BUSINESS TAXATION

HC Deb 19 March 1991 vol 188 cc169-72

I now turn to my tax proposals. In preparing this part of my speech I have been guided by great Finance Ministers of the past—first, by Gladstone, whose advice on delivering tax proposals to the House of Commons was: Get up your figures thoroughly … and then give them out as if the whole House was interested".

Secondly, I have perhaps been influenced by Colbert, the French Finance Minister, who said: The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing".

In framing my tax proposals, I have also sought to address a number of the concerns which have been put to me and to carry foward the process of tax reform initiated by my predecessors. Above all, I have produced a Budget for business. I therefore begin with business taxation.

In this country, there are 50,000 large companies paying the main rate of corporation tax, nearly 1 million other companies and 3 million unincorporated businesses. many of them very small, employing a handful of people at most. We should never forget those firms. My measures are designed to benefit businesses in each of those categories.

I have been particularly concerned about businesses which are experiencing cash flow problems, often made worse by late-paying customers. I shall therefore be announcing measures which should give immediate help to businesses' liquidity.

My first proposals concern the value added tax regime. For 18 years, ever since VAT was introduced, the rule has been that businesses become liable for VAT when they send out bills, not when they are paid, so some traders end up paying VAT even though their customers never pay them. In his Budget last year, my right hon. Friend the Prime Minister introduced an entirely new system for giving traders relief on bad debts. That comes into effect on 1 April and extends relief to all bad debts which are at least two years old.

Many business organisations have complained to me that that waiting period is too long. I now propose to reduce it from two years to one. This will enable businesses to claim relief next year on the bad debts that they incurred in 1990–91 and 1989–90. The new scheme will boost businesses' cash flow next year by some £340 million.

Actually, for the smallest firms, the problem of reclaiming VAT on bad debts need not arise in the first place because they can use the cash accounting scheme. That allows smaller firms to pay no VAT at all until they receive payment from their customers. Well over 100,000 traders are already using the scheme, but we estimate that a further 300,000 could do so. Customs and Excise will therefore be taking steps to publicise the cash accounting scheme more widely.

There is another aspect of the VAT regime which I know causes concern—the operation of the serious misdeclaration penalty, which came into effect last April. There have been widespread complaints that the automatic penalty that it imposes—30 per cent. of the tax wrongly declared—is too severe and unfair to those who make minor mistakes.

I accept that the penalty in its current form is an unnecessarily blunt instrument. We will therefore undertake a thorough review so that the SMP system can be reformed in the 1992 Finance Bill. I have also asked Customs to make some immediate changes to the rules, giving traders more time to put mistakes right themselves without incurring a penalty. I do not wish to pre-empt the review but, while it takes place, I am reducing the rate of penalty from 30 per cent. to 20 per cent.

Accounting for VAT can be an onerous duty for small traders. When VAT was introduced, we exempted firms with the lowest turnovers from registration. Since then, the registration threshold has been indexed.

European Community constraints have meant that, in the past, we have not been able to increase the threshold by more than the rate of inflation. At the end of last year, however, we pressed the case with the Commission to increase the VAT threshold. It responded very positively, and I therefore feel able to go far beyond indexation and to increase the turnover limit for registration by no less than 40 per cent. to £35,000, taking it to its highest level in real terms since the introduction of VAT in 1973. This will benefit up to 150,000 traders. The cost of raising this threshold will be £25 million in the first year, rising to £40 million in 1993–94.

I have two further deregulatory measures to announce, which will benefit very small businesses. At present, all employers have to pay over the pay-as-you-earn and national insurance contributions that they collect from their employees 14 days after the end of each month, but the burden of collection falls unevenly. Large firms are amply compensated for the trouble and cost of collecting the tax by the benefits of holding the money for this period, but small employers are not.

I have a proposal that will reduce the burden on some 700,000 smaller employers. From May onwards, employers making PAYE and national insurance payments of less than £400 each month will pay quarterly, not monthly. This will reduce the administrative burden on firms and help their cash flow, at a one-off cost to the Exchequer of £210 million.

I have one further measure to announce to help very small businesses account for tax. Last year, for the first time, businesses with a turnover below £10,000 were allowed to send the Inland Revenue a simple three-line statement instead of detailed business accounts. This is an important deregulatory measure which cuts out time-consuming paper work for up to 1 million people. From April 1992, I propose to raise the £10,000 limit, so as to allow up to ½ million more people to benefit.

