Tax measures already known

• Council tax rises still above inflation
• REITs tax windfall for Gordon
• Clampdown on managed service companies
• Pepping up ISAs

Council tax rises still above inflation

A survey of more than 200 local authorities, carried out by The Times, shows council tax bills set to rise for 2007-08 by an average 3.8% - that compares unfavourably with the government's target measure of inflation, the Consumer Price Index, which rose by an annualised 2.7% in January. Such an increase would boost the average annual council tax bill by £47 to £1,315 - up from £688 in 1997.

The lowest rises are in the 238 districts that face elections in May weeks before Gordon Brown is expected to take over as Prime Minister. While the increase is the lowest overall rise since Labour came to power, some say the Chancellor is merely "holding the lid on council tax" and that rises could well be steeper next year.

The increase is sure to provoke more protests from pensioners who would rather go to prison than pay more council tax - presumably not an image the government would want to see splashed in the headlines and on the news ahead of the local government elections.

The increase in charges is also likely to rise to nearer or even over 4% after police and parish elements of the tax are added on.

Sir Michael Lyons is expected to publish his report on the future of local government finance alongside the budget but there have been rumours that it may be delayed (again). Any proposals involving revaluation or a widening of the council tax bands leading to substantial tax increases could prove politically 'difficult' for the Chancellor with his eyes set on another horizon.

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REITs tax windfall for Gordon

The Chancellor is looking at a £1 billion-plus windfall this year from property companies turning themselves into tax-efficient real estate investment trusts (REITs).

The tax windfall, which is equivalent to the yield from a penny on the top rate of income tax, arises from the conversion charge firms must pay to turn themselves into REITs.

By the end of 2007, conversion payments are expected to top £1 billion. Land Securities alone has paid a conversion charge of £315 million.

Other major property groups that have converted since REITs were introduced on January 1 include British Land, Hammerson, Brixton, Great Portland Estates and Slough Estates.

However, Mike Warburton, tax partner at accountant Grant Thornton, says, "To some extent, the Treasury is taking all the tax now. It is a way of mortgaging the future of our children." Once the one-off charge has been paid, REITs pay no corporation tax on rental income, though shareholders will pay tax on dividends.

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Clampdown on managed service companies

Up to 250,000 electricians, plumbers, teachers, nurses and other self-employed people face an effective tax rise of thousands of pounds a year in a crackdown on 'managed service companies'. These agency workers become MSC shareholders and then sell their services to employers. The workers, often recruited from abroad by employment firms that then group them into MSCs, are paid in dividends rather than salary.

Dividends are subject to income tax but not National Insurance contributions, thus cutting the tax bill for the employee by about 20%- and depriving the Treasury of about £350 million a year.

KPMG notes that over the last year, the Government has made a number of statements indicating that it would tighten up on perceived abuse via the use of managed service companies (MSCs). MSCs are used by companies in certain industries, like agency arrangements, to manage a large number of individuals operating under separate self-employed contracts.

HM Revenue & Customs (HMRC) released draft detailed rules regarding the operation of MSCs for consultation at the time of the Pre Budget Report in December last year and a further update to the draft rules on 6 February. Responses to the consultation were required by 2 March. The consultation document states that the final legislation will be published with the 2007 Finance Bill.

Agencies running the managed service companies are attempting to outflank the taxman by advising their clients to set up personal service companies with the result that Companies House is being swamped with new company registrations ahead of the new tax year.

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Pepping up ISAs

Individual savings accounts (ISAs) will change from 6 April 2008. The mini and maxi ISA distinctions will be removed, although only £3000 of the £7000 annual allowance may be invested in a cash ISA.

Personal Equity Plans (PEPs) will be brought into the ISA wrapper and cash ISAs may be moved into equity ISAs but not vice versa. The proposals mean ISAs are looking more and more like their predecessors, PEPs. In broad terms, if the Chancellor felt so minded to raise the investment limit in Budget 2007, say to £9,000 then we would be almost back to square one in 1997! There is now no short-term tax benefit for basic-rate taxpayers when holding equities within an ISA.

Bringing PEPs into the ISA wrapper will penalise investors with un-invested cash in their PEP. Currently, interest on the cash PEP is only taxed if more than £180 of interest is withdrawn each year. Under ISAs, all this interest is subject to a flat 20% tax charge.

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