HMT 1

27 November 2002

Steering a steady course: Delivering stability, enterprise and fairness in an uncertain world

The Pre-Budget Report, published today by the Chancellor of the Exchequer, Gordon Brown, sets out how the Government is meeting the global economic challenges confronting Britain and, from a platform of stability, delivering an enterprising, fairer Britain, even in an uncertain world.

The Pre-Budget Report shows that, in difficult times for the world economy, the British economy is well placed to steer a course of stability with low inflation and sound public finances. Based on cautious, audited assumptions, the fiscal projections show that the Government is comfortably on track to meet both of its strict fiscal rules over the economic cycle, including in the cautious case.

The Government will be consulting on a range of issues and proposals outlined in this Pre-Budget Report in the run up to Budget 2003.

Key Pre-Budget Report announcements include:

further support to build an enterprise society, with extra help for businesses in 2,000 Enterprise Areas covering the most disadvantaged communities in the country, a major new programme of enterprise education in schools, and a review of the links between business and universities;
a package of measures to improve UK skills, including an employer-led Taskforce to support the improvement and expansion of Modern Apprenticeships, a second year of Employer Training Pilots, and new steps to ensure that UK employers are able to recruit easily and effectively from overseas to meet skills shortages;
further steps to deliver higher employment, building on the success of the first five years of the New Deal, through pilots of a new programme of intensive support in neighbourhoods suffering from very high concentrations of worklessness, and additional support to ease the transition to work;
the next steps to promote saving, including commitments to consult key stakeholders on the detailed implementation of the Child Trust Fund, and to set out proposals to help those of working age plan for their retirement in a Green Paper on pensions and a consultation on radical simplification of pensions tax;
further action to tackle the environmental problems of waste, including proposals for revenue-neutral future increases in the landfill tax, and reform of the Landfill Tax Credit Scheme to ensure that Government funding is used more effectively to support better waste management; and
a concerted strategy to tackle VAT revenue losses caused by fraud, avoidance and non-compliance, designed to deliver more than £2 billion per year in additional VAT revenues by 2005-06.

MAINTAINING MACROECONOMIC STABILITY

The world economy continues to face challenging times. Last year saw the sharpest slowdown in world growth for almost three decades. This year, concern over corporate accounting standards, events in the Middle East, further falls on equity markets and rising oil prices have compounded uncertainty and dented the global recovery. Prospects for the world economy are weaker than at Budget time.

No country is immune to the scale of these global challenges. But strong economic fundamentals and decisive macroeconomic policy action have left the UK better placed than in previous world slowdowns to steer a course of stability and growth. Last year the economy grew at the fastest rate in the G7, while employment is at record highs and unemployment is currently the lowest among the G7 for the first time since the 1950s. The projections in the Pre-Budget Report show that:

the economy is forecast to grow by 1.6 per cent in 2002 due to weakness in the world economy, but to accelerate to 2½ to 3 per cent next year and to 3 to 3½ per cent in 2004 as the global economic recovery strengthens, before returning to trend in 2005;
inflation is forecast to remain low and close to the Government’s 2½ per cent target throughout the forecast period;
based on prudent audited assumptions, and despite further weakness and uncertainty in the world economy, the Government is comfortably on track to meet its two strict fiscal rules over the economic cycle, including in the cautious case. Because of the Government’s decisions on tax and to reduce debt, fiscal policy is able to support monetary policy in maintaining stability during a period of cyclically weaker global growth; and
the public finances are also sustainable in the long-term. A new analysis of the long-term sustainability of the public finances is published today, which shows that the UK is well placed to deal with future fiscal challenges and in a strong position relative to many other developed countries.

The Government’s macroeconomic framework has helped to ensure steady and stable growth in the UK, even in difficult times for the world economy. To enhance its reporting of fiscal developments, and strengthen further the transparency of the framework, the Government is also today publishing a new End of year fiscal report, providing detailed information on the public finances in 2000-01 and 2001-02.

MEETING THE PRODUCTIVITY CHALLENGE

Productivity growth, alongside high and stable levels of employment, is an important driver of long-term economic performance and a key route to higher living standards and greater national prosperity.

The UK’s productivity performance has long lagged that of other major economies, and a substantial gap now exists with the US, Germany and France. The Government’s goal is that the UK should achieve a faster rate of productivity growth than its main competitors over the next decade, closing the productivity gap.

Promoting enterprise and entrepreneurship

The Government is committed to building an enterprise society in which people from all backgrounds and all areas of the country consider and act upon enterprise opportunities. Details of the Government’s strategy are set out in Enterprise Britain: a modern approach to meeting the enterprise challenge, published today.

The Pre-Budget Report announces further action to improve the contribution of the education sector to UK business enterprise and innovation, including:

a new strategy to promote enterprise learning throughout the school and further education systems, in line with the recommendations of the Davies Review of Enterprise and the Economy in Education. To ensure that all young people experience enterprise before they leave school, the Government will provide £60 million so that, by 2005-06, every secondary school can offer five days’ enterprise activity to pupils, with pilot schemes to begin next year; and
new steps to enhance collaboration between business and universities, to ensure that UK businesses draw more effectively on universities’ research and teaching outputs, improving the UK’s innovation and productivity performance. The Government has asked Richard Lambert, former editor of the Financial Times, to lead an independent review and make proposals by summer 2003.

The Government is also taking further steps to ensure that UK businesses can compete effectively in global markets, including by:

consulting on reforms to improve the corporation tax system. The Government will consult further once responses to the current round of consultation have been analysed;
simplifying the corporation tax rules for employee share schemes, to encourage firms to offer such schemes to their employees;
taking further steps to reduce business compliance burdens, by consulting on reform of the Construction Industry Scheme and continuing to consult on simplifying the VAT rules for imports;
improving and extending the Small Firms Loan Guarantee Scheme, to make it available to 25 per cent more businesses; and
launching a new information strategy, managed by the Small Business Service (SBS), to help entrepreneurs access information on Government support and requirements.

Further information on these and other reforms to help businesses are set out in the separate press notices, REV/HMT/C&E 1 and REV/C&E 1.

Promoting enterprise in disadvantaged areas

To tackle the barriers to enterprise that exist within the UK’s most deprived areas, the Government has designated 2,000 Enterprise Areas in which measures to boost enterprise will be now concentrated. The Pre-Budget Report describes the range of steps the Government is now taking to support enterprise, investment and wealth creation in these areas, including:

abolishing stamp duty on all commercial property transfers in the 2,000 Enterprise Areas, once state aids approval has been obtained;
giving local authorities new powers to create Business Planning Zones to streamline the system of planning obligations and facilitate business development in these and other areas;
providing targeted advice and support, including through a new SBS starter pack and Inland Revenue Business Support Teams;
providing grants of up to £30,000 for feasibility studies of business incubators which nurture start-ups and early stage SMEs; and
introducing a Community Investment Tax Credit to encourage private investment in enterprises in disadvantaged communities. The SBS will allocate the first round of tax credits by the end of 2002-03.

Improving UK skills

Building Britain’s skills base is central to the Government’s strategy for raising productivity. A highly skilled workforce allows firms to update working practices and products at the rate demanded by rapidly changing markets, making the economy more productive in the long-term. The Pre-Budget Report sets out new steps to improve workforce skills, including:

a new target to increase the participation of young people post-16 in full-time education and training, including vocational programmes such as Modern Apprenticeships. By 2010, ninety per cent of young people will have participated in a full-time programme by the age of 22, fitting them for entry into higher education or skilled employment;
a new National Modern Apprenticeship Taskforce to support the expansion and improvement of Modern Apprenticeships (MAs). The Taskforce will be led by Sir Roy Gardner and will include individuals from across business and the education and training sector. It will report to the Chancellor and the Secretary of State for Education and Skills, and to the Chairman of the Learning and Skills Council, on a range of issues including the involvement of SMEs in MAs, the MA framework, and measures to support completion rates; and
£130 million to enable Employer Training Pilots to be extended for a second year and to around a quarter of the 47 local Learning and Skills Council areas. The pilots are testing different approaches to improving access to training for those in the workforce. The extension will allow the Government to test a wider range of policy packages in different areas.

The Government is also taking steps to help employers facing skills shortages in the UK recruit from overseas. Migration has always been a source of skills and labour in Britain, helping to improve productivity, raise economic growth, and cover shortages in domestic skills. The Pre-Budget Report describes the next steps, including:

further improvement of the work permits system, with the creation of a new Small Business Unit in Work Permits UK to ensure that SMEs can access information and benefit fully from the scheme; and
extension of the Highly Skilled Migrant Programme to support UK employers in their efforts to recruit highly skilled staff. Since its launch in January 2002, the scheme has helped many highly skilled individuals enter the UK to live and work, with the skills to make a valuable contribution to the UK economy. The Programme will now be extended and the criteria will be changed from January 2003 to improve its effectiveness still further.

