Chancellor to defend 'tax and spend'

THE Chancellor is likely to defend the Government's high level of borrowing by extolling the UK's high rates of economic growth.

Gordon Brown‘s Pre-Budget Report is likely to focus on the economy's performance as he unveils his outline plans for the coming year.

The economy is currently growing at about 3% a year, well ahead of the European average. Despite this, the Chancellor is expected to have to increase borrowing levels beyond the £33bn he signaled in the Budget earlier this year to nearer £40bn.

This is because of a substantial increase in spending on public services, particularly health and education.

Although precise spending plans will not be disclosed until the Budget in the Spring, several tax plans are likely to be unveiled today.

They could fuel further Conservative claims that the Labour Party is reverting to its 'tax and spend' past.

Tax receipts have risen by 8% in the past year and tax advisers say that tax allowances have not risen in line with earnings and so many people have been pulled into the tax system who in the past would not have earned enough to pay tax.

Shadow Chancellor Oliver Letwin claims that 'several million people' now pay tax for the first time – and a large number of middle-earners are now paying the top rate.

He declared: 'Labour claimed that they had no plans to raise taxes at all. That was all talk. By stealthily raising thresholds more slowly than the increase in earnings, Tony Blair has dragged 4.2m more people into paying income tax, and 1.35m more people into paying top rate income tax.'

The Chancellor‘s war on tax avoidance is set to continue. Gordon Brown believes that careful tax planning has resulted in many people paying far less tax than they should be.

Some tax advisers, however, suggest that one reason tax revenues are lower than predicted is because the Chancellor has over-estimated the extent to which tax avoidance schemes have worked.

This year‘s Finance Act introduced many tax rules and several key court cases have established precedents for how entrepreneurs are to be taxed.

Overall, tax experts hope to see further clarification in the Pre-Budget Report about how inheritance tax is levied on shares in unquoted companies. In the past IHT has not been levied but new rules have muddied the waters.

And another big potential area for attention is how husband-and-wife companies can share profits.

In November, the Inland Revenue won a case against a husband-and-wife business that led many several tax advisers to suggest said could severely impact the way many people who had set up companies with their spouse are taxed.

The Arctic Systems case saw a couple attempt to minimise their tax exposure by transferring earnings and paying a dividend to the lower-rate paying spouse.

But opinion among tax accountants is split, with some suggesting that it was a 'one-off' because of the couple‘s decision not to declare earnings in a previous year had marked them out for the taxman's attention.

One adviser commented: 'We‘re looking for guidance on this and it may be that the Chancellor decides to make reference to it in the Pre-Budget Report.'