Self-employed facing pounds 900m tax 'bombshell'

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Political Correspondent

Labour yesterday attacked the Government for a "tax bombshell" of nearly pounds 1bn on self-employed people, and promised a Commons battle to amend the Finance Bill, to be published this week.

Andrew Smith, Labour's Treasury spokesman, said the small print in November's Budget statement revealed that the change to self-assessment in 1997 would result in a pounds 900m tax rise - equivalent to the yield from a halfpenny on the standard rate of income tax.

"This pounds 900m is the hidden tax increase associated with self-assessment," said Mr Smith. "While the principle of self- assessment makes sense, the way the Government is going about it is a disaster in the making. They must think again now before it is too late."

An Inland Revenue spokesman confirmed that the self-employed would have to pay double tax when they change to estimating their own liability. At the moment, tax is paid on the previous year's income, but the self- employed will from April 1997 start paying tax on the current year, meaning that for one year they will pay two tax bills. "It's a one-off. It will not raise extra money after the change," the spokesman said.

But Labour claimed that not only would the self-employed face a cash- flow crisis from the bringing forward of tax, they also faced extra costs of at least pounds 130m a year from the red tape of form-filling. "This is a monumental own goal by the Tories. The first self-assessment forms may actually be tumbling through letterboxes just as the general election gets under way. They would be a powerful reminder of all the broken Tory promises on tax," said Mr Smith.

Labour's belated discovery of the hidden tax rise - the change to self- assessment on the basis of current-year profits was first announced in the March 1993 Budget - poses a dilemma for the party. Although Mr Smith pledged to try to "postpone" the measure when it comes before the Commons, the present one-year delay in assessing tax on the self-employed could be described as a loophole which mostly benefits the better-off.

What is more, the bulk of the extra revenue, pounds 850m, is expected to accrue to the Exchequer in 1998-99, when Mr Smith expects to be in government.