Further details of the Government’s work to build UK skills and raise productivity are set out in the separate press notice, HMT 3.

INCREASING EMPLOYMENT OPPORTUNITY FOR ALL

The Government’s long-term goal is to ensure a higher proportion of people in work than ever before by 2010.

Over the past five years the Government has implemented a comprehensive programme of reform. The New Deal has succeeded in reducing both long-term and youth long-term unemployment by more than three-quarters since 1997, and help has been extended to lone parents, disabled people and other disadvantaged groups. Reforms to the tax and benefit system have made work pay at all levels of the labour market, and especially for those on low incomes.

Despite recent weakness and uncertainty in the world economy, employment is currently at record high levels, with more than 1.3 million people in work today compared with spring 1997. UK unemployment is at its lowest for a generation and below that in any other G7 nation. The Government is determined to build on this success and is now taking further steps to address the remaining barriers that prevent people from taking up work, including:

piloting a programme of intensive support in neighbourhoods with very high concentrations of worklessness from April 2004. The pilots will begin in twelve of the most deprived neighbourhoods in the country. In each pilot area, residents claiming Jobseeker’s Allowance will benefit from accelerated access onto New Deal programmes after just three months, and because economic inactivity is often more prevalent than unemployment in these neighbourhoods, more frequent work-focused interviews will also be introduced for all partners and lone parents, with new Incapacity Benefit claimants given more help to ensure that opportunities and barriers to work are addressed;
extending eligibility for the Job Grant, and introducing a new rate of £250 for households with children, to ease the transition to work. Job Grants will replace the existing Back To Work Bonus and the lone parent Income Support run-on;
reforming the administration and design of Housing Benefit to ease the transition to work for tenants. As announced by the Secretary of State for Work and Pensions, the Government is introducing a range of reforms to simplify the claims process and intends to pilot a flat rate local housing allowance for tenants in the deregulated private rented sector;
piloting new measures to improve job retention and advancement among low-paid workers and those moving off welfare as part of a demonstration project from October 2003;
extending Employment Zones to lone parents and people returning to the New Deal for a second time, starting from October 2003. In addition, the Government intends to develop the Employment Zone model further by testing the effect of introducing multiple providers in the largest Employment Zone areas from April 2004. Employment Zones are currently running in 15 disadvantaged areas of Britain, and allow jobseekers and personal advisers to use funds flexibly to overcome individual barriers to work;
expanding the network of new Jobcentre Plus offices, ensuring that all working age benefit recipients are given work-focused support. The Government aims to have opened more than 200 Jobcentre Plus offices by April 2003 and to complete the nationwide roll-out by 2006; and
piloting new means of support to help those with health problems and disabilities find work, including enhanced return to work advice and a new return to work credit of £40 a week, from October 2003, for those who have claimed Incapacity Benefit for three months or more. Further details of this support were set out in the recent Department for Work and Pensions Green Paper.

As announced in Budget 2002, the Government is also introducing the Working Tax Credit from April 2003 to help tackle poor work incentives and persistent poverty among working people, including those without children. On its introduction, the Working Tax Credit will guarantee minimum incomes of:

£237 a week for a family with one child and one earner working full-time on the National Minimum Wage; and
£183 a week for a single earner couple aged 25 or over, without children or a disability, and working full-time on the National Minimum Wage.

BUILDING A FAIRER SOCIETY

Economic strength and social justice must go hand in hand. The Government is committed to building a fairer and more inclusive society in which everyone has the opportunity to share in rising national prosperity.

Reform of the welfare state is at the heart of the Government’s strategy for supporting families with children and helping to provide security for all in old age. A modern and fair tax system, which encourages work and saving and ensures that everyone pays a fair share of tax, underpins the Government’s reforms.

Support for families and children

The Government is committed to ensuring that every child has the best possible start in life and has set a long-term goal to halve child poverty by 2010 and to eradicate it within a generation. Building on the comprehensive reforms already introduced, the Pre-Budget Report describes further steps, including:

the forthcoming publication of a new document setting out the Government’s strategy and next steps to help parents balance their work and family lives, building on the new tax credits, changes to maternity, paternity and adoption leave provision, the new right to request flexible working and the improved support for childcare already announced; and
extra investment in the Social Fund to enhance its ability to help those on low incomes manage their finances. From April 2003, the maximum payment for the fixed element of the funeral grant will rise from £600 to £700, and £90 million will be added to the Discretionary Fund over the three years to 2005-06.

As announced in Budget 2002, the Government is introducing a new Child Tax Credit from April 2003 providing a single, seamless system of income-related support for 90 per cent of families with children. Alongside the Working Tax Credit, this represents the next stage in the Government’s reform of the tax and benefit system and will make a major contribution towards lifting children out of poverty.

As a result of all personal tax and benefit reforms since 1997, by April 2003:

families with children will be, on average, £1,200 a year better off in real terms; and
families with children in the poorest fifth of the population will be, on average, over £2,400 a year better off in real terms.

To ensure that families are aware of the new Child and Working Tax Credits and understand what they might be entitled to, the Government has launched a nationwide awareness campaign, using television, radio, press and on-line advertising. This has been supported by 11 regional road shows and partnership working with the voluntary sector. As of 22 November:

over 2 million enquiries had been received. People can call the tax credits response line (0800 500 222) or log on to the tax credits website; and
4 million claim forms had been sent out and so far around 1.4 million claims have been made, ahead of expectations.

Promoting saving throughout life

Saving and assets provide people with security in times of adversity, long-term independence and opportunity, and comfort in retirement. The Government is developing a series of savings products suitable for each stage in the life cycle, to increase incentives to save and empower individuals to make informed and responsible saving choices. The Pre-Budget Report announces progress and the next steps, including:

consulting key stakeholders on the detailed implementation of the Child Trust Fund, to help strengthen the saving habit and spread the benefits of asset ownership to all;
further evaluation of the Saving Gateway, based on evidence gathered from pilot projects launched in August. As of 20 November, 250 accounts had been opened in the pilot areas; and
work to take forward the recommendations of the Sandler review of the markets for medium- and long-term retail savings in the UK. The Pre-Budget Report sets out how the Government and the Financial Services Authority are addressing each of the recommendations of the review.

Saving for a pension should be a key consideration for most individuals throughout their working lives. The Government provides a foundation of support in retirement through the Basic State Pension and the State Second Pension, the Minimum Income Guarantee and, from October 2003, the Pension Credit, which will guarantee minimum incomes in retirement and ensure that people benefit from having saved.

Above the foundation of support provided for today’s workers in retirement, Government, individuals, employers, and the financial services industry must work together in partnership to encourage and facilitate private pension provision. The Pre-Budget Report describes how the Government will seek to strengthen this framework of partnership, by:

publishing, on 17 December, a Green Paper on Pensions, setting out proposals for renewing this partnership for the future, and helping today’s workers plan more effectively for their retirement; and
consulting on proposals to simplify radically the taxation of pensions and deliver greater flexibility and choice to individuals, businesses and the pensions industry alike. The Government’s proposals will be published alongside the Pensions Green Paper.

A modern and fair tax system

A modern and fair tax system encourages work, saving and investment, keeps pace with developments in business practice and the global economy, and ensures that everyone pays their fair share. The Pre-Budget Report sets out further action to strengthen the UK tax system, including:

further steps to encourage charitable giving, including an extension of the existing 10 per cent Government supplement on donations through the payroll for one further year until 2004;
abolition of North Sea Royalty payments from 1 January 2003. Building on the reforms announced in Budget 2002, this will help to ensure that the North Sea tax regime strikes an appropriate balance between encouraging long-term investment and providing a fair share of revenue derived from a national resource - delivering a significant boost to companies investing in mature fields (see press notice REV/C&E 1 for further details);
the first ever concerted strategy to tackle VAT revenue losses caused by fraud, avoidance and non-compliance. The Government is publishing a new paper, Protecting indirect tax revenues, which shows that the growth in cigarette smuggling has been stopped for the first time in recent history and sets out how the Government now intends to tackle long-standing leakages in the VAT system, designed to save more than £2 billion a year in additional VAT revenues by 2005-06 (see press notice C&E 1 for further details);
further steps to tackle tax avoidance, closing loopholes in the tax system which allow some people to avoid paying their fair share of tax, increasing the burden on other taxpayers (see press notice REV/C&E 1 for further details);
consulting on the details of a new regime for stamp duty on land and buildings to be introduced late next year. The new regime will ensure that stamp duty is applied fairly to all relevant transactions and is supported by a modern compliance regime balanced by proper appeal rights. Draft clauses covering the main charge will be published shortly; and
for the third year in a row, a freeze in Class 2 national insurance contributions in 2003-04. Class 3 voluntary contributions will rise in line with inflation (see press notice REV/HMT 1 for further details).

