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Budget
Earlier chapters have discussed the measures the Government is taking to promote economic stability and employment growth. Building on those foundations this chapter describes further reforms designed to help improve UK business performance.
Further tax reform to promote enterprise and encourage investment:
Better exploiting the UK's high-tech ideas and research:
Improving Revenue and Customs advice and services to business:
4.01 The UK has some of the most dynamic and enterprising businesses in the world. Unfortunately there are too few of them; too many firms lag behind the standards set by these top businesses and behind the performance of their international competitors.
4.02 Improving the performance of British business has to be the responsibility of the management, employees, and shareholders in individual companies. The DTI paper "UK Competitiveness: A Benchmark for Business" sets out the challenge by comparing the performance of UK businesses against our key competitors in each sector. The UK performs well in many respects. Some sectors such as pharmaceuticals are world leaders. But too often the average performance falls behind. Unless improvements are made there must be a question-mark over the long term viability of underperforming businesses and the jobs they provide in an increasingly competitive world economy.
4.03 The UK also needs to create - and sustain - more dynamic and innovative firms which can exploit technology, be at the forefront of design, and generate highly-skilled jobs which are the key to long-term prosperity. The UK has the raw material: a high quality science and engineering base, a record of creativity and invention, and the proven record of many world class entrepreneurs. However, it does not produce such businesses in sufficient numbers or on a sufficient scale, and not enough grow to be global companies.
4.04 The Government cannot itself improve the performance of industry or create dynamic new companies. But, in partnership with business, it can create the right framework for enterprise and investment. The Government is committed to removing the barriers that hold back investment and that discourage enterprising individuals from starting dynamic businesses that would allow British products and services to lead the world in the 21st Century.
4.05 The Pre-Budget Report (PBR) identified the main barriers to business growth in the UK. Principal among these are a record of economic and fiscal instability and a tax system that has distorted investment decisions and discouraged enterprise.
4.06 Earlier chapters have set out how the Government has tackled the issues of economic and fiscal stability. But to compete effectively in the global economy the UK must also tackle its legacy of chronic under investment.
4.07 Since at least 1960 the UK has consistently invested less as a share of GDP than the OECD as a whole. The UK share has averaged around 18 per cent, compared to the OECD average of almost 21 per cent. The UK has also invested out of a lower level of GDP per head, this translates into a lower level of investment per worker.
4.08 As a result of lower investment per worker, the UK has a lower level of capital stock per worker as Chart 4.1 shows. This helps to explain why the UK's productivity is up to 40 per cent lower than our major competitors, and hence the lower level of GDP per head. If it is to improve its relative position the UK needs to invest more than other countries as a proportion of GDP, whilst ensuring that the quality of that investment is maintained and improved.
4.09 The PBR set out some of the Government's proposals for tackling these problems. Since the publication of the PBR the Government has been consulting widely on these proposals. The Government has listened to views of the business community, and the measures outlined in this Budget reflect that consultation.
4.10 This Budget continues the process of tax reform to produce a corporate and capital tax system that:
4.11 The Government inherited a corporation tax system which did not encourage investment because:
4.12 The Government's first Budget:
4.13 This Budget confirms the Government's intention to deal with the second problem, by:
4.14 ACT will be replaced by a system of quarterly instalments for corporation tax paid by large companies:
4.15 The main rate of corporation tax will be cut by 1 per cent to 30 per cent from 1 April 1999 to ease further the transition to instalments.
4.16 The scheme under which companies have to account quarterly for income tax on gilt interest they receive gross will be abolished from 1 April 1999.
4.17 This package of measures will remove many of the distortions that discouraged investment. There will be a transitional cash flow impact on companies. However, taking these measures together, companies will gain by around £1.6 billion a year once these changes are complete.
4.18 The Government recognises the importance of SMEs to a successful enterprise economy. Of the 3.7 million businesses in the UK, 99 per cent have under 50 employees. These firms provide 46 per cent of non-government jobs and, excluding financial services, 42 per cent of UK turnover.
