§ Evident in the measures I have announced so far is the Government's consistent determination to help create the right conditions for the new investment needed to create new jobs. But this Budget, like its two predecessors, is designed also to provide a special tonic for small businesses.
§ There can be no doubt that higher rates of interest and the consequent reluctance of companies to borrow longterm at high fixed rates have caused a distortion of balance sheets. Too much reliance is now placed on short-term bank finance. As a result there is additional pressure on monetary growth.
§ A number of suggestions have been made for reducing the burden of interest rates on companies. We are all indebted to my hon. Friend the Member for Surrey, North-West (Mr. Grylls) and others for the way in which they have focused public attention on this problem. In many cases, the selectivity in the remedies proposed would favour lending by the banks, and lending to "tax-exhausted" companies. We have considered these ideas very carefully. But they raise difficult questions of principle, and we are not persuaded that they offer the best solutions to the problems they are designed to solve. Moreover consultations are still not complete on the corporation tax Green Paper, which raises major questions about incentives to investment, and we are still considering how best to ensure a proper contribution to tax revenue by the banking sector.
§ However, we can all agree that the basic problem of financing profitable expansion and investment demands urgent and continuing attention. A particularly important aspect of this is the provision of equity capital, about which I have some new proposals to make.
§ The business start-up scheme, which provides income tax relief for investments of up to £10,000 in the equity of companies starting new trades, has been widely welcomed. I propose for 1982–83 and 1983–84 to increase the annual limit from £10,000 to £20,000. As less than a full year has elapsed since it became law, some potential investors may have been unable to use up the full £10,000 limit in 1981–82. I propose, in addition, that any unused balance of this year's limit should be added to next year's entitlement. This means that, in some cases, the effective limit for 1982–83 will be as much as £30,000. These improvements should provide a further stimulus to investment in new enterprises.
§ Where capital for small businesses generally is concerned, many people have emphasised the importance of the new provisions in the Companies Act 1981 for companies purchasing their own shares. Clearly it would be wrong to change the tax law in such a way that these provisions could be used to pay out what would amount to tax-free dividends. But there is scope for tax changes which will significantly increase the attractions of equity capital, both to the investor and to the entrepreneur.
§ I now propose that certain purchases of their own shares by unquoted trading companies, mainly small and family businesses, should not be subject to ACT and income tax. They will be treated instead as sales of shares by the shareholder, and therefore, subject in most cases to capital 753 gains tax only. This measure will be of special benefit to small companies which have a limited market for their shares.
§ Two years ago, I relaxed the conditions governing profit-sharing schemes and reintroduced legislation enabling employees to take up options to buy shares in their companies without incurring income tax liability. I did this because I have no doubt that employees who own shares in the company for which they work develop a greater sense of commitment to the success of the business. Since I made my first changes two years ago, the increase in the numbers of employee share schemes has been extremely encouraging. In 1979 there were only 30 such schemes. Now there are over 400. This is exactly as we should wish. Wider share ownership is good for the business, good for the worker and good for Britain.
§ It is important to maintain and extend this progress. Accordingly, I now propose to increase the value of shares that can be allocated each year to any one employee from £1,000 to £1,250. I also propose to amend the detailed rules to simplify the administrative problems arising on rights issues. We should also give some help and incentive to those who acquire share options outside the ambit of approved schemes. I therefore propose to make it easier for them to pay the income tax chargeable on the exercise of such an option, by providing that it should be collected over three years rather than in a single sum.
§ In the last two years we have substantially relaxed the rules for tax relief for interest on money borrowed to invest in small companies. This year I propose to move a stage further. If a shareholder works full-time in the management of a business he will in future be able to qualify for tax relief to invest in that business even though he does not have more than 5 per cent. of the shares.
§ Now I turn to loan finance. In my last Budget I announced the establishment of a pilot loan guarantee scheme. The scheme started in June 1981. Since then the demand for loans has far exceeded expectations. Last October, in response to that demand, we increased the allocation for the first year from £50 million to £100 million, but with 2,700 loans worth almost £100 million already approved after only nine months, some further increase is desirable. Accordingly, I propose to increase the amount which the participating institutions may lend to £150 million for the first year. In addition, a further £150 million will be available for loans under the scheme during its second year, to June 1983.
§ I also propose that the limits for the "small companies" rate of corporation tax should go up again from £80,000 to £90,000 and from £200,000 to £225,000. This will mean that this Government have increased the lower limit by 80 per cent. and the upper limit by more than 150 per cent. As a further help for new businesses, the period for income and corporation tax relief for pre-trading expenditure will be extended from one to three years.
§ Many hon. Members, I know, have been impressed by the value of the work done by local enterprise agencies. These agencies depend in the main on businesses already established in the local community. They clearly play a valuable part in helping small local firms to start and to prosper. I therefore propose to allow businesses to deduct for tax purposes the contributions they make to certain enterprise agencies, which concentrate on helping small firms. I hope this measure will encourage more widespread support for such agencies. The relief will be available from 31 March and will run for 10 years.
754§ On value added tax, I have two principal changes to propose. The registration threshold will be increased from £15,000 to £17,000. And I propose to introduce VAT relief for services supplied before registration. This measure, and the extension of relief for pre-trading expenditure, will reduce the costs of starting a new business. The total revenue cost of these measures to help small firms is about £80 million in a full year.
§ I also want to make it easier for those who have recently left school or college to start a business. Hitherto—[Interruption.] Hon. Members may laugh, but I shall propose a change in relation to a very practical obstacle to those young people securing employment opportunities. As the whole House should know and appreciate, hitherto people who have just left school or college have not been able to qualify for the so-called 714 certificates under the construction industry tax deduction scheme. The present system, designed to prevent tax evasion, may actually keep young people out of work as sub-contractors in the industry. The certificates are widely used in the industry but the existing rules require an individual to show that he already has years good record as a taxpayer before he can secure a certificate. By definition, someone who has just left school or college cannot qualify under this three year rule. I therefore propose—I hope the whole House will welcome it—to change it, so as to enable school and college leavers to obtain special certificates. I also propose a guarantee scheme which may help others to obtain these special certificates.
§ I have one other measure to help the self-employed. A decade of inflation has eaten into the value of money which the self-employed had put aside to provide for their retirement. I therefore propose to increase the limits on retirement annuity relief for contributors who are now in their fifties and sixties to 20 per cent. for those born between 1916 and 1933; to 21 per cent. for those born in 1914 or 1915; and to 24 per cent. for those born in 1912 or 1913. I also propose to alter the present restrictions on the relief to allow more self-employed people to benefit from these higher levels. These changes will cost £12 million in 1982–83 and £25 million in a full year. They will provide a significant improvement in the position of the older contributor whose lifetime savings have suffered particularly from high rates of inflation in the 1970s.
§ The self-employed play a key role in the economy. Their contribution to its vitality, its adaptability, is apparent to all. Along with small business men, they fully merit this special encouragement.