Conservatives’ tax pledge – blessing or straitjacket?

By Clare Munro, Tax Partner

On the face of it David Cameron's pledge to ban tax rises for the next five years should make life simple for those of us whose work involves advising clients on their tax obligations.  Business people calling for stability should be happy that their employment costs won't rise, as should the 'hard-working families' who'll be able to budget knowing that income tax rises won't eat into their take home pay, nor VAT rises add to their costs of living.

The reality is likely to be rather different.  The promise covers income tax, national insurance and VAT; that leaves plenty of other taxes where, it would seem, rises are fair game, including corporation tax, inheritance tax and stamp duties.  As ever with tax, the devil is in the detail so the cynic might say that, even if the Conservatives managed to apply a 'triple tax lock' to the rates of income tax, national insurance and VAT, that still leaves plenty of scope for meddling with the reliefs and allowances in order to maintain and even increase the flow into the Exchequer's coffers.

Whoever forms a government after 7 May, one thing we can be sure of is that resources will be stretched. All parties have pointed to crackdowns on tax avoidance as a source of revenues.  It's a popular message, but given that HMRC has spent the last decade tightening up on both evasion and avoidance, it's hard to see that a further squeeze will yield up to £10bn (the Lib Dem estimate). If it turns out that money doesn't actually grow on trees, and spending in areas such as pension provision and overseas aid are already ring-fenced, the Chancellor could well regret taking one more economic tool out of the box.

The concept of freezing income tax, national insurance and VAT emerged in the Conservative manifesto but has been given a new lease of life today with a commitment to enshrine it in legislation. Perhaps this is a sign of the scepticism with which people approach manifesto promises but one feels that this promise is one that could turn out either to be ineffectual or a hostage to fortune. Ultimately none of us can predict the economic ups and downs that will crop up over the next few years and even an ineffectual triple lock could turn out to be more of a straitjacket for the Treasury than a blessing for the electorate. 

Please feel free to contact me to discuss how we could help with your own specific tax planning requirements.

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