MEETING INTERNATIONAL OBLIGATIONS

Just as it is determined to deliver opportunity and security at home, the Government is also taking steps to secure peace and prosperity internationally. The Pre-Budget Report announces further action, including:

an additional provision of £1 billion this year to ensure that resources are available to meet overseas and defence needs in the fight against global terrorism. These resources will be held in a special reserve and are taken fully into account in the projections for the public finances published in the Pre-Budget Report; and
steps to deliver a global new deal to tackle international poverty, by championing a new $50 billion International Financing Facility (IFF) and improvements in aid effectiveness. The Government will publish shortly a new prospectus for the IFF, which would provide substantially higher aid flows over the long term, helping to achieve the Millennium Development Goals.

DELIVERING HIGH QUALITY PUBLIC SERVICES

On a foundation of economic stability and sound public finances, the Government is able to deliver the investment and reform needed to ensure world-class public services that provide opportunity and security for all.

The 2002 Spending Review provided significant extra investment in public services, with resources matched to reform. Departmental spending on public services will be £63 billion higher by 2005-06 compared with 2002-03 - an average annual increase in public services spending of over five per cent in real terms. Public sector net investment, already projected to be almost three times higher this year than in 1997-98, is planned to rise further to 2 per cent of GDP in 2005-06.

To secure value for money, resources allocated in the 2002 Spending Review are tied to reform and results. The Pre-Budget Report describes how the Government is working to deliver reform, based on:

increased public transparency about what is being achieved. The Pre-Budget Report announces major reforms in public reporting, including:
twice yearly published progress reports of departments’ performance against their Public Service Agreement targets;
a single web-based portal to all departments’ progress reports and other material, from the Treasury website; and
from next April, regular web-based reporting of progress against all new PSA targets.
stronger independent auditing and inspection to ensure that departments and agencies are held accountable for performance against targets, including through a new independent Commission for Healthcare Audit and Inspection, a Comprehensive Performance Assessment in local government and the new Police Standards Unit; and
maximum local flexibility and discretion to innovate, to ensure that local service providers can respond to local conditions and consumer demands, with new freedoms for high-performing local authorities, Regional Development Agencies, further education colleges and health service organisations.

PROTECTING THE ENVIRONMENT

Sustainable development is vital to ensure a better quality of life for everyone, today and for generations to come. Economic growth and social progress must not come at the expense of the environment. The Government is committed to address the challenge of sustainable development, tackling local environmental threats and controlling and reducing emissions of the gases responsible for global warming.

Details of the Government’s strategy for using economic instruments, such as environmental taxes, to achieve environmental and sustainable development objectives are set out in Tax and the environment: using economic instruments, published alongside the Pre-Budget Report. The paper builds on the Government’s 1997 Statement of Intent on environmental taxation and the large number of measures that have been introduced since then.

The Pre-Budget Report describes the next steps in the Government’s work to protect and enhance the environment, including:

further action to improve waste management to help tackle climate change and local disamenity and to deliver greater economic benefits from recycling. The Government will now:
consult on a proposal to increase the landfill tax escalator to £3 per tonne in 2005-06, and to increase the rate of tax by at least £3 per tonne in future years, on the way to a medium- to long-term rate of £35 per tonne, to encourage the diversion of waste away from landfill. The Government’s intention is that increases will be introduced in a way that is revenue-neutral to business as a whole; and
reform the Landfill Tax Credit Scheme from 1 April 2003 to ensure that funds more effectively promote the development of sustainable waste management techniques, while continuing to support local community environmental projects.
a new duty rate for bioethanol set at 20 pence per litre below the prevailing rate for ULSP, to ensure the UK benefits from the reduced greenhouse gases and local pollution that the fuel can offer. The Government will set out further details in Budget 2003 following discussion with stakeholders;
further work to introduce a lorry road-user charge to ensure that all lorry operators contribute to the cost of using UK roads, regardless of nationality. The Government will publish a second progress report early next year;
further discussion and consultation on the use of economic instruments to advance environmental objectives, including to promote household energy efficiency, address the environmental impacts of agriculture and encourage the aviation industry to take account of its contribution to global warming, and local air and noise pollution;
a new proposal to allow local authorities to retain additional increases in business rates revenue to spend on their own priorities. The Government will consult on this proposal in 2003; and
a new tax incentive to encourage donations toward the running costs of Urban Regeneration Companies, helping them to play an effective role in stimulating regeneration and growth in many of Britain’s urban areas.

Further details of the Government’s environmental strategy are set out in the separate press notice, HMT 2.

NOTES FOR EDITORS

Further details of the Pre-Budget Report can be found on the this website. More details are also included in the separate press notices listed below and available on the HM Treasury, Inland Revenue and HM Customs and Excise websites.

HM Treasury

HMT 2 An economic strategy for delivering environmental protection and tackling waste

HMT 3 Developing skills in the UK workforce

Inland Revenue and HM Treasury

REV/HMT 1 Income tax allowances and national insurance contributions

Inland Revenue, HM Treasury and Customs and Excise

REV/HMT/C&E 1 Enterprise Britain: supporting small business, entrepreneurship and innovation

Inland Revenue and Customs and Excise

REV/C&E 1 A modern and competitive business tax system

Customs and Excise

C&E 1 Protecting indirect tax revenues

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HMT 2

27 November 2002

AN ECONOMIC STRATEGY FOR DELIVERING ENVIRONMENTAL PROTECTION AND TACKLING WASTE

Chancellor Gordon Brown today announced further important steps in the Government’s strategy to protect the environment, including action to tackle the problem of waste, and expand on the Government’s strategy for using economic measures for delivering environmental benefits.

Economic Secretary to the Treasury, John Healey, said:

“The Government is today publishing its strategy for improving the environment by using economic instruments. Following discussions with business and environmental groups on how best to develop our approach, this strategy sets out how economic instruments can promote a dynamic and innovative economy, improve resource productivity and deliver environmental benefits for all.

“In order to encourage a reduction in the amount of waste going to landfill, and develop greener alternatives such as recycling, the Government intends to consult on the introduction of significant increases in the landfill tax escalator rate. The Government has also announced that it will introduce a new fuel duty incentive to encourage the use of bioethanol. Furthermore, the Government intends to discuss with stakeholders the most effective economic instruments for ensuring that the aviation industry is encouraged to take account of, and where appropriate reduce, its contribution to global warming, local air quality pollution and noise.”

Building on its recent Budgets, the Government today announced a series of targeted measures to help to deliver environmental benefits, including:

a major package of fiscal measures, aimed at helping the UK to move towards more sustainable waste management. The Government will consult on a revenue-neutral proposal to raise the landfill tax escalator - currently the tax is at £13 per tonne, and is raised by £1 per year until 2004-05 - to £3 per tonne in 2005-06 and to increase the rate of tax by at least £3 per tonne in future years, on the way to a long-term rate of £35 per tonne. The landfill tax credit scheme will be reformed with approximately a third of the funding – nearly £50 million - continuing to be available for spending on community environment projects. The remainder – almost £100 million in 2005-06, rising to £110 million in 2006-07 and 2007-08 - will be allocated to public spending to encourage sustainable waste management;
responding to the consultation on economic instruments for improving domestic energy efficiency by consulting further on a shortlist of potential fiscal measures;
following this year’s wide-ranging consultation on the future of air transport, discuss with stakeholders the potential for using economic instruments to ensure that the aviation industry takes more account of its environmental impact and to help deliver a sustainable aviation sector. The Government will set out its plans in next year’s Air Transport White Paper;
subject to discussion with stakeholders on timing, introducing a new duty rate for bioethanol used as a road fuel, set at 20 pence per litre below the prevailing ULSP duty rate, to offset the additional production costs of bioethanol and allow the UK to benefit from the reduced greenhouse gases and lower levels of pollutants that this fuel can offer; and
taking forward work to modernise the taxation of road haulage through the introduction of a distance-based lorry road-user charge alongside offsetting tax reductions for the UK industry, by setting up a Road Haulage Forum sub-group and publishing a second progress report early next year outlining the results of work on how to administer and procure the necessary systems.

