City jitters over Labour tax plans

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The City fears that Labour may be forced to raise company taxes in a move that could leave businesses and pension funds around pounds 12bn a year worse off and prompt a stock market sell-off.

Leading figures have warned that a Labour government, faced with revenue shortfalls from its 1998-99 Budget onwards, might raise corporation tax by up to two percentage points.

The City is already sceptical about the gap between Chancellor Kenneth Clarke's current tax and spending plans in last year's Budget, a minefield that Labour will have to negotiate.

As a result, City economists believe employers' national insurance contributions may also rise, to take the place of higher basic or upper rates of personal income tax, which shadow Chancellor Gordon Brown has pledged he will not raise in the lifetime of the next parliament.

Broker Merrill Lynch calculates that two points on corporation tax - lifting it to 35 per cent - and 1 per cent on employer's national insurance contribution rate would net pounds 5bn, without any huge loss of popularity.

"Labour is caught between the devil and the deep blue sea when it comes to getting more tax money, and I think they see business as a soft target that will not lose them votes," another City economist said.

Labour, however, vigorously denied that it would raise tax on companies, if it wins the election.

"We have said we will review the corporate and capital gains tax regimes to promote greater long-term investment in the manifesto, and that is what we will do," said Charlie Whelan, Mr Brown's press secretary.

"There is nothing in our plans that calls for more tax."

Labour's plans for business, he added, would be fleshed out this week with the publication of the party's business manifesto.

The complexity of the corporate tax system, however, would mean that changes would not materialise before Mr Brown's scheduled Budget next March, at least.

The City's fears came as Alistair Ross Goobey, the outspoken head of the pounds 30bn Hermes pension fund, warned that scrapping tax credits on share dividends would lead to sharp falls in the value of UK equities.

The credits, which arise from advance corporation tax (ACT), can be reclaimed by tax-exempt organisations such as pension funds. The elimination of ACT would raise between pounds 6bn and pounds 8bn, according to the Institute for Fiscal Studies.