§ I undertook last year to review the legislation on fringe benefits, following the start we made in last year's Finance Act with the legislation on medical insurance and vouchers.
§ As the Diamond Commission showed in its Report on Higher Incomes from Employment, the two main benefits provided by firms for their employees are cars and loans at a nil or low rate of interest. The provision of a company car for a director or an employee earning over £5,000 is already taxable; but the rules for measuring the benefit derived from its use for non-business purposes do not in most cases bring into liability anything like the real value to the beneficiary.
§ I propose therefore that this benefit should in future be measured by a scale which will vary with the size of the car and will reflect standing charges and running costs borne by the employer in respect of the employee's private use of the car. The substitution of a scale for the present rather cumbersome method of measuring car benefit" will bring a much-needed simplification into this part of the tax system and will also make it more equitable.
§ The scale will not take effect until 1977–78, and in view of the importance of not adding to the difficulties of the British car industry it will be phased in 263 over a period of two years, so that its full effect will not be felt until 1978–79. In the meantime my right hon. Friend the Secretary of State for Industry will be consulting the motor industry on the industrial implications of this decision.
§ The benefit of low-interest or interest-free loans is not at present taxable. I accept the view of the Diamond Commission that there is no tax advantage from such loans where the interest on them would be eligible for tax relief. But where it would not be, I propose to make the benefit of these loans liable to tax. This will mean, for example, that house mortgages provided cheaply will not attract liability so long as they do not exceed the ceiling for tax relief; but loans made, say, for buying shares in a public company or for paying school fees will be taxable to the full extent of the benefit conferred by the remission of interest.
§ In addition to my proposals on cars and loans, I intend to strengthen the 1948 legislation on benefits in some other respects including its extension to employees in the public sector and non-trading organisations. My right hon. Friend will give details of these in the course of the debate.
§ I propose that all these changes in the treatment of fringe benefits should take effect from 1977–78—with the exception of certain anti-avoidance provisions which will take effect immediately—and that they should at the outset apply only to directors and employees earning over £5,000. But I am well aware that some of the benefits I have referred to are not confined to those on over £5,000 a year, and in due course, when staffing in the Inland Revenue permits, I intend that the provision of car and loan benefits at least should be taxable in the hands of all employees whatever their salary.