'Nearly poor' to get help with fuel tax: Chancellor set to widen VAT compensation package under threat of backbench revolt

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SOME 'nearly poor' people just above income support level are likely to get help to cope with the imposition of value-added tax on domestic fuel, it emerged last night.

Kenneth Clarke, the Chancellor, who is due to present the package of the coming year's spending decisions at today's Cabinet, has carried out intensive negotiations with numerous MPs as the arguments over the compensation package have worn on. A source said the Chancellor was acutely aware that, with a majority of 17, restricting assistance to those on income support risked a serious revolt in the Commons.

That message was strongly reinforced last night as Sir Marcus Fox, chairman of the Tory backbench 1922 Committee, and Geoffrey Johnson Smith and Dame Jill Knight, the vice-chairs, warned that something more must be done.

A political decision that assistance must be provided for some 'nearly poor' people now looks set to override objections from the Treasury, which wanted the compensation to apply only to the 5 million people on income support.

Some ministerial sources have suggested that part of the compensation package could take the form of help with home insulation.

Andrew Bowden, Tory co-chairman of the all-party Parliamentary Group for Pensioners, said the key group was pensioners with only a small income over the income support level.

Labour, meanwhile, insisted that the VAT controversy could have been avoided in its entirety had the Government clamped down on lax tax laws. Gordon Brown, the shadow Chancellor, said ending abuses that successive Conservative governments had refused to challenge would produce pounds 10bn over two years, easily covering the pounds 950m that VAT on fuel would raise. Stephen Dorrell, Financial Secretary, said the Government was willing to stop tax avoidance by closing loopholes, and would go on doing so, but said Mr Brown's figures were 'pure Alice in Wonderland'.

Mr Brown insisted, however, that under 'pay-as-you-like' rules, 'millionaire foreigners and some of Britain's already wealthy individuals, companies and others in privileged positions can exploit a series of major tax loopholes'.

Mr Brown claimed research of official sources, backed by Inland Revenue figures, showed that reform of inheritance tax would raise pounds 250m, and closing down relief on executive share options would raise up to pounds 400m, over two years.

Immediately scrapping the Business Expansion Scheme for repossessed homes would raise pounds 200m, while ending tax relief on private medical insurance for pensioners would raise pounds 120m in two years.

Other urgently needed measures included ending deferred payments of corporation tax and 'scandalous' abuses of sovereign immunity by states trading aggressively in the market place, Mr Brown said. 'The Kuwaiti Petroleum Company received more in one single tax refund than next year's cost of imposing VAT on pensioners' fuel bills.'

Mr Brown said millionaires claimed they were not British domiciled, while making their money in Britain - the 'Asil Nadir and Octav Botnar loophole'.

Mr Dorrell also said, in a Commons written reply last night, that it remained the Government's intention to tax invalidity benefit at a suitable opportunity.