§ I now turn to business taxation. Here the Government have two responsibilities towards British business and industry. The first is to ensure that they do not have to bear an excessive burden of taxation. The second is to ensure that, given a particular burden, it is structured in the way that does least damage to the nation's economic performance.
§ The measures that I am announcing today will, taking the next two years together, result in a substantial reduction in the burden of taxation on British business. And, in addition, I shall be proposing a far-reaching reform of company taxation.
§ Responses to the corporation tax Green Paper in 1982 showed a strong general desire to retain the imputation system. I accept that. But other changes are needed.
§ The current rates of corporation tax are far too high, penalising profit and success, and blunting the cutting edge of enterprise. They are the product of too many special reliefs, indiscriminately applied and of diminishing relevance to the conditions of today. Some of these reliefs reflect economic priorities or circumstances which have long vanished, and now serve only to distort both investment decisions and choices about finance. Others were introduced to meet short-term pressures, notably the upward surge of inflation.
§ With inflation down to today's low levels, this is clearly the time to take a fresh look. And with unemployment as high as it is today, it is particularly difficult to justify a tax system which encourages low-yielding or even loss-making investment at the expense of jobs.
§ My purpose, therefore, is to phase out some unnecessary reliefs in order to bring about, over time, a markedly lower rate of tax on company profits.
§ First, capital allowances. Over virtually the whole of the post-war period there have been incentives for investment in both plant and machinery and industrial, although not commercial, buildings. But there is little evidence that these incentives have strengthened the economy or improved the quality of investment. Indeed, quite the contrary: the evidence suggests that businesses 296 have invested substantially in assets yielding a lower rate of return than the investments made by our principal competitors. Too much of British investment has been made because the tax allowances make it look profitable rather than because it would be truly productive. We need investment decisions based on future market assessments, not future tax assessments.
§ I propose to restructure the capital allowances in three annual stages. In the case of plant and machinery, and assets whose allowances are linked with them, the first year allowance will be reduced from 100 per cent. to 75 per cent. for all such expenditure incurred after today, and to 50 per cent. for expenditure incurred after 31 March next year. After 31 March 1986 there will be no first year allowances, and all expenditure on plant and machinery will qualify for annual allowances on a 25 per cent. reducing balance basis.
§ In addition, from next year annual allowances will be given as soon as the expenditure is incurred and not, as they are today, when the asset comes into use. This will bring forward the entitlement to annual allowances for those assets, such as ships and oil rigs, for which some payment is normally made well before they are brought into use.
§ For industrial buildings, I propose that the initial allowance should fall from 75 per cent. to 50 per cent. from tonight, and be further reduced to 25 per cent. from 31 March next year. After 31 March 1986 the initial allowance will be abolished, and expenditure will be written off on an annual 4 per cent. straight line basis.
§ When these changes have all taken place, tax allowances for both plant and machinery and industrial buildings will still on average be rather more generous than would be provided by a strict system of commercial depreciation.
§ The changes in the rates of allowances will not apply to payments under binding contracts entered into before midnight tonight, provided that the expenditure is incurred within the next three years.
§ There will be transitional tax arrangements for certain investment projects in the development areas and special development areas. When a project in those areas has had an offer of Industry Act selective financial assistance and also attracts regional development grants, the existing capital allowances will continue to apply to the expenditure to which the selective assistance is related. These arrangements will cover projects for which offers have already been made between 1 April 1980 and today. Similar arrangements for regional development grants were, of course, announced by my right hon. Friend the Secretary of State for Trade and Industry in his White Paper last December.
§ Over the same period to 31 March 1986 most other capital allowances will be brought into line with the main changes which I have announced. The Inland Revenue will be issuing a press notice tonight giving full details of these proposals.
§ Next, stock relief. As the House will recall, this was introduced by the last Labour Government as a form of emergency help to businesses facing the ravages of high inflation. Those days are past; and the relief is no longer necessary. Company liquidity has improved and, above all, inflation has fallen sharply. Accordingly, I propose not to allow stock relief for increases in prices after this month.
297§ The changes that I have just announced, in capital allowances and stock relief, enable me to embark on a major programme of progressive reductions in the main rate of corporation tax. For profits earned in the year just ending, on which tax is generally payable in 1984–85, the rate will be cut from 52 per cent. to 50 per cent. For profits earned in 1984–85 the rate will be further cut to 45 per cent. Looking further ahead, to profits earned in 1985–86, the rate will go down to 40 per cent.; and for profits earned in 1986–87 the main rate of corporation tax will be 35 per cent.—no fewer than 17 percentage points below the current rate.
§ All these rates for the years ahead will be included in this year's Finance Bill; and when these changes are complete our rates of capital allowances in this country for the generality of plant and machinery will be comparable with those in most other countries, while the rate of tax on profits will be significantly lower.
§ The substantial reduction in the rate of corporation tax will bring a further benefit. Our imputation system allows a company to offset in full all interest paid. But only a partial offset for dividends is allowed. Companies thus have a clear incentive to finance themselves through borrowing and in particular bank borrowing rather than by raising equity capital. The closer the corporation tax rate comes to the basic rate of income tax, the smaller this undesirable distortion becomes.
