UK's Hammond forced into U-turn on jobs tax after party revolt

By William James and Kylie MacLellan

LONDON (Reuters) - British finance minister Philip Hammond announced a tax policy U-turn on Wednesday, scrapping a planned rise in an employment levy announced in a budget just a week ago following criticism that the measure breached his party election promises.

The reversal came after a threatened revolt by lawmakers in Prime Minister Theresa May's Conservative Party and outrage in many British newspapers over the planned change, which drowned out the message Hammond had wanted to send with his budget about his plans to steer Britain's economy through the Brexit process.

The episode underlines how slim May's majority in parliament is as she prepares for complex negotiations to leave the European Union, during which she will need lawmakers to approve several major pieces of legislation.

"In light of what has emerged as a clear view among colleagues and a significant section of the public I have decided not to proceed with the Class 4 NIC measures set out in the budget," Hammond said in a letter to Conservative lawmakers, referring to the tax known as National Insurance.

"It is very important to me and to the prime minister that we are compliant not just with the letter, but also the spirit, of the commitments that were made."

The increase, which targeted self-employed workers, had been due to take effect from April next year.

AUTHORITY "SHREDDED"

The policy reversal adds Hammond's name to the long list of finance ministers who have come unstuck over the annual budget announcement. His predecessor George Osborne's reputation took years to recover after a botched budget in 2012, which opponents dubbed an 'Omnishambles'.

"(Hammond's) authority is now shredded after just one budget," said opposition Labour finance spokesman John McDonnell. "This episode throws up urgent questions that he and the cabinet must now answer."

A spokesman for May said she had full confidence in Hammond.

In his letter on Wednesday, Hammond said there would be no increases during the current parliament to rates of national insurance, which allows workers to qualify for certain benefits including a state pension. This parliament runs until 2020.

The government had tried to justify the tax rise by saying it addressed an imbalance in the system. Employed workers pay a higher rate of national insurance than the self-employed.

Hammond's letter said a planned review of employment practices would be widened to look at how the differences could be better addressed.

In initial reaction to Hammond's U-turn, the business community urged the government to aim for consistency.

"The business community needs to feel that the government has confidence in its plans for the tax system, and policy isn't going to chop and change from week to week," Stephen Herring, Head of Taxation at the Institute of Directors.

"Credibility takes a long time to build, but can be lost in a moment."

(Editing by William Schomberg and Gareth Jones)