It is unacceptable that the public should be expected to wait for an election campaign before a debate around tax levels. This report issued by BDO Stoy Hayward calls for greater clarity over the tax policies of the main political parties. It urges that, should it become inevitable that there will be a need for tax increases, in tandem with spending cuts, due to the ongoing size of the national deficit, now is the time for the main political parties to break the silence over where tax increases might be – and comes in the same week that Alistair Darling has said there should be more openness over potential spending cuts.

1. Autumn 2009
Time to break
the silence?
Assessing the tax options available to help
rebuild the UK Government’s fiscal policy

2. Contents:
02 Assessing the tax options available to help rebuild the
UK Government's fiscal finances
04 The worst options
05 Reading between the lines – political choices, policies
and tax
08 Finding the elusive balance
09 Appendix

3. Time to break the silence? 01
Assessing the tax policy options available
Preface
Hard decisions will need to be made about the best ways to
address the scale of the Government’s £175bn fiscal deficit.
All the political parties are – or should be – more than aware
of this.We believe that the public deserves to be fully engaged
in the process of debating the key taxation priorities well before
the election is called. The electorate is becoming increasingly
alive to the fact that there will be both cuts in public spending
and increases in taxation. However, voters need to have a clear
idea about the level of pain they are expected to endure and
where exactly it is going to hurt.
We have identified a number of areas of tax policy where the
three main parties could raise the additional £25bn a year, which
a prudent estimate suggests is now necessary to rebuild national
finances. It is important to stress, of course, that none of these
are, as yet, the stated policies of any of the three major parties.
We believe that the onus is now on all three parties to share
their projected tax policies – it is time to break the silence.
Stephen Herring
Senior Tax Partner

4. 02 Time to break the silence?
Assessing the tax policy options available
Assessing the tax options available
to help rebuild the UK Government’s
fiscal finances
The 2009 Budget revealed that the fiscal deficit for a single year return the Government’s finances to a more sustainable footing
had reached an alarming £175bn with no prospect of significant is urgently needed. A prudent estimate suggests that an
reduction in the next two years.The ensuing political debate additional £25bn of tax revenue could well be required to help
has initially focused on the inevitability of cuts in public address the deficit and place the UK’s public finances on a path
spending that will be needed to address such a large shortfall. to long term sustainability and ultimate balance.
However, a less openly discussed painful truth is that there will,
almost without a doubt, be a need for some taxes to rise – at The recent deterioration in tax collections
least in the medium term. Political debate about which taxes as the impact of the credit quake works its
these will be, and at what levels they will be imposed, is
remarkable by its absence.The three major political parties are
way through to businesses, employees and
understandably reticent to provide details of their proposed tax
the consumer, is highlighted in Government
increases. However, while no politician is keen to discuss statistics (Table 2) demonstrating the
taxation (unless popular tax cuts are being proffered), a debate dramatic falls in tax collections in the first
about the contribution that increased taxes will make to helping half of the calendar year.
Table 1 – The scale of the Government deficit
Source – HM Treasury “Budget 2009 Building Britain’s future”, April 2009. Actual 2007/08; Estimate 2008/09; Projections 2009/10 and 2010/11
800
700
2007/08
600
2008/09
500
2009/10
400
£bn 300 2010/11
200
100
0
-100
-200
-300
Government Spending Tax Receipts Deficit