DETAILS

Waste

Waste Strategy 2000 sets out the Government’s vision of sustainable waste management in England. It sets challenging targets for recycling and composting, recovery of household and municipal waste and reducing the amount of industrial and commercial waste sent to landfill. The Cabinet Office Strategy Unit has conducted a review of waste policy, considering the role of different policy measures, including economic instruments, in achieving the Government’s waste targets. The Strategy Unit’s conclusions are being published alongside the Pre-Budget Report.
Landfill tax

The Government is already committed to increasing the standard rate of landfill tax (which covers active waste) by £1 each year until 2004-05, in line with the landfill tax escalator announced in 1999. The Government also announced in Budget 2002 that it expected that the standard rate would need to be increased significantly in the medium term. Subject to consultation on details, the Government has announced that it will increase the landfill tax escalator to £3 per tonne in 2005-06, and by at least £3 per tonne in future years on the way to a medium- to long-term rate of £35 per tonne. The Government’s intention is that the increases will be introduced in a way that is revenue-neutral to business as a whole. The Government will consult with stakeholders on options for the package, including the recycling of revenue, before making any decisions.

No changes are being made to the lower rate for inactive waste, which remains at £2 per tonne.

Aggregates levy

Following extensive consultation with industry, and failure to secure a voluntary scheme, the Government introduced the aggregates levy on 1 April 2002 to incorporate the environmental costs in the price of virgin aggregates. Following independent research, the levy was set at a rate of £1.60 per tonne on virgin aggregate commercially exploited in the UK.

In the 2001 Pre-Budget Report the Government announced that it would examine proposals to deliver additional environmental benefits through the aggregates levy by encouraging the positive use of aggregates waste. Following informal discussion with the industry, the Government will issue a formal consultation paper shortly in order to gather further information on the issues involved.

Pesticides

A voluntary package of measures to reduce the environmental damage caused by pesticides was entered into by the industry and other stakeholders in April 2001. Implementation of the package has been generally satisfactory, and good progress has been made in assessing the current approach of farmers to the use of pesticides and in the production of good practice guidance. However, the Government believes that more progress is required in other areas, including the agreement of key indicators of performance between DEFRA and the industry, and the introduction of incentives to encourage farmers to take action. The Government will continue to press the signatories to the package to make faster progress and is carrying out further work and analysis on possible tax or other economic instruments, should the voluntary package fail to meet its objectives.

Aviation

The Government recognises both the important economic benefits that aviation offers and the need to ensure that the industry faces an appropriate set of economic incentives to deliver an efficient environmental outcome. Following the Budget announcement on the role of economic instruments to encourage aviation to take more account of its environmental impact, and this year’s wide-ranging consultation on the future development of air transport, the Government will discuss with stakeholders the most effective economic instruments for ensuring that the industry is encouraged to take account of, and where appropriate reduce, its contribution to global warming, local air quality pollution and noise. The Government will set out its plans in the Air Transport White Paper next year.

Fuel duty

The Government has announced that, subject to consult at discussion with stakeholders on timing, it will introduce a new duty rate for bioethanol, set at 20 pence lower than the prevailing rate for ULSP in recognition of the environmental advantages that this fuel offers. The Government will also discuss with oil producers and vehicle manufacturers the potential role optimum timing of a duty incentive to encourage the use of sulphur-free fuels in order to maximise their environmental benefits.

Modernising road haulage taxation

In Budget 2002, the Government announced plans to modernise the taxation of road haulage by introducing a distance-based lorry road-user charge alongside offsetting tax reductions. Since publishing its first progress report in April, the Government has worked up options for implementing and procuring the necessary systems. The Government will publish a second progress report early next year outlining the results of this work and will discuss it with a new Road Haulage Forum sub-group containing a wide range of stakeholders.

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Press enquiries: 020 7270 5238

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Non-media enquiries: 020 7944 3000
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GOVERNMENT DEPARTMENT INTERNET SITES

Further information and all published documents relating to the Pre-Budget Report may be found on the Internet at the following addresses:

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HMT 3

27 November 2002

DEVELOPING SKILLS IN THE UK WORKFORCE

The Government today announced a new employer-led taskforce to support the improvement and expansion of Modern Apprenticeships, and an ambitious new target to increase the participation of young people in post-16 education and training, among several measures to improve UK skills. These measures, along with others aimed at supporting the training of low-skilled adults already in the workforce, will help to reduce the proportion of the UK workforce with low skills, currently more than 8 million people.

Chancellor Gordon Brown said:

“Skills are critical to an individual’s chances of success. To push a teenager into the world of work today without any qualifications is to put them at lifetime risk of poverty, failure and wasted potential. A skilled workforce is also important for the wider health of the economy and for UK employers - improving productivity and increasing prosperity. Adults in the workforce with low skills must be supported to develop their potential if we are to increase productivity and tackle social exclusion.”

New measures announced today to improve the skills of the UK workforce and help ensure that UK employers can recruit staff with the skills they need include:

setting a new target to increase post-16 participation in education and training. By 2010, 90 per cent of all 22 year olds will have participated in a full-time programme fitting them for entry into higher education or skilled employment;
a new National Modern Apprenticeship Taskforce, led by Sir Roy Gardner, to encourage more employers to get involved in Modern Apprenticeships and report to ministers and to the Learning and Skills Council on key policy issues;
providing £130 million to enable the Employer Training Pilots to be extended for a second year, and expanded to around a quarter of local Learning and Skills Council areas, to test the impact on the training of low-skilled adults of a wider range of policy packages; and
· taking further steps to ensure that the UK immigration system helps meet the recruitment needs of UK employers, including by extending permanently the Highly Skilled Migrant Programme.

DETAILS

Post-16 participation in education

The decision to remain in education and learning after the age of 16 is the major determinant of skill and attainment levels as an adult. The Government wants to ensure that young people can enter high quality academic and vocational programmes, reducing the historically low rate of post-16 participation compared with other countries. In 2000, 86 per cent of 18 year olds in Germany were enrolled in full-time or part-time education or training, compared with only 56 per cent in the UK. The target includes young people studying level 3 academic or level 2 or 3 vocational programmes, both work- and college-based, and builds on the existing Public Service Agreement that by 2004, 28 per cent of 22 year olds will have participated in a Modern Apprenticeship.

Modern Apprenticeships (MAs)

MAs provide opportunities for young people to develop skills in a work environment, with the costs shared between the Government and employers, and are at the centre of the Government’s strategy to ensure that all young people can access high quality education and training. Recent measures have done much to improve MAs, and participation is rising - with over 135,000 young people enrolling on MA courses each year. Employer involvement in MAs is critical to ensure MAs continue to meet the needs of UK firms and offer young people high quality training in a work environment. A National Modern Apprenticeship Taskforce was launched today to champion MAs and encourage more employers to get involved. The Taskforce will also report to the Government, and to the Learning and Skills Council, and report on key policy issues. The Taskforce will be led by Sir Roy Gardner, CEO of Centrica, and will include individuals from across industry and the education and training sector.

Employer Training Pilots

Employer Training Pilots are now operating in six local Learning and Skills Council areas. Firms who offer their low-skilled staff paid time off to train are provided with subsidies to cover the costs involved (up to 150 per cent of wage costs for small firms), free training courses up to NVQ level 2, and information and guidance on training.

Early evidence suggests that the model being tested in the pilots is proving successful in engaging low-skilled individuals in training, and employers have responded positively to the pilots. At the end of October, only 2 months into the pilots, nearly 500 employers had signed up to participate, and almost 900 employees with low levels of qualifications and skills had committed to undertaking basic skills or NVQ level 2 training. Over 40 per cent of individuals signed up to the pilots so far work in firms employing fewer than 50 people.

The Government has made available £130 million to enable the Employer Training Pilots to be extended for a second year. This will enable the Government to further explore the impact of the pilots on the demand for training, and allow the expansion of the pilots to around a quarter of local LSC areas.

Migration

The Highly Skilled Migrant Programme will now be extended from January 2003, in view of its success since January 2002. To improve its effectiveness further, the criteria for awarding points in certain categories will be revised from 28 January 2003.

Further steps are also being taken to ensure that SMEs can benefit fully from the work permits system. The Government has created a new Small Business Unit in Work Permits UK to ensure that small firms can access appropriate information and more easily recruit skilled staff to meet their needs.

Last month the Home Secretary announced new sectoral migration schemes to help address skills shortages in specific sectors, such as hospitality and food processing. In light of experience with these previously announced sectoral schemes, the Government will consider the case for further policy development in this area, working with other sectors where employers are facing labour shortages.

NOTES FOR EDITORS

Skills and productivity

The skills report of the CBI-TUC productivity group and the second report on workforce development by the Strategy Unit in the Cabinet Office have identified the lack of basic skills and level 2 qualifications as the biggest skills problem the UK faces. The CBI and TUC cited estimates in their recent study which suggest that UK firms lose up to £10 billion per year due to basic skills shortages in the workforce.