§ Of course, the majority of companies are not liable to pay the main rate of corporation tax at all. For them it is the small companies' rate, at present 38 per cent., which applies. I propose to reduce this rate forthwith to 30 per cent. for profits earned in 1983–84 and thereafter. A tax regime far small companies which is already generous by international standards will thus become markedly more generous.
§ The corporation tax measures I have just announced will cost £280 million in 1984–85. In 1985–86 the cost will be £450 million—made up of £1,100 million by way of reductions in the rates, only partially offset by a £650 million reduction in the value of the reliefs. During the transitional period as a whole, these measures should have a broadly neutral effect on the financial position of companies. But when the changes have fully worked through companies will enjoy very substantial reductions in the tax that they pay.
§ Business and industry can go ahead confidently on the basis of the corporation tax rates I have announced today, which set the framework of company taxation for the rest of this Parliament.
§ Over the next two years, these changes will cause some investment to be brought forward, to take advantage of high first-year capital allowances—a prospect made all the more alluring for business since the profits earned will be taxed at the new, lower rates. But the more important and lasting effect will be to encourage the search for investment projects with a genuinely worthwhile return and to discourage uneconomic investment.
§ It is doubtful whether it has ever been really sensible to subsidise capital investment irrespective of the true rate of return. But certainly, with over 3 million unemployed, it cannot make sense to subsidise capital so heavily at the expense of labour.
§ These changes hold out an exciting opportunity for British industry as a whole: an opportunity further to 298 improve its profitability, and to expand, building on the recovery that is already well under way. Higher profits after tax will encourage and reward enterprise, stimulate start innovation in all its forms, and create more jobs.
§ I now turn to some more detailed measures affecting business.
§ The business expansion scheme, introduced last year as a successor to the business start-up scheme, has been widely welcomed as a highly imaginative scheme for encouraging individuals to invest in small companies. It is already proving a considerable success. It now needs time to settle down, and I have only one change to propose this year.
§ The scheme was designed to offer generous incentives for investment in new or expanding companies in high-risk areas. The ownership of farmland cannot be said to fall within this category, and I therefore propose that from tomorrow farming should cease to be rated as a qualifying trade under the scheme.
§ Next, in keeping with what I have said about removing complexity and distortions, I propose to abolish two reliefs in the personal tax field which were introduced at a time when this country suffered from excessively high rates of income tax. As we have reduced those rates, the reliefs are no longer justified.
§ The first is the 50 per cent. tax relief—falling after nine years to 25 per cent.—applied to the emoluments of foreign-domiciled employees working here for foreign employers. These employees are often paying much less tax here than they would either in their own country or in most other European countries. At present income tax rates, the need for this relief has clearly disappeared. Moreover, it is open to widespread abuses. It is, for example, possible for someone whose parents came here from abroad, and who has himself lived here all his life, to enjoy this relief, if he works for a foreign company. That cannot be right.
§ I therefore propose to withdraw the relief for all new cases from today. For existing beneficiaries, the 25 per cent. relief will cease on 6 April, and the 50 per cent. relief will be phased out over the next five years.
§ I also propose to withdraw the foreign earnings relief for United Kingdom residents who work at least 30 days abroad in a tax year. This relief, too, harks back to the days of penally high income tax rates. It, too, has been exploited, in particular by those who prolong their overseas visits purely in order to gain a tax advantage. I propose to withdraw the matching relief for the self-employed who spend 30 days abroad, and for those resident in the United Kingdom who have separate employments or separate trades carried on wholly abroad. The relief will be halved to 12½ per cent. in 1984–85 and removed entirely from 6 April 1985.
§ However, I am not making any change to the 100 per cent. deduction given for absences abroad of 365 days or more. In addition, I have authorised consultations by the Inland Revenue about a possible relaxation in the rules governing the taxation of expenses reimbursed to employees for travel overseas.
§ The abolition of these reliefs will eventually yield revenue savings of over £150 million and represents another useful step in the removal of complexity and distortions in the tax system.
§ I need to set the car benefit scales for 1985–86 for those provided with the use of a car by their employer. Despite the increases over recent years, the levels still fall short of 299 any realistic measure of the true benefit. I am proposing an increase of 10 per cent. in both the car and car fuel scales with effect from April 1985.
§ Unnecessarily high rates of tax discourage enterprise and risk taking. This is true of the capital taxes, just as it is of the corporation and income taxes. It is a matter of particular concern to those involved in running unquoted family businesses. The highest rates of capital transfer tax are far too high and badly out of line with comparable rates abroad. I propose therefore, in addition to statutory indexation, to reduce the highest rate of capital transfer tax from 75 per cent. to 60 per cent. For lifetime gifts I propose to simplify the scale so that the rate is always one half of that on death.
§ For capital gains tax I will, as promised, bring forward in the Finance Bill proposals to double the limit for retirement relief to a figure of £100,000, backdated to April 1983. A consultative document on other possible changes in this relief is being issued next week. I am proposing no other changes this year in capital gains tax beyond the statutory indexation of the exempt amount from £5,300 to £5,600. However, the tax continues to attract criticism—not least for its complexity—and that is a matter to which I hope to return next year.