4.19 To promote investment by SMEs this Budget:
4.20 The Government will continue to look at how best to create an environment that encourages investment by small and medium sized enterprises. This will include reviewing the case for continuing with enhanced first year capital allowances.
4.21 Dynamic and innovative SMEs have the potential to make a vital contribution to employment and output growth. The evidence of the United States suggests that, increasingly, it is from small, often high-tech, start-ups that tomorrow's corporate giants grow. Yet in the United Kingdom such companies often fail to live up to their early potential. A business environment that encourages the growth of these companies is essential if the UK is to produce the high value-added products needed to compete internationally and generate the skilled employment opportunities which can sustain and improve the UK people's standard of living in a global economy.
4.22 To grow, dynamic and innovative SMEs need:
4.23 The Budget sets out a package of measures which improves incentives for entrepreneurs and investors.
4.24 To get the best out of the country's entrepreneurs the UK tax system needs to recognise the investment of individuals who nurture promising start-ups into successful businesses.
4.25 Reflecting this the Budget announces significant reform of Capital Gains Tax (CGT), which applies to capital gains made by individuals and trusts. The Government's objectives are to:
4.26 Under the current capital gains system, tax is paid on the excess of an asset's sale proceeds over its acquisition costs, less a reduction to allow for any gain due to inflation. The system does not differentiate structurally between short-term speculative assets and longer-term holdings, or between business investment and investment in other assets. The indexation allowance also makes the system difficult to understand and complicated to administer.
4.27 The Government believes the capital taxation system should better reward long term investment particularly in economically productive business assets. The Government also wants capital taxation to be fairer and simpler to understand.
4.28 To achieve this the Budget introduces a CGT taper which for higher rate taxpayers will tax capital gains on business assets held for more than ten years at an effective rate of 10 per cent.
4.29 The taper will:
4.30 The taper will replace the CGT indexation allowance on gains realised after 6 April 1998. Indexation will be frozen from 6 April 1998. Only holding periods after 5 April 1998 will count for the purposes of the taper, but, to ease the transition, there will be a one year addition for assets held at Budget day. So, for example, an asset bought on 1 January 1998 and sold on 1 July 2000 would be treated as if it had been held for three years (two complete years after January 1998 plus one additional year).
4.31 Chart 4.2 below sets out the reduction in the percentage of gain chargeable for business and non-business assets over a ten year period under the proposed reforms.
4.32 The Government is committed to building a fair tax system. Chapter 5 outlines further reforms to CGT designed to ensure capital gains are taxed in a fair and consistent manner.
4.33 The Government has announced a further period for comment on the taxation of capital gains realised by companies, in the light of the package now proposed for the personal sector.
4.34 The Budget proposes further measures to stimulate the provision of equity capital for smaller, higher risk, trading companies.
4.35 The existing Enterprise Investment Scheme (EIS) is designed to promote investment in such companies. The scheme gives relief from income tax at 20 per cent and deferral of a capital gain on up to £100,000 each year. CGT reinvestment relief allows deferral of an unlimited capital gain invested in a higher risk trading company.
4.36 However, there are many areas of overlap between these two reliefs and the range of investee companies is practically identical. Under present rules, companies can hold land and other property which reduces the risk of the investment, undermining the purpose of the tax reliefs and meaning that they are not well targeted.
4.37 The Government proposes changes to existing venture capital schemes to encourage the provision of new equity capital and to ensure that the schemes are targeted in the most effective way.
4.38 The Budget proposes a new EIS which merges the former scheme with CGT reinvestment relief. Its main features are:
4.39 The Government also propose better targeting of the new EIS scheme and the existing Venture Capital Trust scheme by excluding:
4.40 The Government recognises that investment is not just about building up the physical capital stock. Investment in research and development (R&D) is also an important element in promoting the UK's competitiveness and growth. Yet, as Chart 4.3 shows, whilst almost all of our major competitors have increased R&D's share of GDP in the past decade, the UK's R&D share has actually fallen.