There is an established relationship between improvements in skills and increased productivity (more details are set out in Developing workforce skills: piloting a new approach, published with Budget 2002). Higher levels of workforce skills enable workers to:

undertake an increased number of tasks;
perform them more efficiently;
adapt faster and more effectively to change; and
become a greater source of innovation.

Improving UK workforce skills

There are over 8 million people in the UK workforce who have skills below the level 2 standard (equivalent to 5 A*-C GCSEs). Over 50 per cent of these people are employed in firms with fewer than 50 employees. Over 30 per cent of those in employment in the UK have low skills. This compares to only 17 per cent of workers in Germany.

Those with higher levels of skill receive significantly more training than those at lower levels. According to the National Skills Taskforce, when surveyed, 19 per cent of employees qualified to level 4 (degree equivalent) had received training in the last four weeks compared to 8 per cent of those qualified below level 2. People employed in small firms also receive less training than those employed in large firms. This uneven distribution of training occurs in most countries but these findings are particularly worrying in the UK context because the UK’s skill gap with other countries is primarily at intermediate level - levels 2 and 3.

Migration and the UK workforce

The work permit system allows UK employers to recruit highly skilled staff from outside the EEA, if they can show that they have been unable to recruit a suitable person domestically. Around 140,000 work permits were granted in 2001-02.

To provide a further source of skills for the UK economy, a pilot Highly Skilled Migrant Programme was launched in January 2002, allowing highly skilled individuals to enter the UK to seek and take work. Applicants to the scheme may demonstrate their eligibility by educational qualifications, work experience, achievements in their field or past income. Since its introduction, the scheme has helped many highly skilled individuals to enter the UK to live and work, making a valuable contribution to the economy.

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REV/ HMT 1

27 November 2002

INCOME TAX ALLOWANCES AND NATIONAL INSURANCE CONTRIBUTIONS

Tax allowances

The Chancellor confirmed today the level of income tax allowances for 2003-04. From next April, no one aged 65 or over will pay tax until their income reaches at least £127 a week.

The personal allowance for people aged 65-74 will be £6,610, £400 more than if it had been increased in line with inflation.

For people 75 or over, the personal allowance will be £6,720, £240 more than if it had been increased in line with inflation.

The basic personal allowance for people aged under 65 will be frozen at £4,615.

All other personal tax allowances will increase in line with inflation.

National insurance contributions

Budget 2002 announced an increase in the rates of national insurance contributions (NICs) from April 2003.

There will be an additional 1 per cent national insurance contribution by employers, employees and the self-employed on all earnings above the NICs threshold of £89 per week. This is in addition to existing rates of contribution below the upper earnings limit for employees and the upper profits limit for the self-employed.

The starting point for both employers’, employees’ and self employed NICs in 2003-04 will be frozen at £89 per week and no one will pay NICs on earnings or profits below this amount.

The upper earnings and profits limits for NICs will increase from April 2003 in line with inflation from £585 to £595 a week (£30,940 a year).

For the self-employed the rate of Class 2 contributions will be frozen for the third successive year at £2 a week.

DETAILS

Tax allowances

The basic personal allowance will be frozen at £4,615 in 2003-04.

The personal allowance for someone aged 65 to 74 will rise to £6,610, £400 over inflation, and the allowance for someone aged 75 or more will increase to £6,720, £240 over inflation. The married couple’s allowances for those born before 6 April 1935 will rise in line with inflation. The maximum income a pensioner can have and still get the age-related allowances above in full (the income limit) will increase in line with inflation from £17,900 to £18,300 in 2003-04.

The blind person’s allowance will rise in line with inflation.

The 2003-04 allowances are set out in the annex to this press notice.

National insurance contributions

The Paymaster General, Dawn Primarolo, today set out the level of national insurance contributions in 2003-04.

For employers and employees:
- in line with the Social Security Contributions and Benefits Act 1992, the lower earnings limit for primary Class 1 contributions is to be raised to £77 a week. It is set at the level of the basic retirement pension for a single person from April 2003, rounded down to the nearest pound;
- the primary and secondary thresholds for Class 1 contributions will be frozen at £89 a week, the same as the weekly amount of the income tax personal allowance. This means that no tax or Class 1 contributions will be paid on earnings below this level;
- the upper earnings limit for primary Class 1 contributions will be raised to £595 a week, in line with inflation;
- all employees will pay an additional 1 per cent on all their earnings above the primary threshold of £89 a week. This means that the standard rate of primary Class 1 contributions below the upper earnings limit will be 11 per cent, and above the limit will be 1 per cent; and
- employers will pay 1 per cent more on earnings above the secondary threshold of £89 a week. This means that the standard rate of secondary Class 1 contributions will be 12.8 per cent.
For the self-employed:
- the rate of Class 2 contributions will be frozen at £2.00 a week;
- those with earnings below the annual small earnings exception can apply to be exempted from paying Class 2 contributions. This limit will be raised to £4,095;
- the annual lower profits limit will be frozen at £4,615;
- the self-employed will pay 1 per cent more Class 4 contributions on all their profits above the lower profits limit of £4,615. This means that the rate of Class 4 contributions will be 8 per cent on profits below the upper profits limit, and 1 per cent on profits above that limit; and
- the upper profits limit for liability to Class 4 contributions at the main rate of 8 per cent will be raised to £30,940 (in line with inflation), to maintain the link with employees’ earnings liable to Class 1 contributions at the main rate.
For share fishermen:
- the special rate of Class 2 contributions, which allows them to build entitlement to contributory Jobseeker’s Allowance in addition to the other contributory benefits available to the self-employed, will be frozen at £2.65 per week.
For volunteer development workers:
- the special rate of Class 2 contributions which entitles them to the full range of contributory benefits, will be increased by 10 pence to £3.85 in line with the statutory formula of 5 per cent of the primary Class 1 lower earnings limit.
For those paying voluntary contributions:
- the rate of Class 3 voluntary contributions will be increased by 10 pence to £6.95 a week.

A draft re-rating order, accompanied by a report by the Government Actuary on the effect the order will have on the National Insurance Fund, will be laid before Parliament in due course.

The annex to this press notice sets out rates, earnings and profits limits, and thresholds for national insurance contributions for 2003-04.

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NOTES FOR EDITORS

The Chancellor set out the policy for income tax allowances and national insurance contributions in the 2002 Budget. The announcement today confirms those figures. Income tax allowances are uprated each year by indexation unless legislation is passed to override its effects, as with the personal allowances in Finance Act 2002. Statutory indexation for 2003-04 is based on changes to the Retail Prices Index in the year to September 2002 (1.7 per cent). A statutory instrument – The Income Tax (Indexation) (No. 2) Order 2002 - has been laid today, confirming the effect of indexation on the blind person’s allowance, the married couples’ allowances and the income limit for 2003-04.

Estimates of the yield of national insurance contributions will be included in the Government Actuary’s report on the draft of the Social Security (Contributions) (Re-rating and National Insurance Funds Payments) 2003 Order, which will be laid before Parliament.

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ANNEX

Income tax personal and age-related allowances 2003-04 (£ per year)

	2002-03	Change	2003-04
Personal allowance (age under 65)	4,615	(0)	4,615
Personal allowance (age 65-74)	6,100	(+510)	6,610
Personal allowance (age 75 and over)	6,370	(+350)	6,720
Blind person’s allowance	1,480	(+30)	1,510
Married couple's allowance* (aged less than 75 and born before 6 April 1935)	5,465	(+100)	5,565
Married couple's allowance* (aged 75 and over)	5,535	(+100)	5,635
Married couple's allowance* - minimum amount	2,110	(+40)	2,150
Aged income limit	17,900	(+400)	18,300

* Married couple’s allowance given at the rate of 10 per cent

National insurance contributions

Item	2003-04
Lower earnings limit, primary Class 1	£77 per week
Upper earnings limit, primary Class 1	£595 per week
Primary threshold	£89 per week
Secondary threshold	£89 per week
Employees’ primary Class 1 rate	11% of £89.01 to £595 per week 1% above £595 per week
Employees’ contracted-out rebate	1.6%
Married women’s reduced rate	4.85% of £89.01 to £595 per week 1% above £595 per week
Employers’ secondary Class 1 rate	12.8% above £89 per week
Employers’ contracted-out rebate, salary-related schemes	3.5%
Employers’ contracted-out rebate, money-purchase schemes	1.0%
Class 2 rate	£2.00 per week
Class 2 small earnings exception	£4,095 per year
Special Class 2 rate for share fishermen	£2.65 per week
Special Class 2 rate for volunteer development workers	£3.85 per week
Class 3 rate	£6.95 per week
Class 4 lower profits limit	£4,615 per year
Class 4 upper profits limit	£30,940 per year
Class 4 rate	8% of £4,615 to £30,940 per year 1% above £30,940 per year

REV/ HMT/ C&E 1

27 November 2002

ENTERPRISE BRITAIN: SUPPORTING SMALL BUSINESS, ENTREPRENEURSHIP AND INNOVATION

New measures outlined in the Pre-Budget Report today will benefit up to 200,000 businesses and entrepreneurs and take forward the Government’s support for innovation.