5. Time to break the silence? 03
Assessing the tax policy options available
Table 2 – Tax collections from largest Uncomfortable truths
Analysis of the public pronouncements from the major parties
taxes are falling
(All figures £bn) (Note 1)
and reading between the lines of other areas of their policies,
suggests that there are some common areas of tax policy that
TAX 2006(H1) 2007(H1) 2008(H1) % (Falls) 2009(H1)
all may agree will receive relatively little challenge politically and
[2008(H1)
to will raise useful tax revenues without crushing the fragile tips of
2009(H1)] the ‘green shoots’ of economic recovery.These measures which
all three political parties might consider ‘acceptable’ tax rises
Income tax 76.0 81.3 88.7 (6.5) 82.9
include leaving personal allowances to lag behind inflation,
Corporation tax 21.1 18.5 21.3 (25.4) 15.9 increasing alcohol and tobacco duties at a rate above inflation,
VAT (note 2) 36.3 39.6 39.9 (15.5) 33.7 increasing fuel and road duties by an inflation-exceeding
amount and increasing insurance premium tax by four per cent.
National Insurance
Contributions
45.9 49.7 51.0 (3.5) 49.2
Notes
1. Source for all figures is Office for National Statistics “Statistical Bulletin; Public Sector
Finances” for June 2009 published 21st July 2009. Table 3 – The tax rises all three parties might
2. Includes effect of temporary reduction in VAT standard rate from 17.5% to 15% in consider acceptable
December 2008.
Source – HM Treasury “Tax ready reckoner and tax reliefs” November 2008
• Do not increase income tax allowances in line £5bn
The art of the possible? with inflation
• Increase alcohol and tobacco duties by £1bn
The discussion of tax policy typically takes place in at least two
12 per cent above inflation
related but distinct realms: the economic and the political.
There have been a number of tax measures proposed or
• Increase fuel and road duties by 3 per cent £1bn
enacted in recent years that illustrate the tension between
above inflation
these two perspectives. Politicians are acutely sensitive to how
their policies are perceived.The Finance Act 2009 increase in
• Increase insurance premium tax by 4 per cent £2bn
income tax to 50 per cent, from 2010/11, for those earning
over £150,000 or more, may secure significant and
controversial coverage from the media, but in economic terms, Total increases predicted for all parties £9bn
it barely registers with regard to the extra revenue it will raise.
In fact, history suggests that taxing high earners at a higher rate
can, counter intuitively, lead to a decline in the tax revenues Using HM Treasury’s data collected in the Government’s “Tax
collected from them.This is because the incentive at the margin Ready Reckoner and Tax Reliefs (November 2008)” publication,
for those taxpayers is to arrange their affairs so that they applying these measures would generate an annual revenue
sidestep the impact of higher tax rates. Other measures may increase of £9bn. The more interesting – and much more
be designed to appeal to ‘ordinary voters’ – such as the difficult – question is where additional tax increases could be
temporary reduction in VAT from 17.5 per cent to 15 per cent applied that would produce an additional £16bn, making a total
but have had little impact on actual economic behaviour £25bn in additional taxes that a prudent analysis suggests may
through increased consumer spending. be required to help address and reduce the budget deficit.

6. 04 Time to break the silence?
Assessing the tax policy options available
The worst options
There are particular areas that we consider must be wholly out illustrated in the table below. Even substantial increases in the
of bounds to all three of the major parties. While all tax rises rates of inheritance tax, capital gains tax and stamp duties
may be regrettable, some are simply out of the question for could not go far towards achieving any major reduction of the
either economic or political reasons. deficit, as their prospective yields are both very low and will
continue to be severely depressed for years to come by the
The economic impact of some tax increases could be severe. impact of the credit crunch.
For example, raising the level of UK corporation tax, already
among the highest rates imposed by an EU Member State, Regardless of political persuasion, future Chancellors may feel
would undoubtedly inflict significant damage upon the UK under pressure to tax the more wealthy taxpayers. However
economy, damaging its prospects for foreign inward investment the recent increase in income tax to 50 per cent for those
and diminishing the ability of UK businesses to compete. In earning more that £150,000, for example, will result in less
much the same way, an increase in employers’ national than £2bn in extra revenue, even according to the Treasury’s
insurance could be seen as a tax on jobs. Given the very own forecasts (our estimates would be much lower due to
significant and potentially persistent increase in unemployment behavioural changes by entrepreneurial companies).The
arising from the economic downturn, this is unlikely to be perception is that this change is driven more by politics than
politically or, more importantly, economically sensible unless and economics. Restricting future increases to target the wealthiest
until it can be seen that unemployment is reducing. cannot raise significant amounts and would also have damaging
macro-economic impacts.The wealthy targeted by such
On the other hand some superficially more politically increases will inevitably seek ways to mitigate the impact of
acceptable tax increases simply would not make a noticeable such tax increases through planning and behavioural changes
dent in the £175bn deficit. Even before the credit crisis, certain that may well lead to a decline in economic activity which
high profile taxes raised a very small proportion of revenues as generates sustainable tax receipts.
Table 4 – The amounts raised by key taxes
Source – HM Treasury “Budget 2009 Building Britain’s future”, April 2009. Actual 2007/08; Estimate 2008/09; Projections 2009/10
160
140 2007/08
2008/09
120
2009/10
100
£bn 80
60
40
20
0
Income tax National insurance VAT Corporation tax Capital gains tax Inheritance tax Stamp duties

