§ Before I deal with the taxation of business profits I propose to refer to the taxation of capital, a matter of vital interest to business as well as to individuals.
§ We made it clear in our manifesto that we were determined to make the taxation of capital simpler and less oppressive. The objection to capital gains tax in its present form is that most of the yield comes from paper gains arising from inflation. The tax is, therefore, a capricious and sometimes savage levy on the capital itself. The capital transfer tax, despite the improvements secured in the last Parliament by constant pressure from the Conservative Benches, is oppressive, harmful to business and a real deterrent to initiative and enterprise. It is perfectly natural that people should want to build up capital of their own and pass it on to their children, and this is particularly true of the small business proprietor.
§ The issues involved in both of these taxes are difficult and complex. I have, therefore, decided that we should not attempt to deal with them in the coming Finance Bill—abbreviated as it is bound to be—but should press ahead with a thorough study, with a view to legislation on all these matters at an early date. There is, however, one specific issue on 256 which legislation is required in order to hold the present position. I propose to extend for a further two years the period for CTT transitional relief for capital distributions from discretionary trusts and to defer for two years the introduction of the periodic charge.
§ The development land tax, however, is a very different matter, which calls for immediate action. This tax has combined with the Community Land Act to prevent much worthwhile development and to increase unemployment in the construction industries. We have already said that we will repeal the Community Land Act. I propose now to deal with the development land tax. In place of the present rates of 66⅔ per cent. and 80 per cent., which the previous Government intended should rise to 100 per cent., I propose that development land tax will in future be charged at a single rate of 60 per cent. The amount of development value which can be realised in a financial year without liability to development land tax will be raised from £10,000 to £50,000. Both these changes take effect for disposals made on or after today.
§ I do not propose to make any further reductions in rate, and the generous increase in the exempt slice should mean that it will not need early revision. Owners of development land will, therefore, have no reason for holding back in the hope of further tax reductions. What I have said today should remove the major uncertainties which have been hanging over the market.
§ I now turn to the taxation of profits. A vigorous, profitable and expanding company sector is essential if we are to rebuild this country's prosperity. Profitability has dropped sharply in recent years and the rate of return on capital employed is now far too low, especially in manufacturing industry.
§ Without higher profits we shall not see the new investment and jobs which are so urgently needed. Achieving those profits is very largely the task of management and workpeople. The Government can help or hinder them, and this is no time to add to the difficulties that they face by raising taxes on profits still further. Against that background I propose no change this year in the general system or in the rates of corporation tax. Nor would it be right to make any major 257 changes in the system of company taxation without careful consultation in advance.
§ Looking further ahead, however, it is important that the tax system should take account of the effects of inflation on businesses, and do so in a way that is reasonably objective, equitable and simple to administer. The Government will therefore be reviewing this matter along with the accountancy profession's latest proposals for current cost accounting. I am arranging for the Inland Revenue to consult the accountancy profession and business later in the year.
§ I need, however, to deal now with the question of stock relief. The Finance Bill will include legislation to honour the undertaking which my predecessor gave last year, and which we supported, to write off the deferred tax liabilities arising from stock relief given for the first two years of the scheme—1973–74 and 1974–75—and thereafter to write off these liabilities in respect of each subsequent year, after they have been outstanding for six years.
§ In addition, following consultations which the Inland Revenue has had with industry, I am proposing two further changes in the stock relief scheme. I intend to reduce the profit restriction for unincorporated businesses from 15 per cent. to 10 per cent.; and all businesses will be given greater flexibility in the amount of relief that they can claim. Both these changes will be of particular benefit to small businesses.
§ Details of the stock relief and car leasing proposals will be given in Inland Revenue notices which I am making available in the Vote Office.
§ I come now to dividend control. If industry is to flourish, it needs not only adequate profits, but a vigorous capital market to provide funds for investment and expansion. The control of dividends has now outlived its purpose, and will accordingly come to an end when the existing legislation expires on 31 July.
§ We on the Conservative Benches have consistently championed the cause of smaller businesses. So I also propose to raise this year the qualifying profit limits for the small companies rate of corporation tax to the figures of £60,000 at the lower end and of £100,000 at the upper 258 end. This will go some way further than is necessary to maintain their real value.
§ In the tax field, however, there is one measure that will do more than anything else to encourage smaller businesses—indeed, businesses of every size. That is a major reduction in the burden of income tax.