Chancellor of the Exchequer, Gordon Brown, said:

“Enterprise is the lifeblood of the UK economy - it boosts productivity, creates employment and prosperity, and revitalises communities. This Pre-Budget Report demonstrates the Government’s commitment to promoting and supporting enterprise across society, and particularly within disadvantaged areas, changing attitudes to enterprise - from the classroom to the boardroom - and tackling the difficulties entrepreneurs can face in starting and growing their businesses.”

The Government is committed to boosting enterprise in the UK to help raise productivity and regenerate disadvantaged areas. The Pre-Budget Report and Enterprise Britain: a modern approach to meeting the enterprise challenge set out a series of new measures to:

improve the environment for small business investment and growth;
cut red tape for small businesses and make it easier to comply with Government requirements;
provide additional support to businesses in 2,000 Enterprise Areas – the 2,000 most deprived communities in the UK; and
improve the quality and cohesion of support for small businesses at national, regional and local levels.

Enterprise Britain: a modern approach to meeting the enterprise challenge, published today by the Treasury and the Small Business Service, sets out the revival of the enterprise economy and outlines the challenges facing the UK. It also sets out the steps the Government is taking to ensure that the UK realises its full entrepreneurial potential, by:

creating the most favourable business environment so that all those with the initiative, skills and drive have the opportunity to start up and run a successful business;
tackling specific barriers that inhibit successful enterprise; and
raising levels of enterprise in the UK’s least prosperous communities, where these barriers are typically greatest.

Innovation is one of the key drivers of productivity growth, complementing the contribution from entrepreneurship. Two major reviews to improve innovation throughout the UK economy were launched today.

The Government has commissioned a wide-ranging review on the contribution that improving the UK’s relative innovation performance will make to close the productivity gap, and the strategy for doing so. To complement this innovation review, the Government has asked Richard Lambert to examine how - building on the research and development (R&D) tax credits and the successful University Challenge and Higher Education Innovation Funds - the long-term links between British business and British universities can be strengthened to the benefit of the British economy.

The innovation review will:

assess the UK’s relative innovation performance;
identify the strengths and weaknesses of UK firms, and where market or institutional problems inhibit their innovation;
identify and prioritise how Government policies can address those problems; and
set out a clear outcomes-based strategy, involving all key stakeholders to improve the UK’s relative innovation performance compared to other countries.

The complementary business-university collaboration review will:

identify the benefits to business of greater interaction with higher education, how this can be promoted and how any barriers holding back business demand for universities’ knowledge and skills outputs can be addressed;
examine the national, regional and local economic impacts of business-university interactions, including how Regional Development Agencies and Sector Skills Councils can best support such interactions;
assess the lessons to be learned from business-university interaction across a range of countries and from best practice across the UK;
analyse how business employers can better communicate their skills requirements to a responsive university sector and how they can improve the attractiveness of career paths to graduates and postgraduates, especially in technology; and
examine the effectiveness of measures such as the R&D tax credits on business demand for research and skills.

To encourage small business investment and cut red tape, the Government will:

extend the VAT flat-rate scheme from April 2003 to businesses with an annual turnover of up to £150,000 - reducing compliance costs by up to £1,000 a year for eligible businesses. A targeted information campaign to raise awareness of the benefits of the scheme is being launched, and the Government will also seek views on whether the scheme could be further extended and improved;
further reform the VAT penalty system from April 2003 so that more businesses are first offered support and advice before incurring penalties; and
undertake research in consultation with key stakeholders, with a view to a further increase in the statutory audit threshold for small companies.

To help new and growing small businesses gain access to finance and business support services, the Government will:

extend eligibility for the Small Firms Loan Guarantee Scheme from April 2003, making it available to a further 25 per cent of businesses and particularly benefiting business in the 2,000 Enterprise Areas;
help small businesses and intermediaries understand and access different finance options. ‘Investment readiness’ demonstration projects are currently being launched around England. This form of support will be evaluated and, if successful, made more widely available across the UK;
build on the success of the Inland Revenue guide, Starting up in Business. The Government will bring together information on all Government requirements and support for small business by Spring 2003. The new guide will also raise awareness of the types of additional support available to businesses in the 2,000 Enterprise Areas;
work with banks to help develop a virtual university for small business offering a comprehensive service of advice and training for existing and prospective businesses through leaflets, the internet and more formal college courses;
make it easier for small- and medium-sized businesses to understand and comply with Government regulations through a single web portal by summer 2003. The portal, which has been designed around customer needs, enables users to see at a glance which requirements are relevant to them and to carry out some transactions online;
work with Regional Development Agencies (RDAs) to launch a series of Personal Enterprise shows to encourage people to consider starting a business and publicise locally the services and support available for small businesses; and
work with RDAs in the North West, East Midlands and West Midlands to develop pilots of RDA management and co-ordination of business support services.

To help tackle the acute barriers to enterprise in disadvantaged communities, the Government has designated 2,000 Enterprise Areas, covering the most deprived areas in the UK, in which Government measures to boost enterprise are concentrated. The Chancellor announced today a further package of measures to improve conditions for businesses in these Enterprise Areas, including:

a targeted package of support for employers from the Inland Revenue, including assistance from Business Support Teams;
new grants of up to £30,000 from the Business Incubation Fund to cover the costs of feasibility studies for incubators, with higher levels of funding in disadvantaged areas;
proceeding with proposals for Business Planning Zones (BPZs), giving local authorities new powers to streamline the system of planning obligations and facilitate business development;
a series of enterprise events, to encourage potential and existing entrepreneurs and inform them of the services and support available locally, run by the Small Business Service;
a dedicated section in the Small Business Service’s Start-Up Guide for new businesses, providing details of help available in the 2,000 Enterprise Areas and how to access them;
an examination by HM Customs and Excise, the Small Business Service and others as to how their support services for businesses, particularly with regard to VAT, can be enhanced and targeted more effectively in disadvantaged areas; and
a new proposal to allow local authorities to retain additional increases in business rates revenue to spend on their own priorities. The Government will consult on this proposal in 2003.

Businesses in the 2,000 Enterprise Areas already benefit from:

stamp duty exemptions for all property transactions up to £150,000, to be extended to all non-residential transactions, subject to EU state aid approval;
increased availability of finance through the Bridges Community Development Venture Fund, increased availability of finance through the Bridges Community Development Fund, and the Community Investment Tax Credit, for which the accreditation process will run before the end of the financial year;
targeted business support through the Phoenix Fund, which received an extra £50 million of funding in the 2002 Spending Review; and
wider regeneration policies coordinated by Local Strategic Partnerships, and supported by the Department of Trade and Industry’s PSA target to promote enterprise in disadvantaged communities.

DETAILS

Extension of the VAT flat-rate scheme to businesses with an annual turnover of up to £150,000

Budget 2002 announced an extension to the VAT flat-rate scheme. From April 2003 over 650,000 businesses will be eligible for the scheme.

An increase in the threshold for the default surcharge for VAT

From April 2003 businesses with a turnover of up to £150,000 will be offered help and support if they face difficulties, before they face the prospect of a fine for late payment. Up to 200,000 more small businesses will benefit from this extension.

NOTES FOR EDITORS

Enterprise Britain: A modern approach to the enterprise challenge

Enterprise Britain: a modern approach to the enterprise challenge, published today by the Treasury and the Small Business Service, sets out the development of the new enterprise economy and the role of enterprise in increasing productivity and regenerating the UK’s least prosperous communities. The document outlines the evidence to support enterprise’s inclusion as one of the five productivity drivers and sets out the principles for Government intervention. It also sets out the full range of policies the Government has already put in place and further steps it will take to stimulate enterprise throughout the UK, and especially in the 2,000 Enterprise Areas.

While entrepreneurs themselves are the main components of change, the Government is playing an important role in promoting enterprise by:

encouraging a fertile business environment through a tax system that rewards rather than penalises success, including one of the most favourable capital gains tax regimes in the world;
working to reduce unnecessary regulation through measures such as the VAT flat-rate scheme and providing a stable macroeconomic environment encouraging investment and limiting risks for entrepreneurs;
targeting specific market failures in finance, skills, business advice and innovation which hinder business start-up and growth; and
breaking down the barriers to enterprise in the most deprived areas in the UK by targeting support on 2,000 Enterprise Areas. Measures include the Community Investment Tax Credit and support delivered through the extended Phoenix Fund.

