Darling set to tighten tax loopholes By Chris Giles and George Parker
Financial Times Published: October 8 2007 21:23 | Last updated: October 8 2007 23:46
Alistair Darling will on Tuesday launch a crackdown on tax loopholes in a mini-budget designed to regain the political initiative from the Conservatives after Gordon Brown¹s retreat from a general election at the weekend.
The chancellor will announce plans to tackle elements of the tax system used by the private equity industry; the super-rich taking advantage of non-domicile status; and small family businesses that distribute profits among relatives.
Tax experts expect him to tighten rules to raise revenue. He is expected to set out plans to tackle the private equity industry¹s use of tax reliefs on shareholder debt in their highly leveraged deals. The Treasury also plans to stop couples minimising the higher earner¹s tax liability by paying dividends to a low-earning spouse.
Martin Wolf, chief economics commentator, looks at the limited options for Chancellor Alistair Darling in his first pre-Budget report More efforts to close tax loopholes, particularly for wealthy foreigners with non-domiciled status, would have the political advantage of removing the source of funding for the Conservatives¹ tax-raising proposals.
If any money raised was committed to other spending, it would leave the Tories struggling to explain how they would finance their plans to raise the inheritance tax threshold.
Mr Brown indicated yesterday, in his monthly news conference, that the government was minded to review inheritance tax, which he accepted was a ³major issue². George Osborne, shadow chancellor, predicted that Mr Darling would attempt to steal some of his ideas on cutting the burden of inheritance tax and raising more money from non-domiciled foreigners living in Britain.
Mr Darling will find himself boxed-in by a weaker-than-expected economy, with public finances undershooting the Budget forecast for a seventh pre-Budget report in a row.
Economists believe that the only prudent path is for the chancellor to reduce next year¹s growth forecast from a 2.5-3 per cent range to between 2 per cent and 2.5 per cent. John Hawksworth of PwC estimates that borrowing will rise by £3bn or 0.25 per cent of gross domestic product in 2008 and
2009.Public finances are further at risk since tax revenues are disproportionately dependent on corporation tax from financial companies¹ and income tax on City bonuses.
The public services will be looking to see how much money they will have in the next three years. Experts expect health to be win the largest increase but even if it achieves an average rise of a little over 3 per cent more than inflation a year, that will represent a halving of the rate of growth of recent years.
The defence budget is also tighter than the 1.5 per cent average annual increases announced in the summer, a Financial Times analysis shows, because increased wear and tear from operational activities in Iraq and Afghanistan is squeezing the rest of the military.