§ I now come to the detailed measures in this year's Budget, and I shall begin with the taxation of business. Everyone in this country benefits from the success of British enterprise. Tax reform cannot create success, but it can help and encourage it. Within the tight fiscal position that I judge necessary, I am able to make some changes that should help small and medium-sized companies.
§ Cash flow is particularly important to new and growing companies of this size. I have two measures that should help to improve it.
§ At present, traders pay value added tax on all their sales, even if their customers do not actually pay the bill. They can claim VAT relief for a bad debt only when the debtor has been declared formally insolvent. As a result, the trader, who has dealt in good faith, can be out of pocket, in some cases for years, and often for large sums.
§ This has long been resented by businesses and the time has come to deal with it. I therefore propose that, from April next year, all debts that are over two years old and 1018 written off in the trader's accounts will qualify automatically for relief from value added tax. This will be worth about £150 million to business next year.
§ I also propose to help smaller companies by simplifying the rules for traders registering for value added tax. At present, whether or not a trader has to register depends on quarterly and annual turnover thresholds. One only has to say that to realise how difficult it is. Businesses also have to peer into the future to see whether these limits might possibly be exceeded within the next year.
§ That complication is unnecessary, so, as from today, I propose a simple rule for VAT registration. This will be based on actual turnover in the preceding 12 months and not unknown turnover in the distant future. It will bring certainty and simplicity in place of uncertainty and complexity. It has a second benefit for businesses: because they will, in general, register later than they otherwise would have done, it will save them £35 million in 1990–91 and £75 million the year after.
§ I have two further value added tax changes. First, I propose to increase the VAT threshold to £25,400, a modest sum, but the maximum permitted under European Community law.
§ The second change will affect companies that provide accommodation for their own directors. As things stancl, the company can reclaim the VAT that they pay on this—for something that is more a fringe benefit than a legitimate business cost. Frankly, I do not believe that this generous treatment is justified. I therefore propose that VAT paid on directors' accommodation should no longer be deductible. This will take effect from Royal Assent.
§ I also have some changes to corporation tax. While the main rate of corporation tax will remain at 35 per cent., I propose to reduce the burden of tax for smaller companies.
§ At present, companies with profits below £150,000 pay a reduced rate of corporation tax of 25 per cent. I propose to raise this ceiling by one third, to £200,000. This amounts to a doubling in two years of the profits level for the reduced rate. This will be of special benefit to smaller growing companies.
§ For companies with profits above this limit, the average rate of tax gradually rises until their profits reach the upper profits limit of £750,000 a year. I propose to raise this limit, again by a third, to £1 million. This means that no single company will be liable for the full rate of corporation tax until its profits reach £1 million a year. These changes will mean that we will have the most favourable structure of corporation tax for small companies anywhere in the European Community.
§ I also have a specific tax change to help training. One of the most welcome features of the last few years has been the massive sums of money being invested in training throughout the economy by employers in both public and private sectors, large firms and small. Our estimate is that in total this amounts to £20 billion a year.
§ In addition, the Government are spending £2.5 billion a year on training programmes; and the value of tax relief on companies' spending must be at least as much again.
§ In future, over £2 billion of our public expenditure on training will be spent through training and enterprise councils, or TECs as they are known, most of which will be coming into operation over the next year. I have no doubt that TECs will do much to improve training in skills and that we shall see the benefits of this in future. They 1019 give employers a genuine opportunity to determine their own needs and will provide generous cash help to meet them.
§ The Government have already promised to match local business donations to TECs pound for pound within certain limits. I now propose to encourage business to maximise the money they put into training by providing tax relief on business donations to TECs for five years until April 1995. I propose to extend the same concession to local enterprise agencies until the same date.
§ My next announcement has implications for one in four of the adult population, for that is the number of people—nearly 11 million—who now own shares in the United Kingdom. That remarkable figure—a new record—is published today in the annual stock exchange survey of share ownership.
§ Over the next few months, the stock exchange will be taking crucial decisions on its plans for a new share-dealing system, affectionately known as TAURUS. This will cut costs, eliminate paper forms, and provide a modern computerised system for transferring shares. Decisions on the design of the new systems for TAURUS will have to be taken shortly. We need, therefore, to decide what stamp duty regime to apply to paperless transactions.
§ As we approach 1992, we can expect even sharper international competition in financial services, much of it from other European centres. Competitive and practical arguments point in the same direction. I have therefore decided to abolish stamp duty on securities late in 1991–92 to coincide as closely as I can manage with the introduction of paperless trading. Stamp duty reserve tax will also be abolished at the same time.
§ Both the abolition of the tax and the introduction of a more modern dealing system will help to secure the United Kingdom's position as a leading financial centre in an increasingly competitive world market. They will also reduce transaction costs and permit higher returns for 11 million holders of occupational pension schemes, over 3.5 million personal pension holders, and the many millions of people who hold life assurance policies or unit trusts. It will also be of considerable benefit to small shareholders.
§ The assumption in the Red Book is that abolition will be at the end of 1991, at a revenue cost of £120 million in 1991–92. This date will be subject to confirmation later, when I have fuller information about the progress of TAURUS. However, although there is some flexibility about the timing, there is no doubt whatsoever about the decision to abolish stamp duty on shares. I have made the announcement now for two reasons: to remove uncertainty, and to make it clear that there is no need to plan for stamp duty within TAURUS. I should add, for the avoidance of doubt, that stamp duty on land and property will be unaffected by this measure.
§ The Finance Bill will also include a number of measures on life assurance, announced by my hon. Friend the Financial Secretary to the Treasury last December. These measures, which flow from the changes in the Finance Act 1989, followed extensive consultation with the industry. They put the taxation of life assurance companies' unit trust holdings on a sounder footing, and make a number of technical improvements. They will yield £50 million in 1990–91. A further measure will be introduced to ring-fence long-term business assets. Without this measure, there could be a significant loss of tax.
§ I also have a measure to announce that will clarify the tax regime for banks. Tax relief is rightly available to 1020 banks, as it is to other lenders, for bad and doubtful debts, but this has given rise to two problems. First, in recent years, the banks have increased very substantially the amounts written off for their lending to Third-world countries. That has been widely welcomed, but sudden increases do have an adverse impact on the public finances. Over time, the tax cost of the 1989 increases could come to an amount going on for £1 billion.
§ Secondly, although the principle is clear, it is less clear how to implement it in practice. That is because the relief available depends on the extent to which the debts are estimated to be irrecoverable—and that is often far from clear-cut. This difficulty is magnified when the debts in question are those of sovereign nations rather than of individuals or firms.
§ This is an extremely unsatisfactory position for the banks, for the Inland Revenue, and for the taxpayer. I have therefore decided to resolve it and to remove the uncertainties in the present law. Banks will continue to be able to offset their losses on sovereign loans fully against tax, but under a clearer mechanism than previously, which will be broadly based on the Bank of England's present guidelines. There will be a limit on future increases in the cost of this tax relief between years.
§ For the 12 months starting today, banks' tax relief on such provisions will be limited to the same high proportion of debts as this mechanism indicates for 1989. Thereafter, the ceiling will be increased in steps of 5 per cent. a year, so that the banks will, in time, get all the tax relief to which they are entitled. If the banks sell their debt to a third party and crystallise their losses, their tax relief on them will be similarly phased, but where the debt is sold back to the foreign state, to reduce its debt once and for all, tax relief on that loss will be available in full and immediately. This measure will produce a yield of around £200 million in 1991–92, compared with what might have been expected if I had taken no action.