7. Time to break the silence? 05
Assessing the tax policy options available
Reading between the lines –
political choices, policies and tax
Given these challenges, what are some of the choices that the
three main parties might consider? Our analysis of each political
party’s stated policies, political priorities and past history
suggest a number of areas of which they may consider raising
current levels of tax. Of course, it is important to stress that
none of these are stated party policy – indeed, perhaps
unsurprisingly, they have said little on this matter.
A summary of our analysis is set out in the table below:
Table 5 – Potential options aligned to party priorities and preferences
Sources – HM Treasury “Tax ready reckoner and tax reliefs”, November 2008.
HM Treasury “Budget 2009 Building Britain’s future”, April 2009. Estimate 2008/09; Projections 2009/10.
Labour Conservatives Liberal Democrats
Abolish all higher rate Raise VAT by 2.5% £12bn Apply CGT at 10%
income tax relief on on principal private
pension contributions £6bn residence £3bn
Apply full VAT to
books and magazines £2bn
Raise NIC by 1% Charge full VAT rate
for employers on domestic fuel £3bn
and employees £10bn Increase VAT on
domestic fuel from
5% to 9% £1bn Increase green taxes
by 25% over inflation £1bn
Increase green taxes
by 25% over inflation £1bn Reduce capital
allowances by 25% £6bn
Abolish relief for
savings and investment £3bn
Labour total £16bn Conservative total £16bn Liberal Democrat total £16bn

8. 06 Time to break the silence?
Assessing the tax policy options available
Labour Conservatives
Labour’s likely intentions should be easier to predict as it has The Conservative Party has already expressed its concern
set out its fiscal priorities in the 2009 Budget Report. We about what it believes to be the damagingly high rate of
consider, however, that it is inevitable that the figures already corporation tax when compared to the UK’s European and
announced by the Treasury will have to be supplemented international competitors. It is not unreasonable to infer that
with additional and far reaching tax raising measures for the they would view many other increases in direct taxation in
next Parliament. much the same way.
The Chancellor has already introduced restrictions on the If previous behaviour is a guide to any
pension contributions tax relief available to taxpayers potential future steps they make take,
earning in excess of £150,000 but this is only estimated to
raise an additional £0.2bn. Abolishing the relief on pensions
then indirect taxes are a strong candidate
contributions for all taxpayers would see this increase to
for a potential Conservative Government’s
a much more substantial £20bn. However political taxation agenda.
considerations would almost certainly prevail, meaning
that a more realistic restriction could be applied only to The standard rate of VAT was increased by almost
higher-rate taxpayers (ie those earning £44,000 and above) ten percentage points (from 8 per cent to 17.5 per cent)
which would raise £6bn. under the previous Conservative administrations.
An increase of 2.5 percentage points by a future Chancellor
would not seem out of the question. Indeed, a VAT rate of
20 per cent would be comparable to many of the UK’s
Another well-tried instrument in the
European neighbours and would raise an additional £12bn.
Labour tax repertoire has been National
Insurance increases, applied to employees Other possible areas in the VAT area might include the full
and employers. Raising contributions for imposition of VAT on books and magazines but this and
both by one per cent would generate an similar reforms would inevitably be more controversial.
The Conservatives have given prominence to their
additional £10bn.
The combined impact of both measures could realise a total commitment to introducing measures aimed at cutting
of £16bn in additional revenue. greenhouse gas emissions.There are a number of existing
green taxes and levies including air passenger duty, landfill
tax, the climate change levy and the aggregates levy. It is
reasonable to assume that a Conservative administration
would fulfil their stated commitment by increasing those
green taxes by, perhaps, 25 per cent above the rate
of inflation.
A more politically controversial step, but one that would
have a green rationale, would be an increase in the reduced
rate of VAT payable on domestic fuel bills.These are
currently set at five per cent. Increasing them to nine per
cent would yield an additional £1bn in revenue.

