According to tax specialists at Smith and Williamson, the chancellor's decision to move to a flat rate of CGT at 18% in 2008 is at odds with a top rate of income tax of 50% (announced in the Pre-Budget report. This differential is encouraging taxpayers to seek out ways of re-designating income as capital.
Consequently the CGT rate on short-term gains could be increased from its current flat rate of 18%, by June this year, to make it less attractive to reclassify income.
Although the standard VAT rate returned to 17.5% on 1 January 2010, there are likely to be further increases in the pipeline, according to Smith and Williamson. The average rate of VAT in the EU is almost 20%, and each 1% increase brings in just under £5 billion. However, any VAT rise will have an immediate impact on inflation.
A new 50% top rate of income tax will apply from 6 April 2010 on taxable income over £150,000. The 40% rate, which currently applies on earnings over £43,875, could be increased to 42% or even 45% but it would hit the mass affluent so would be unattractive politically just before an election.
A harsher approach from HMRC on tax avoidance is already evident, with rules and penalties strictly applied. Moreover, HMRC has improved powers of inspection and more information at its disposal, giving greater scope to pinpoint tax evasion.
Smith and Williamson does not anticipate major rule changes in terms of tax avoidance, rather implementation of existing legislation. But the Human Rights Act means that any penalties must be proportionate, putting HMRC under pressure with regard to some of the current penalties that are charged irrespective of the gravity of the offence.
The Budget will provide an election platform for the Government, but with a deficit of £178 billion and promises to reduce this by half in four years, any tax concessions are likely to be short term, making substantial tax rises a simple matter of timing. Higher earners and the financial services are likely to bear the brunt.
Richard Mannion, national tax director at Smith and Williamson, said: "The reality is that the Government - whoever wins the election - will need to fill its fiscal bucket.
"A VAT rise must be top of the agenda, but perhaps not introduced until later in the year. Every one per cent increase in VAT brings in just under £5 billion a year, making this a tempting option. The downside is that it has the immediate effect of adding to inflation.
"Capital gains tax is almost inevitably set to rise - possibly from as early as 6 April - since the current rate of 18% is much less than the higher rates of income tax, which encourages people to seek ways of converting income into capital.
"The big earners for the Government are income tax, national insurance and VAT. Together, these taxes typically represent around 75% of the Government's annual revenue. So unless there are tax rises in one or more of these areas in the not too distant future, the Government will have very little chance of balancing the books.
"We can be certain of an increasingly hard-line approach from the authorities to complicated tax planning and a renewed emphasis on rooting out tax avoidance.
"I anticipate the chancellor will make few - if any - unappealing announcements in the Budget. The majority of tax increases, however, will emerge later this year or next year once the election has come and gone.
"While the chancellor needs to be realistic, it is important that we don't stamp out nascent green shoots. Fiscal-raisers are necessary, but businesses and individuals need the Government to take a measured approach."
HR magazine will bring you all the Budget news as it breaks. Look out for our Budget Special in your inbox tomorrow afternoon.