The recently published Cross-cutting review of Government Services for Small Business noted that Government at all levels spends around £2.5 billion giving support to SMEs. The Small Business Service will shortly be publishing a Framework for Government Policy towards small business to ensure that service standards for SMEs are improved across Government.

The innovation and business-university collaboration reviews

Richard Lambert - former editor of the Financial Times - supported by a cross-departmental team, will lead the business-university review. He will report to Government by Summer 2003. This review will feed into the innovation review, which will also report by Summer 2003. A steering group led by the Minister for Science and Innovation, Lord Sainsbury, will oversee the innovation review. The group will include representatives from Government departments, business, Regional Development Agencies, trade unions and academia.

Both reviews build on the substantial increase in resources being invested in the UK science and engineering base arising from the Spending Review 2002 (an extra £1.25 billion by 2005-06 compared to 2002-03) and in business innovation (through the R&D tax credits and increases to the Department of Trade and Industry’s innovation budget). The Government’s science strategy focuses on:

investing in the UK’s science base, upgrading capital infrastructure and increasing research funding;
moving the funding of university research onto a financially sustainable footing;
improving the supply of people with science and engineering skills, and increasing the attractiveness of science and engineering careers in both business and universities; and
encouraging the translation of research into business innovation, through the new Higher Education Innovation Fund and the R&D tax credits for both small and large companies.

VAT flat-rate scheme

The voluntary flat-rate scheme was introduced in Budget 2002 for businesses with an annual VAT exclusive turnover of £100,000, making around 500,000 businesses eligible to join. The Chancellor also announced that from Budget 2003 the scheme would be extended to businesses with a VAT exclusive turnover up to £150,000.

Reforms to the VAT penalty system

The VAT default surcharge is designed to encourage businesses to submit their VAT returns and tax payments on time. When a business is late in paying its VAT return for the first time a penalty is not applied, but it is notified that if it is late again it will be liable to a surcharge. The penalty rate escalates from 2 per cent of the tax paid late up to a maximum of 15 per cent for each late payment.

The rules were reformed last year for businesses with a turnover up to £100,000 so that they are now offered advice and support and the opportunity to sort out any difficulties before they incur penalties.

As announced in Budget 2002 the qualifying turnover will be increased to £150,000 - meaning that up to 700,000 small businesses will be covered by the reformed system. The likelihood of receiving an automatic penalty will be removed for all but the most persistent late payers.

Starting up in Business

Starting up in Business is a package of measures introduced in January 2001. The package aims to encourage self-employed people to register with the Inland Revenue as soon as possible after starting up, providing new support material for them and seeks to raise awareness of that support. The Inland Revenue’s evaluation of the package found that along with increasing numbers of registrations, self-employed people are now registering earlier. People receiving the new material said that the guidance provided a lot of practical help and led them to realise that the Inland Revenue could be a useful source of advice.

Copies of the evaluation report Starting up in Business are available on the Inland Revenue website.

Enterprise Areas

Full details of the Enterprise Areas, the most disadvantaged areas across the UK, which are eligible for the stamp duty exemption, are available on the Inland Revenue website.

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Non-media enquiries: 020 7944 3000
(office hours only)

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GOVERNMENT DEPARTMENT INTERNET SITES

Further information and all published documents relating to the Pre-Budget Report may be found on the Internet at the following addresses:

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REV/ C&E 1

27 November 2002

A MODERN AND COMPETITIVE BUSINESS TAX SYSTEM

Further steps to remove distortions in the tax system and tackle market failures, to ensure that business decisions are made for commercial reasons, were announced in today’s Pre-Budget Report. The steps will also reduce the tax and compliance burden on business and maintain an efficient tax system that reflects the realities of today’s business environment.

Steps announced today include:

introduction of a statutory corporation tax deduction for the cost of providing shares for employee share schemes, for accounting periods starting on or after 1 January 2003, to further encourage employee share ownership;
abolition of North Sea Royalty with effect from 1 January 2003, delivering a significant boost to companies and creating a stable long-term framework for investing in the North Sea; and
a consultation on reform of the Construction Industry Scheme, to reduce the regulatory burden on construction businesses.

In addition to these steps, the Government is also:

consulting on options for reform of corporation tax. Over 150 responses to the consultation document published in August 2002 have been received. The Government intends to consult further when the responses have been analysed;
publishing draft legislation and guidance in respect of the measure, announced in Budget 2002, to modernise the taxation of foreign companies operating in the UK through branches, for accounting periods starting on or after 1 January 2003.
taking forward work to replace the offshore funds tax regime with new rules in Finance Bill 2004. The Government is committed to continuing constructive dialogue with fund managers and other stakeholders on the implementation of a new regime;
making further changes to the rules on deduction of tax at source on interest payments;
making changes to the approach followed when recognising overseas stock exchanges for tax law purposes; and
retrospective legislation to ensure that subsidiaries of UK companies in the Hong Kong and Macao Special Administrative Regions of China continue to be able to benefit from the Exempt Activities Test in the controlled foreign companies rules in cases where it was always intended that they should.

In addition to the announcement in September to stop unfair tax avoidance through the exploitation of the financial instrument rules, the Government is also setting out a number of other steps being taken to protect UK revenue and tackle abusive tax avoidance schemes, including:

immediate legislation to stop companies abusing the rules governing commercial property development to avoid paying VAT on the sale of new freehold buildings;
immediate legislation to counter the avoidance of tax and national insurance contributions through the abuse of Employee Benefit Trusts;
legislation to close, for accounting periods beginning on or after today, a loophole in the rules for controlled foreign companies, which allows some companies selling extended warranties, credit protection and similar products to escape UK tax on the profits; and
immediate legislation to stop businesses from exploiting the rules on capital allowances by entering into artificial transactions which accelerate capital allowances on their qualifying expenditure.

Further information on other business tax reforms is provided in the separate press notices REV/ HMT/ C&E 1 and C&E 1.

DETAILS

Corporation tax (CT) and employee share schemes

Currently employers are not guaranteed a CT deduction for their employee share schemes. Instead there is a mixture of statutory and ‘case-law’ routes by which a deduction might be obtained. Following widespread support during informal consultation in summer 2002, the Government is introducing a statutory CT deduction for the cost of providing shares for employee share schemes. This will provide companies with the certainty of getting a CT deduction, and encourage more companies to set up employee share schemes.

The statutory CT deduction will be available for employee share schemes where the employees are subject to UK tax on award of shares, or would be but for the fact that the shares are obtained under an Inland Revenue approved scheme or Enterprise Management Incentives. This makes the UK regime more generous than the US, where the CT deduction is limited to the amount taxable on the employee. Smaller companies in particular will benefit from the certainty of the CT deduction when offering share participation to their employees. They will not need to set up complex and expensive trust structures in order to generate a CT deduction for the cost of shares.

The rules relating to Qualifying Employee Share Ownership Trusts (QUESTs) are being changed at the same time to remove duplication and simplify the statutory rules for the CT treatment of share schemes. Companies using QUESTs for Save-As-You-Earn schemes will continue to receive a similar deduction under the new rules. In addition, CT benefits currently enjoyed by small family-owned companies using QUESTs will be preserved by the provisions of the Employee Share Schemes Act 2002 that made some changes to the CT provisions in the Share Incentive Plan legislation.

North Sea Royalty

The decision to abolish North Sea royalty payments forms part of an overall package to create a stable long-term fiscal framework for the next stage of development of the North Sea.

Budget 2002 introduced important measures to modernise the taxation of the North Sea, so that from Budget day:

companies pay a 10 per cent supplementary charge on North Sea profits; and
companies will receive a 100 per cent first year allowance for capital expenditure in the North Sea to promote investment.

Reform of the Construction Industry Scheme (CIS)

The Government is seeking views on a series of new proposals to reform the CIS. The proposals respond directly to concerns from the industry about the current CIS, and fulfil three key objectives:

to reduce the regulatory burden of the scheme on construction businesses;
to improve the level of compliance by construction businesses with their tax obligations; and
to help construction businesses to get the employment status of their workers right.

The main proposals are:

to replace Registration Cards and Gross Payment Certificates with a verification service;
to introduce an employment status declaration;
to replace vouchers with periodic returns; and
to replace the Inland Revenue computer system with a new system capable of supporting the use of e-services and helping to trace non-compliant businesses.

