of the courts. The closure of one loophole retrospectively boosted its coffers by £1 billion. Meanwhile the Franked Investment Income case saw judges side with the taxman on how dividends to UK companies from overseas businesses are taxed, saving HMRC a reported £7bn. And HMRC clawed back a further £525m from AstraZeneca in a transfer pricing settlement.
 
But Herring at BDO warned that Labour may look to set an elephant trap for the Tories. “They may announce a raft of tax avoidance measures, then if the Conservatives get in and dispute them, it would be easy for Labour to put the boot in.”  
 
One of the most widely touted changes in the Budget is likely to be an increase in the rate of Capital Gains Tax. Given the introduction in April of the 50% top rate of tax, and the relatively low 18% flat rate of CGT,  advisers have warned that the Chancellor may well look to reduce the disparity between the two.
 
Any measures announced in the Budget to aid unemployment would be warmly welcomed by employers, although risk being overshadowed by the 1% National Insurance Contributions scheduled for April 2011, which could have a significant impact on hiring decisions.
 
“I think Labour are concerned about how the electorate will perceive the anti-business stance that the opposition is trying to pin on the Government,” BDO’s Herring said. “Budget’s are always political, but one a few weeks before a general election will be an immensely political occasion with very little in the way of economic or fiscal reform.”