There is a case for making a more radical simplification of the taxation of the self-employed. The Inland Revenue will shortly be publishing a consultative document containing our proposals.

I am concerned that the system of income tax appeals can sometimes operate unfairly, in particular because there is no provision for the award of costs. My noble and learned Friend the Lord Chancellor and I want to deal with criticisms by the Council on Tribunals about the absence of proper rules for hearing tax appeals. We shall be publishing a consultative paper which will include proposals about the award of costs where either party has acted unreasonably.

I have one proposal to limit the impact of capital gains tax on entrepreneurs and on our growing venture capital industry. I have in mind particularly those who may give up safe managerial positions to set out on the risky road of running their own business. For those people, the possibility of a large capital gains tax charge can be a deterrent. I have considered whether it would be suitable and sensible to introduce specific rules for venture capital, but I have concluded that that would be extremely difficult.

However, one way in which we can help business men and women to reap the rewards of their efforts is to improve the relief available to them when they retire and have to realise the asset that they have created. That is why I propose to reduce the qualifying age for capital gains tax retirement relief from 60 to 55, and to raise the limits on it. From today, the first £150,000 of capital gains and half of the next £450,000 will be exempt from capital gains tax. This will be a powerful incentive to entrepreneurs to start new businesses.

I have one other important change relating to capital gains tax on small businesses. Under existing law, only companies can offset their trading losses against their capital gains. I propose to give unincorporated businesses similar treatment. This will help small businesses if they wish to sell off assets to help themselves through a difficult period.

In addition to the measures that I have announced for small business, I wish to propose some changes to corporation tax. In his Budget last year, my right hon. Friend the Prime Minister raised the profit limits that govern the corporation tax rates paid by smaller companies. He increased the ceiling below which single companies pay corporation tax at 25 per cent. from £150,000 to £200,000, and the upper limit above which they pay the full rate from £750,000 to £1 million.

I propose this year to raise the limits again by a quarter. That means a total increase of 150 per cent. in three years. As a result, companies will need to be earning profits of more than £250,000 before they are liable to pay more than 25 per cent. Companies will not have to pay the full rate of corporation tax until their profits reach £1,250,000 a year. This will benefit 30,000 companies.

In 1984, my right hon. Friend the Member for Blaby made a radical reform of corporation tax. In his time as Chancellor, the main rate of corporation tax was reduced in stages from 52 per cent. to 35 per cent., thus boosting companies' post-tax profits, encouraging profitable investment at home and overseas and increasing the incentive for overseas firms to invest in Britain.

I believe that the philosophy behind his reforms—to widen the tax base, but to reduce the rates—was the right one. It is a policy that has been welcomed by industry. It allows business men, and not Governments, to decide how much to invest and in what to invest. It set the pattern for similar reforms in many countries throughout the world and ushered in an increase in investment of 50 per cent. between 1984 and 1990.

I propose today to take a further step in that direction. Corporation tax rates have remained unchanged at 35 per cent. since 1986, but since then the basic rate of income tax has been reduced from 30p to 25p and the top rate from 60p to 40p. I believe that the time has come to cut the main rate of corporation tax again.

However, I am also aware that cutting the rate of corporation tax only helps companies that are making a profit. Many businesses that have prospered in recent years have moved into loss this year. A cut in corporation tax does not help them and nor, in some cases, do existing arrangements for the carry-back of losses.

I am taking two measures to improve company cash flow. I am cutting by 1 per cent. to 34 per cent. the main rate of corporation tax, applied retrospectively to profits earned in the financial year 1990. This will give an immediate boost to the cash flow of companies that were profitable in the year just ending. It will benefit not only companies paying at the main rate, but the 30,000 other companies with profits between the lower and upper profits limits.

To help profitable companies that have just moved into loss, I propose to extend the carry-back period for trading losses from one year to three. That means that more companies making losses will qualify for tax rebates in 1992–93—valued at £250 million—which will help them to carry on through this difficult period.

My main concern in this Budget is to encourage profitable firms to go on investing in Britain's future. The best way in which to do that is to increase still further the post-tax return on successful investment projects. For that reason, I am cutting the main rate of corporation tax on profits earned in the 1991 financial year by two percentage points, to 33 per cent.

The two reductions in the main rate, from 35 to 33 per cent, will together cost £380 million in 1991–92 and £830 million in 1992–93. They will give us the lowest rate among our major competitors—lower than that of the United States, and the lowest in the European Community.