2010 was a year of two Budgets and a spending review. 2015 is shaping up the same and this may give a hint as to what tax policy levers are likely to be pulled this time round. In the 2010 ‘Emergency’ Budget – Osborne’s first – the new administration increased VAT to 20%, capital gains tax to 28% and insurance premium tax (IPT) to 6%. The government at the time presented these increases as part of the urgent need to balance the books – a project which they intended to complete within 5 years. Now, in 2015, with a Conservative majority Government and a job only half complete, on 8 July we face a second Budget which offers further spending restraint and, undoubtedly, a number of tax rises.
During the election, the Tories made a pledge not to increase VAT, income tax and national insurance during the life of the Parliament. Although criticised by those who saw it as Osborne fettering himself for political gain, the Conservatives were in practice probably not going to increase these anyway. The same can be said for a few other taxes where there was no such commitment – corporation tax will clearly not go up this Parliament (although I’m not sure it’ll necessarily continue to fall at the same aggressive rate). There are also a number of areas where the Government is likely to cut the tax burden. The bank levy looks likely to be re-scoped only to apply to UK balance sheets of UK domiciled banks, and if Osborne wants to scrap the 45p rate, the time to do so is now. Further increases in the income tax personal allowance and a rise in the higher rate threshold (the point at which you start paying 40p tax) are also on the cards.
The Government’s plan is to eliminate the structural deficit by 2018. To achieve that, huge spending cuts and significant public service reform will be required, to an extent that goes beyond what we have already seen. The Treasury will also actively be looking for areas where they can raise more money through tax. Excluding the above areas, the most likely options are increases in duties (such as fuel duty) and indirect taxes such as IPT.
IPT is the perfect lever to pull at this point. Even at 6%, the UK standard rate is low by international standards and there are large numbers of exemptions. An increase in the standard rate to 7% will bring in £460 million – and that is before any exemptions are removed. It is the perfect stealth tax; relatively few people even know it exists. Despite the huge sums it brings in, it does not enjoy the totemic political significance of VAT.
Tomorrow, Osborne will unveil the second Budget of 2015. We will discover whether he takes his cue from the Budget of 2010 and increases IPT. Given his relatively limited options for serious revenue raising, the risk must be high that he will. The insurance industry, and anyone with a large premium to pay, should prepare themselves accordingly.
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