§ Mr. LawsonI now turn to taxation. As I have done on a number of previous occasions, I propose to divide this into three broad sections: the taxation of business. the taxation of savings, and the taxation of personal income and spending.
First, taxes on business. Ever since the corporation tax reform I introduced in 1984, the rate of corporation tax for small companies, defined for this purpose as those with annual profits of less than £100,000, has been set at the basic rate of income tax, currently 25 per cent.
Large companies, defined as those with profits of £500,000 or more, pay the main rate of corporation tax of 35 per cent., one of the lowest rates of tax on company profits in the world. Between £100,000 and £500,000, the averge rate of tax gradually rises from 25 to 35 per cent.
I propose to keep the small companies rate in line with the basic rate of income tax for 1989–90 and to leave the main corporation tax rate unchanged, but I propose to increase the small companies' rate band substantially, by 50 per cent.
299 Thus, the small companies' rate will apply to companies with profits of less than £150,000, and the 35 per cent. rate will be reached only at profits of £750,000. These changes will reduce the corporation tax burden for more than half of all those companies that do not already enjoy the benefit of the small companies rate.
I propose to increase the VAT threshold to £23,600, the maximum permitted under European Community law.
I also have to set the scales for the private use of company cars. This remains far and away the most widespread benefit in kind. When I doubled the car scales in last year's Budget, I made it clear that this still left this benefit significantly undertaxed. Accordingly, I propose to increase the car scales by one third for 1989–90. The yield from this will be £160 million in 1989–90 and £200 million in 1990–91. There will be no change in the fuel scales.
Over the years, I have received a number of representations from business complaining about the long-standing tax treatment of foreign exchange gains and losses. I recognise that, as business becomes more global, this subject becomes increasingly important. However, I have to say that I find it one of the most intractable I have encountered. Certainly, there can be no question of any change in the present system until a number of crucial and complex issues have been satisfactorily resolved. I have therefore authorised the Inland Revenue to publish today a consultative document which explores those issues and examines the scope for reform.
Finally, on business taxation, I have two major simplifications to propose, both of which follow from the income tax reforms that I introduced in last year's Budget.
One of the many undesirable features of an income tax system with several higher rates was that, since a taxpayer's marginal rate could well be very different in different years, the question of which year income related to made a great deal of difference. This was true of schedule E, where the strict rule is that income is taxed in the year to which it relates, on an accruals basis.
For the vast majority of employees, this basis of assessment for schedule E poses no problem, but for about half a million people, mainly directors, who do not receive all their income in the year to which it relates, it causes complications and often needless assessments and correspondence long after the tax year is over. It is also open to manipulation.
I therefore propose that income tax under schedule E should in future be assessed on a receipts basis, with the simple principle that one pays the tax when one receives the income. This will have a transitional cost of £80 million in 1989–90 and £60 million in 1990–91, but in the long term it will yield both extra revenue and a significant saving in both taxpayers' time and Inland Revenue staff.
The reduction in the top rate of income tax to 40 per cent. in last year's Budget also enables me to make a major simplification of the tax regime for the vast bulk of the incorporated sector of small businesses: those known as close companies—generally speaking, unquoted companies that are controlled by five or fewer people.
The rules for the so-called apportionment of close companies' income are notoriously complex, taking up some twenty pages of impenetrable legislation. These rules 300 are no longer needed, and I propose to abolish them. I believe that family businesses in particular will welcome this substantial simplification.
I do, however, have to guard against the avoidance of tax on investment income by channelling it through a closely controlled investment company. Any such company which does not distribute the bulk of its profits and other investment income will therefore be taxed at 40 per cent., equivalent to the higher rate of income tax.