HC Deb 18 March 1986 vol 94 cc173-6

I now turn to the taxation of business and enterprise. [HON. MEMBERS: "Is that all about jobs?"] Hon. Members opposite would do well to listen. [HON. MEMBERS: "Hear, hear."] While the measures I have just announced help the unemployed directly, in the long run what really matters is the creation of a climate in which business and industry flourish. For it is companies, not Governments, which create jobs. The reformed system of business taxation which I introduced in my 1984 Budget has reached the end of its transitional phase and comes fully into force next month. From then on the United Kingdom will have, at 35 per cent., the lowest rate of corporation tax of any major industrial nation.

This year I have only two further amendments to make. First, I propose to ensure a full measure of depreciation for tax purposes for short-life agricultural buildings and works, by giving the taxpayer the option of making balancing adjustments on the sale or destruction of such buildings. Secondly, I propose to reform the mines and oil wells allowances broadly along the lines of the proposals published in last July's consultative document. The overall net benefit of this to the industries concerned will amount to £45 million in 1987–88. Otherwise I propose only minor technical changes to the taxation of North sea oil; but I am continuing to keep the economics of incremental investment under review, and shall not hesitate to introduce at the earliest opportunity any changes which may prove necessary to ensure that worthwhile projects are not frustrated by the fiscal regime.

I need to set the 1987–88 car and fuel benefit scale charges for those with company cars. At the same time, the motor industry has represented to me that the discrepancy between the engine size break points in these scales and the break points in the new European Community directive on car exhaust emissions is potentially damaging to its international competitiveness. Accordingly, I propose, from April 1987, to change our break points to those in the new directive.

At the same time, as last year, I propose to increase the restructured car benefit scale charges by 10 per cent. This will still leave the scale charges well short of the true value of the benefit. The fuel scale will also be restructured, but there will be no general increase in the charges; and as from April 1987 the same scale will also be used to assess the VAT due on petrol used by registered traders and their employees. This will be simpler and more equitable than the present system, and will also bring in an extra £40 million of revenue in 1987–88.

I propose to increase the VAT threshold to £20,500, in line with the maximum permitted under existing European Community law.

I also propose to correct an anomaly in the taxation of international entertainers and sportsmen. When British entertainers or sportsmen work overseas, the foreign tax authorities normally levy a withholding tax on their earnings, but at the present time we levy no such tax on the earnings of foreign entertainers and sportsmen when they work in the United Kingdom. I believe that in future we should fall into line with most of the rest of the world. Accordingly, I propose to withhold tax at the basic rate on the earnings of overseas entertainers and sportsmen in the United Kingdom. This should yield £75 million in 1987–88.

A key element in the Government's strategy for jobs is the encouragement of new businesses. As the House knows, I have been reviewing the future of the business expansion scheme, which is due to come to an end in April 1987. I have been assisted in this review by the independent report commissioned by the Inland Revenue from the consultants Peat Marwick which is being published in full today. I am placing a copy in the Library of the House.

It is quite clear—this is confirmed by the evidence in the Peat Marwick report—that the business expansion scheme, which my predecessor introduced in 1983 as an improvement on the 1981 business start-up scheme, has been an outstanding success. It has fully achieved its aim of attracting new equity capital into unquoted companies. The amount subscribed has been running at well over £ 100 million a year, and steadily rising; and a high proportion of this has gone into new and small businesses. Roughly half the companies involved raised sums of less than £50,000 each.

Mr. Straw

How many in manufacturing?

Mr. Lawson

I therefore have no hesitation in proposing to extend the life of the business expansion scheme indefinitely. But at the same time, despite the exclusions of farmland and property development in my two previous Budgets, I am still concerned that too much BES money is being diverted from the high-risk areas for which the scheme was always intended into areas where the risk is very much less. Accordingly, I propose from now on to exclude from the scheme all companies holding more than half their net assets in the form of land and buildings. I also propose to exclude companies whose main purpose is to invest in objects, such as fine wines, whose value may be expected to rise over time. [Interruption.]

At the same time, I have one new inclusion to announce. I have decided to bring within the scope of the BES companies engaged in the chartering of United Kingdom-registered ships. This will provide new opportunities for investment in shipping engaged in the coastal, short sea and offshore trades. I propose to take power to make further changes in the ambit of the scheme by order.

Finally, having taken steps to target the business expansion scheme more carefully, I propose to improve it. BES shares issues after today will be entirely free of capital gains tax on their first sale. [HON. MEMBERS: "Why?"] As a further measure of help for small and new businesses, the loan guarantee scheme, under which the Government guarantee 70 per cent. of qualifying bank loans, will also be extended, in this case for a further three years. The House will be glad to learn that the premium will be halved, from 5 per cent. to 21½ per cent.

My last proposal in this section concerns capital transfer tax which, ever since its introduction by the Labour Government in 1974, has been a thorn in the side of those owning and running family businesses, and as such has had a damaging effect on risk taking and enterprise within a particularly important sector of the economy. In addition to statutory indexation of the threshold and rate bands, I propose this year to reform the tax radically.

In essence, the capital transfer tax is two taxes, as its two separate scales imply: an inheritance tax and a lifetime gifts tax. We have had an inheritance tax in some shape or form ever since Sir William Harcourt introduced his estate duty in 1894. But the lifetime gifts tax which the Labour Government introduced in 1974, in the teeth of united Conservative opposition, is an unwelcome and unwarranted impost. By deterring lifetime giving, it has had the effect of locking in assets, particularly the ownership of family businesses, often to the detriment of the businesses concerned.

Accordingly, I propose to abolish entirely the tax on lifetime gifts to individuals. As with the old estate duty, there will be a tapered charge on gifts made within seven years of death and provisions to charge gifts made with reservation; and the regime for trusts, which is needed as a protection for the death charge, will be kept broadly unchanged. The cost of abolishing the tax on lifetime giving will be £35 million in 1986–87 and £55 million in 1987–88.

In recognition of the radically changed nature of the tax, I have decided to rename it the inheritance tax. My two previous Budgets abolished three unnecessary taxes: the national insurance surcharge, the investment income surcharge and development land tax. The abolition of the tax on lifetime gifts adds a fourth.