9. Time to break the silence? 07
Assessing the tax policy options available
Liberal Democrats
The Liberal Democrats’ policies and public statements on
various aspects of government policy suggest two particular
avenues for their possible future tax policies.The first of
these, and certainly the most politically controversial, would
be the possible reduction or even abolition of the capital
gains tax exemption applying to the sale of principle private
residences.The party’s finance spokesman,Vince Cable, has
been highly critical of what he characterises as the persistent
reliance on asset bubbles in the housing market to boost the
economy and tax revenues. It does not stretch credulity too
far to suggest that a partial restriction on principal private
residence relief may therefore be a possibility for a Liberal
Democrat administration. Doing so could yield an extra
£3bn in revenue.
A second major policy area that seems likely to drive Liberal
Democrats’ tax policies is the environment.They have
arguably made the boldest claims about their intentions to
introduce measures to address climate change, green
taxation and encourage green living. We infer from the
boldness of their statements that they would be willing to
make bold changes in the tax arena on this. One way could
be to apply the standard rate of VAT on domestic fuel, as
well as increase green taxes by at least 25 per cent above
the rate of inflation.Taken together, these measures would
result in an increase of £4bn.
The Liberal Democrats are also likely to
look for additional tax rises by restricting
reliefs that favour the affluent and
business owners as opposed to less
affluent families. This could mean the
abolition of a wide range of the reliefs
currently applying to various investment
incentives – ISAs, VCTs, EIS, SIPs, EMIs,
etc – and, possibly, a reduction in the
capital allowances available to businesses
for their capital expenditure.

10. 08 Time to break the silence?
Assessing the tax policy options available
Finding the elusive balance
There is no doubt that the UK faces an unprecedented and
bleak fiscal outlook over the next few years. Hard decisions will
need to be made about the best ways to address the scale of
deficit and return Government finances to balance or, to an
acceptable medium term deficit at least. All the political parties
are more than aware of this.The electorate is becoming
increasingly alive to the fact that there will be both cuts in
public spending and increases in taxation. However, for voters
to make informed decisions about the level of pain they are
expected to endure and where exactly it is going to hurt, they
need to have a clear idea of the choices that each party is
prepared to make and the impact those choices will have on
the economy generally, as well as their own personal finances.
It is beyond the remit of this paper to discuss the political
fall-out that may arise from a failure to conduct an intelligent and
‘grown-up’ debate about the harsh choices ahead. However a
failure to communicate and debate these key issues transparently
will only generate ill-will towards the political parties.We believe
that the public deserves to be fully engaged in the process of
debating the key taxation priorities and choosing between the
tough choices that undoubtedly lie ahead.
Call for tax policy
honesty… now!
Assuming, as we do, that the political parties say that we
have made incorrect inferences about what tax increases
they might have in mind, the onus is on all three parties to
share their tax policy alternatives with the electorate well
before the election is called.Three weeks in the run up to
an election is not enough to debate the complex tax
options and make properly informed decisions.

11. 09
Appendix
The appendix contains all sources used, and reproduced below is an extract from one of the sources
(1) Office for National Statistics “Statistical Bulletin; Public Sector Finances” for June 2009 published 21st July 2009.
(2) HM Treasury “Tax ready reckoner and tax reliefs”, November 2008.
(3) HM Treasury “Budget 2009 Building Britain’s future”, April 2009.
Extracts from "Tax ready reckoner and tax reliefs", November 2008.
Table 5: Direct effects of illustrative changes in other direct taxes and national insurance contributions
£m
National insurance contributions 2009-10 2010-11 2011-12
Rates
Change Class 1 employee main rate by 1 percent pt 3,900 4,100 4,300
Change Class 1 employee additional rate by 1 percent pt 950 1,000 1,100
Change Class 1 employer by 1 percentage point 4,950 5,200 5,500
Change Class 2 rate by £1 per week 155 165 170
Change Class 4 main rate by 1 percentage point 340 350 365
Change Class 4 additional rate by 1 percentage point 180 190 205
Table 6: Direct effects of illustrative changes in indirect tax rates
£m
VAT 2009-10 2010-11 2011-12
VAT: change reduced rate by 1 percentage point 250 260 270
VAT: change standard rate by 1 percentage point 4,600 4,800 5,000

12. About BDO Stoy Hayward
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How we can help you
If you would like further information about this publication or our wide range of
services please contact:
Stephen Herring
Senior Tax Partner
020 7893 2437
stephen.herring@bdo.co.uk
Paul Eagland
Head of Audit and Tax
020 7893 2435
paul.eagland@bdo.co.uk
www.bdo.co.uk
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