`Little scope for tax cuts,' IoD tells Clarke

The Chancellor received conflicting advice on the Budget from business leaders yesterday.

The Institute of Directors called for abolition of inheritance tax and capital gains tax on assets held over three years to take priority over income tax cuts in its budget submission to the Chancellor.

However, the British Retail Consortium called for abolition of stamp duty on housing and a reduction in the burden of personal taxation. "The time has come to provide some relief for consumers," said the director- general, James May.

The IoD warned that there was no scope for tax cuts beyond pounds 3-4bn and that these would have to be matched by spending reductions.

"Let's have prudent fiscal management with the prospect of a cut in interest rates before the end of the year," said Tim Melville-Ross, the Institute's director general.

Spending cuts of pounds 3-4bn next year could realistically be achieved through efficiency gains, said Mr Melville-Ross.

But further reductions in expenditure necessary to finance a rolling programme of tax cuts, including two subsequent cuts of 1.5p on the standard rate of income tax, could not be achieved by "paring away at the present system". Instead they would require fundamental reforms to welfare expenditure, switching substantially more welfare provision from the public to the private sector.

The institute's key proposal was the replacement of the existing system of capital gains tax with a new tapered tax, reducing liability the longer the asset was held.

The proposal met with scepticism from Andrew Dilnot, director of the Institute for Fiscal Studies, who argued that the tax was needed to prevent income being converted into capital gains.

Malcolm Gammie, a tax specialist at the law firm Linklaters & Paines, said that "although the tax was a bad one, there was still a need for it in one way or another". If dividends were taxed, there was also a case for taxing real gains.