How ‘tax cuts’ in Brown’s last Budget backfired

Alistair Darling's announcement of a tax cut for 17 million people hit by the abolition of the 10p tax band is the most dramatic of a succession of U-turns and policy shifts that have dogged his tenure as Chancellor.

Yesterday's announcement is the most comprehensive rewriting of a Budget for decades. But the move is just the latest in a series of policy shifts made as the Treasury has been buffeted by the knock-on effects of the turmoil in the global financial markets.

Last year, Gordon Brown's last Budget as chancellor used the abolition of the 10p tax band to fund the rhetorical flourish of cutting the standard rate of income tax from 22 to 20p in the pound from this year. The dramatic announcement, made at the height of speculation about a possible general election, started to unravel within mere minutes.

Mr Brown always insisted that changes to the tax credits system would prevent people losing out. But his position was undermined after the tax change came into effect last month.

Labour MPs campaigning for the local elections returned after Easter having taken a hammering on the doorstep and demanded action to compensate millions of people who could not recover their losses through the tax credit system.

Mr Darling's first Budget was dominated by his decision to double the inheritance tax allowance for married couples in a move widely seen as a response to the proposal days earlier by George Osborne, the shadow Chancellor, to increase the threshold to £1m.

There have also been changes to policy over capital gains tax (CGT), non-dom workers and, most notably, over the nationalisation of Northern Rock.

The Chancellor was forced to retreat over proposals published in the pre-Budget report to replace controversial capital gains tax reliefs with a new flat rate of 18 per cent. The new rate brought howls of protest from some small entrepreneurs, who faced a huge leap in tax if they sold their assets. But, in January, Mr Darling backed down, handing a reprieve to up to 80,000 small business owners.

Under the changes, the Chancellor said he had decided to impose a lower rate of CGT on small business owners and entrepreneurs selling their businesses, rather than charging them the new rate of 18 per cent due to be introduced in April.

Under the concession, small business owners selling their firms will pay only 10 per cent CGT, as long as gains do not exceed £1m.

Mr Darling has also been forced into a partial retreat over plans to reform the controversial tax status of so-called "non-doms" – people who are registered abroad for part or all of their tax affairs. In February, Mr Darling dropped many of his proposed new rules on financial disclosure amid warnings by wealthy non-doms that they would quit the country. He also pledged to work towards making the proposed £30,000 levy free of US tax.

Mr Darling was also forced to abandon a lengthy search for a private-sector buyer to take over the stricken Northern Rock Bank and announced that it would be nationalised as a temporary measure. The bank's eventual nationalisation was derided by the Tories as a "catastrophic decision" after months of "dither and delay".