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Last Updated: Thursday, 2 December, 2004, 16:51 GMT
Brown delays the pain
By Anne Redston
Tax partner, Ernst & Young

Anne Redston
Anne Redston: "Conjurer delays the pain"

This was the Chancellor's final performance before the election and he was even more of a conjurer than normal.

Despite large and growing deficits he managed to give money away to children, council tax critics and motorists.

He aimed to prevent a pre-election backlash from the elderly by finding 1bn to subsidise council taxes and ward off the fuel lobby by delaying this year's increases in fuel duty and Vehicle Excise Duty. Along with the cash gifts to children through the Child Trust Fund, these will create a feel-good factor for voters.

Savers have also some reason to celebrate. The government is considering extending the 7,000 tax-free Individual Savings Account (Isa) limit until 2009.

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This will be a real crowd-pleaser for the financial services industry and millions of modest investors.

There were no headline tax increases, other than a draconian crackdown on certain tax-avoidance schemes.

The government have promised that any arrangements which prevent employees and employers paying the "proper amount of tax and national insurance" will be stopped with immediate effect.

Initially this looks like a narrow focus on City bonus schemes, but it is worded very loosely and will worry many honest employers.

The problem is that people may not know if their arrangements fall foul of this new rule.

For example, paying a lower salary and, instead, putting money into an employee's pension, saves tax and NI. Currently we believe the government thinks this is acceptable.

However, the possibility that in the future a government might consider that these employees might not be paying the correct tax and NI.

We will need assurances that this radical new power will be used exceptionally and only for artificial and contrived schemes where nobody can be in any doubt that they are engaged in artificial tax avoidance.

Tax review

Small businesses will be relieved to note that the government is to consult on a fairer and more coherent tax system.

There were concerns that it would introduce reforms without consultation that would radically affect our smallest businesses.

However, the consultation does not cover the highly controversial husband and wife tax (section 660a) or the much-criticised IR35 provisions.

These are also areas that need reform, so they are fair, simple and appropriate.

Because this is a pre-election pre-Budget, the key issue of how to fund the growing deficit was completely avoided.

If he is to sustain the same levels of government bureaucracy and service delivery in the next parliament, taxes will have to rise. The most likely candidates are NI and VAT.

In summary, the pain has been deferred until after the election.


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