4.41 The reforms to capital gains tax, corporation tax, and the other investment incentives outlined in this chapter are an important step towards creating a more favourable environment for investment and that will include investment in research and development. However, the Government recognises that there may be other steps that either it or business can take. That is why, in the Pre-Budget Report, the Chancellor and the President of the Board of Trade announced that they would be undertaking a wide ranging look at ways of improving the UK's record on investment in R&D.
4.42 As the first step in this process the Treasury and DTI are jointly publishing today a consultative document, "Innovating for the Future", which identifies issues which it is the Government's intention to consider over the next year, including in the various working groups on investment and competitiveness sponsored by the DTI and the Treasury. The views of business and others are invited on the issues raised.
4.43 The UK also needs to improve its record of exploiting the ideas generated by its many world class scientists and universities. This Budget announces a new University Challenge Fund which will help universities bridge the funding gap which can prevent them successfully transforming good research into good business. Under this scheme to create £50million in venture capital, universities will be able to compete for up to twenty seed venture capital funds. The scheme is a partnership between the Government, providing £20million, and the Wellcome Trust and Gatsby Trust, together providing an additional £20million. These contributions will lever in additional funds raised by Challenge-winning universities, in partnership where possible with the private sector.
4.44 The Government recognises the need to encourage top quality managers to join high-technology SMEs. It will therefore consult on ways of incentivising managers through equity based remuneration.
4.45 The Government can play an important role in improving business performance by helping to remove barriers to growth. Regulatory burdens can involve significant costs for business, smaller companies with fewer staff and resources may face disproportionate costs. The Government is determined to ease these burdens by:
4.46 Helping businesses to comply with rules by providing them with advice and assistance is an important way in which government can ease the burdens of compliance. The Government is committed to looking for new ways to do this by providing better, more coordinated advice and adapting government services to new technologies and working methods.
4.47 Many businesses say they want to deal with one organisation about the tax and national insurance contributions (NICs) they collect from their employees. The Contributions Agency will therefore be transferred to the Inland Revenue in April 1999. Separately the Government is also committed to transferring the related NICs policy functions to the Inland Revenue once agreement on a new entitlement test for benefits has been reached (the Department of Social Security would retain responsibility for benefit entitlement). These transfers will further improve customer service through unified delivery of guidance and assistance, and speed the pace of tax and NICs alignment.
4.48 This Budget announces an important new payroll service which will help reduce costs for new employers. The service from the Inland Revenue is for small businesses who want to take on their first employees.
4.49 This announcement follows the early findings of an experimental service running in Leicester with employers who were not using professional help with their payroll. The service offers a range of advice to new employers including help with the employer's first pay-day, and one-to-one assistance with a wide range of other subjects such as Statutory Sick Pay, Statutory Maternity Pay, expenses, and benefits in kind. The experimental service will be offered in more areas during the coming year and will be rolled out nationally from April 1999.
4.50 The Employment Service will also take active steps to put employers, considering taking on young people under the New Deal, in touch with this service.
4.51 Increasingly businesses and individuals are managing their financial affairs electronically, using the telephone and computer, rather than just paper. So:
4.52 The Government wants to ensure that businesses run by all sections of the community are able to benefit from the best information on their tax affairs. Customs and Excise is expanding its comprehensive introductory package for newly registered VAT businesses by developing further video aids in English and seven minority languages.
4.53 This Budget also announces further measures which reflect the Government's commitment to simpler and better regulation. For example:
4.54 A detailed list of further tax simplification and abolition measures is set out in Annex C, The Budget Measures.
4.55 The Government will consult on the VAT registration threshold and its impact on competition between registered and un-registered businesses. In the meantime the annual turnover threshold, above which traders must register for VAT will rise from £49,000 to £50,000 and the deregistration threshold will rise from £47,000 to £48,000 from 1 April 1998.
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