TAX NEWS - June 2010

UK Tax: big shareholdings continue to benefit from a lucrative tax break

No one can be in any doubt about the horror of the spending cuts to come after David Cameron's warning that Britain's "whole way of life" will suffer.

Workers will be sacked – 750,000 was one guess – benefits slashed and schools left to crumble. Perhaps the Prime Minister will dynamite a new hospital judged too costly to run, as the Canadians did?

Nick Clegg has already set one test for how these cuts are carried out – no return to "sink-or-swim" Thatcherism and the North- South divide, he vowed – and he should be held to that ambitious pledge.

But the Cameron-Clegg coalition must pass a second test if the public is to be convinced that all the slashing is being done as fairly as possible – a hurdle that it is already struggling to clear.

I have written before that taxes should rise sharply for the better-off, because the cuts being contemplated are simply too terrible to achieve without wrecking public services beyond repair.

That is not going to happen – although a VAT hike seems inevitable. Worse, I now fear the backsliding on existing tax rises for the rich is about to accelerate.

Mr Cameron is already revving up for a Uturn on the coalition's plan to hike capital gains tax (CGT) after the Tory press howled in protest.

If those lucky people with second homes and big shareholdings continue to benefit from a lucrative tax break – paying 18 per cent on profits, rather than top-rate income tax of 40 per cent – then the spending cuts must be even harsher.

Now, a similar softening-up exercise is under way to allow the wealthy to wriggle out of another tax rise due next year – a squeeze on their ridiculous 40 per cent tax relief on pension contributions.

The change – which only affects people earning above £150,000 – means they would only get 20 per cent relief, like the rest of us.

It is expected to bring in a useful £600m a year.

It is a modest squeeze, leaving in place higher-rate relief on £100,000-plus of earnings, giving away an extraordinary £5bn a year. An outrage at any time. A 24-carat scandal in this age of austerity.

Yet the Institute of Directors and Confederation of British Industry have launched a campaign to save the entire perk, bleating the normal guff about driving entrepreneurial talent to foreign shores.

Remember that the cuts will already be more severe than Labour planned, because its National Insurance (NI) rises have either been scrapped or reallocated to a tax break.

I should stress there is no evidence of a pension relief U-turn – yet. But the campaign is a re-run of the moaning about higher CGT, which is heading for partial victory.

This second test for the coalition is whether the rich will escape all the pain simply because they – unlike the poor and the jobless – have powerful friends.

MANY were scratching their heads when Nick Clegg promised "progressive cuts" – wondering how hacking back the State could make society fairer.

The confusion extends to the Treasury, judging by the response of its (Conservative) Economic Secretary, Justine Greening.

When asked what a "progressive cut" would look like, a bemused Ms Greening replied: "The gentleman might be better off directing that comment at the Deputy Prime Minister…"