MPs throw down new challenge over 10p tax deal

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Gordon Brown faces a fresh revolt over the 10p tax fiasco after a Labour-dominated committee demanded full compensation for more than a million people who still stand to lose out.

The Commons Treasury Committee issued a stark warning that 1.1 million people would still be worse off because of the abolition of the 10 pence tax band, despite the recent announcement of a £2.7bn package of tax breaks to address the problem. In a scathing report, members of the committee made it clear that the Prime Minister had not fully defused the politically disastrous row over 10p tax, warning that Mr Brown needed to produce new plans to compensate the losers before this autumn's pre-Budget report.

The committee issued a stinging personal rebuke to Mr Brown who faced accusations of a "tax con" when he scrapped the 10p tax rate to pay for a 2p cut in the basic rate of income tax announced in a dramatic flourish at the end of his final Budget in 2007.

MPs said: "For personal tax decisions the sudden and final nature of Budget decisions has been less about the need to prevent forestalling activity than it has been about the perceived benefit of seeming to pull rabbits from the hat." The committee also warned that ministers needed to make sure that the package of compensation announced last month lasted for more than one year.

John McFall, the committee's Labour chairman and a long-standing ally of the Prime Minister, said: "The 13 May measures, whilst welcome, do not go far enough. There are still 1.1 million losing households, many of whom are on low incomes and who are being hit hard by rising food and fuel prices and the slowdown in the economy.

"The Government's short-term priority must be to make every effort to compensate these people in full.

"The Government must not let this issue slide into the background and will need to produce fresh proposals to fully compensate these 1.1 million households by the time of the 2008 pre-Budget report."

The committee warned that the remaining losers were people with small incomes "for whom the loss might be significant when required to manage a personal or household budget at a time of sharply rising prices for many essential goods".

Ministers face a potential revolt on the issue when the Finance Bill goes through its final stages in the Commons next week. Labour left-wingers have tabled amendments to increase the compensation for low-paid workers to ensure that people hit by the loss of the 10p tax band are not out of pocket. One former minister said: "The 10p tax problem is just not sorted."

The Chancellor, Alistair Darling, was forced to unveil an unprecedented "mini-budget" in May raising personal tax allowances for millions of low-paid workers in the face of a rebellion by Labour backbenchers after it became clear that the change would adversely affect many of those least able to afford it.

But in a report published today, the Treasury committee said that only £7m of the £2.7bn cost of the move went towards compensating people hit by the abolition of the 10p rate.

Mr McFall said: "Raising personal allowances was clearly not a well-targeted way to compensate the losers from abolition."