§ We have done much to improve the development land tax. Early in the last Parliament, my predecessor increased the threshold from £10,000 to £50,000. I now propose a further increase to £75,000, which will reduce the number of cases liable to the tax by more than one third.
§ Next, share options. The measures introduced in the last Parliament to improve employee involvement through profit-sharing and savings-related share options schemes have been a notable success. The number of these schemes open to all employees has increased from about 30 in 1979 to over 670 now, benefiting some half a million employees. To maintain and build on this progress I propose to increase the monthly limit on contributions to savings-related share option schemes from £50 to £100. I have also authorised the Inland Revenue to double the tax-free limits under the concession on long-service awards, and to include within these limits the gift of shares in the employee's company.
§ But, beyond this, I am convinced that we need to do more to attract top calibre company management and to increase the incentives and motivation of existing executives and key personnel by linking their rewards to performance. I propose therefore that, subject to certain necessary limits and conditions, share options generally be taken out of income tax altogether, leaving any gain to be charged to capital gains tax on ultimate disposal of the shares. The new rules will apply to options meeting the necessary conditions which are granted from 6 April.
§ I am sure that all these changes will be welcomed as measures to encourage the commitment of employees to the success of their companies and to improve the performance, competitiveness and profitability of British industry.
§ As the House knows, the Government are deeply concerned at the threat which the spread of unitary taxation in certain United States states has posed to the United States subsidiaries of British firms. With our European partners we are monitoring the situation closely, and await with keen interest the imminent report of United States Treasury Secretary Regan's working group. It is essential that a satisfactory solution is found and speedily implemented.
300§ United States firms operating in this country are not, of course, taxed on a unitary basis.
§ I now turn to oil taxation. Last year's North sea tax changes were well received, and there has been a substantial increase in the number of development projects coming forward and a new surge in exploration. Work on no fewer than 128 offshore exploration and appraisal wells started last year—an all-time record.
§ The Government are already committed to a study of the economics of investment in incremental development in existing fields. This is of increasing importance, and in consultation with my right hon. Friend the Secretary of State for Energy I therefore propose to review this area with the industry, and to legislate as appropriate next year to improve the position. To prevent projects being deferred pending this review, any changes will apply to all projects which receive development consent after today.
§ Meanwhile, I am taking two measures to prevent an unjustified loss of tax from the North sea. First, in addition to the PRT measures on farm-outs which I announced last September, I am limiting the potential corporation tax cost of such deals. Second, I propose to repeal the provision which allows advance corporation tax to be repaid where corporation tax is reduced by PRT. I have also reviewed the case for extending last year's future field concessions to the southern basin, but have concluded that an additional incentive here is not needed.
§ I have just two further changes affecting business to propose, both of which will come into force on 1 October.
§ Ever since VAT was introduced in this country, we have treated imports differently from the way our main European Community competitors treat them. While they require VAT on imported goods to be paid in the same way as customs duties, we do not. Under our system an importer does not have to account for VAT on his imports until he makes his normal VAT return, on average some 11 weeks later. During this time the importer enjoys free credit at the taxpayer's expense. But when one British business man buys from another, he gets no such help from the taxpayer: he pays his VAT when he pays his supplier.
§ The European Commission has for some years now been seeking, with our full support, to get a system like ours adopted throughout the Community. But the plain fact is that in all that time the Commission has made no progress whatever.
§ I must tell the House that I am not prepared to put British industry at a competitive disadvantage in the home market any longer. Should our European partners at any time undergo a Damascene conversion and agree that the Commission's proposal should be accepted after all, then of course we would revert to the present system. But in the meantime I propose to move to the system used by our European competitors. We shall provide the same facilities for payment of VAT on imports as apply to customs duties. That means that most importers will be able to defer payment of VAT by, on average, one month from the date of importation. But that is all.
§ As I have said, this change will apply from 1 October. By bringing forward VAT receipts, it will bring in an extra £1.2 billion in 1984–85, some of which will be borne by foreign producers and manufacturers. There will of course be no increased revenue in subsequent years.
§ The second change I propose to make on 1 October concerns the national insurance surcharge. This tax on jobs was introduced by the Labour Government in 1977 at the rate of 2 per cent., and further increased by the right hon.
301§ Member for Leeds, East in 1978 to 3½ per cent. During the last Parliament, this Government reduced it to 1 per cent., and we are pledged to abolish it during the lifetime of this Parliament.
§ Given the impact that this tax has, not only on industrial costs but also—at a time of high unemployment—on jobs, I have decided to take the opportunity of this my first Budget to fulfil that pledge. Abolition of the national insurance surcharge from October will reduce private sector employers' costs by almost £350 million in 1984–85, and over £850 million in a full year. It will thus be of continuing help to British industry. As before, the benefit will be confined to the private sector.
§ The House will, I am sure, agree that a Budget which substantially reduces the Government's demands on financial markets, which abolishes the national insurance surcharge and which cuts the rates and simplifies the structure of corporation tax is a Budget for jobs and for enterprise. It offers British industry an opportunity which I am confident it will seize.