A partial Regulatory Impact Assessment published today shows that proposals are set to cut industry costs by between 50 and 70 per cent compared to the current scheme.

Reform of Corporation Tax

The Reform of Corporation Tax, published in August 2002, sought views on three potential additional reforms. These were:

the tax treatment of capital assets not covered by earlier reforms;
rationalisation of the UK’s schedular system of taxation; and
the differences in the tax treatment of trading and investment companies.

The consultation process included a series of meetings with groups from business and representative bodies. Over 150 formal written responses to the document have been received and the Inland Revenue and the Treasury are now in the process of reviewing those responses.

Modernising the taxation of foreign company branches

Budget 2002 announced the introduction, from 1 January 2003, of a measure to modernise the taxation of foreign companies operating in the UK through branches. Under this measure an amount of capital will be attributed to a UK branch for tax purposes, based on the capital that would be needed if the branch were an independent, free-standing company trading in the UK in the same or similar conditions and circumstances.

The Inland Revenue published draft legislation on 25 July 2002 and has since consulted interested parties on the practical details of this legislation and its implementation. Building on these constructive discussions, the Government is now publishing updated draft legislation and draft guidance. The Government will shortly publish a partial Regulatory Impact Assessment. This will help ensure a smooth and timely implementation, delivering certainty and consistency going forward.

The draft legislation, guidance and partial Regulatory Impact assessment have been published today, and are available on the Inland Revenue website.

Offshore funds consultation

Respondents to the recent consultation on the offshore funds regime were unanimous in wanting change. The majority ruled out abolition, favouring reform or replacement of the current scheme.

The introduction of a replacement regime, rather than adapting the existing rules, received clearest support. Respondents suggested a number of ways such a regime could be designed.

The Government remains committed to a tax system that does not create obstacles for providers or impede fair competition. In particular, the tax rules should be simple for providers and consumers. Work is therefore being taken forward to replace the offshore funds tax regime with new rules to ensure that investors in offshore funds and equivalent UK products are subject to similar tax treatment.

Deduction of tax at source on interest payments

The Government will introduce legislation, to come into force on 1 April 2003, to ensure annual interest payments made by recognised clearing houses and recognised investment exchanges while providing central counter-party clearing services can be paid without deduction of tax at source.

The Treasury has today made an Order to allow annual interest and other payments to UK tax-exempt bodies via nominees to be paid without deduction of tax at source in circumstances where direct payments could be made gross. This will take effect from 1 December 2002.

Recognised stock exchanges

The Inland Revenue is today publishing a policy statement setting out the approach it will follow when recognising stock exchanges outside the UK for tax law purposes. The statement is available on the Inland Revenue website.

Tackling tax avoidance

Measures announced today to protect the revenue and prevent tax avoidance include:

closing the loophole on VAT and freehold buildings. The sale of the freehold of a newly constructed commercial building is liable for VAT during the first three years of the building’s life (when it is still considered ‘new’). However, companies are exploiting a loophole which allows them to pay VAT at the point of payment rather than at the point of sale. These companies then arrange freehold sales with an associated company which delays the bulk of the payment until after the three year period, and effectively purchase the property VAT-free. New legislation will block this loophole;
new legislation on Employee Benefit Trusts (EBTs). EBTs are vehicles through which remuneration and other benefits are indirectly provided by employers to employees. There is evidence that some are being used to avoid paying income tax and national insurance. The new legislation will defer the contributor’s corporation tax deduction until a payment is made out of the EBT in a form that gives rise to a liability to income tax and national insurance, and will apply for contributions made on or after today. Changes to the national insurance regulations, which come into force tomorrow, will make clear who has ultimate responsibility for paying national insurance. This legislation will not adversely affect companies contributing to trusts that qualify for relief under the proposed statutory corporation tax deduction for employee share schemes. Draft EBT legislation is today published on the Inland Revenue website;
new legislation on capital allowances. Some businesses have attempted to exploit the capital allowances rules by entering into artificial transactions which depress the market value of their qualifying assets on a sale. The effect of this device is to accelerate the remaining capital allowances relating to those assets, so that the business may obtain a tax advantage. New legislation, effective from 27 November 2002, will block this device by giving no further allowances to the vendor on any shortfall between the written down value and the sale proceeds of the assets, where the purpose of the transactions includes tax avoidance. Draft legislation is today published on the Inland Revenue website; and
new rules on extended warranties and similar products. Extended warranties or service agreements on domestic goods and services, and credit protection insurance on loans are often sold as part of a package. As a matter of law such products are governed by separate contracts from those for the goods or services themselves. Those contracts are sometimes negotiated by a retailer acting on behalf of an associated company located offshore, and in some cases this means that payment of tax that would normally arise under the UK rules for Controlled Foreign Companies (CFCs) can be avoided - see Notes for Editors. The CFC rules will therefore be revised to ensure that profits from these packaged products are taxable for accounting periods of CFCs beginning on or after 27 November 2002. Draft legislation is today published on the Inland Revenue website.

NOTES FOR EDITORS

North Sea Royalty payments

Royalty is the payment that a company makes in exchange for the right, granted under the licence, to extract oil and gas belonging to the Crown. It is charged at 12½ per cent of the gross value of oil and gas won in a particular licence area, less an allowance for the costs associated with the conveying, treating and initial storage of the oil and gas between the well head and the point of valuation- usually the terminal onshore. Royalty is payable on a licence, not a field, basis. Royalty was abolished in the 1980s for all fields given development consent on or after 1 April 1982. It is administered by the Department of Trade and Industry.

Construction Industry Scheme (CIS)

Special taxation arrangements have been in place for construction businesses since 1972. These arrangements were revised in 1999 but the CIS retains the basic structure of its predecessor, relying on paper vouchers to evidence payments between contractors and sub-contractors.

Following the introduction of the current Scheme concerns have continued about the processes and costs to businesses of complying with it. The Paymaster General therefore announced a fundamental review of the Scheme during the passage of this year’s Finance Bill.

The consultation document and accompanying Regulatory Impact Assessment are available on the Inland Revenue website. In addition the Inland Revenue will be arranging a series of focus groups to talk to construction businesses about the proposals.

Reform of Corporation Tax

The Reform of Corporation Tax consultation document was published jointly by the Inland Revenue and HM Treasury on 5 August 2002. The deadline for responses was 29 October 2002. This consultation follows on from the Large Business Taxation: the Government’s strategy and corporate tax reforms consultation document published in July 2001.

Offshore funds consultation

The offshore funds regime was introduced in 1984. It governs the taxation of all UK resident investors in overseas collective investment schemes or ‘offshore funds’. Its purpose is to counter the use of particular types of fund to convert income flows into capital gains. Prior to its introduction, a UK resident investor could accumulate income in a particular type of offshore fund and, when the investment was realised, be subject only to capital gains tax rather than having to pay income tax on the accumulating income.

The operation of the scheme has attracted increasing criticism in recent years, not least because of the nature of the compliance obligations a fund has to meet annually if its investors are to preserve capital gains tax treatment on the disposal of their interests. One of the main aims of the consultation exercise has been to identify ways to make the scheme, or any successor to it, more user-friendly while preserving the competitiveness of similar UK investment products.

Both the consultation document and a summary of responses are available on the Inland Revenue website.

Capital Allowances

Capital expenditure (and depreciation) is disallowed in computing taxable profits from a trade, property letting or other taxable source. Capital allowances are given instead for various types of capital expenditure. The rules about capital allowances are contained in the Capital Allowances Act 2001, as amended.

Controlled Foreign Companies (CFCs)

A CFC is a company which is not resident in the UK (but which is controlled to a significant extent by individuals or companies who are) and which is subject to a level of taxation less than 75 per cent of the level that it would have paid had it been resident in the UK. The CFC rules are designed to stop UK companies reducing their tax liabilities by diverting profits to CFCs located in low tax regimes. The rules work by charging UK parent companies of CFCs on an amount equal to the profits that would otherwise avoid tax. There are a number of exemptions from the CFC rules which exclude the vast majority of overseas subsidiaries from the effects of the rules, but these exemptions should not be available where business which really arises in the UK is artificially diverted abroad.

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C&E 1

27 November 2002

PROTECTING INDIRECT TAX REVENUES

The growth in cigarette smuggling has been stopped for the first time in a decade, the Economic Secretary to the Treasury, John Healey, announced today, but there would be no let up against those who abuse the tax system and threaten the revenue required for investment in UK public services.

Economic Secretary, John Healey, said:

“In this Pre-Budget Report, the Government has renewed its commitment to create world-class public services and to tackle child and pensioner poverty. If people are paying their fair share towards achieving those objectives, they have the right to expect that everyone else will do the same, and that the Government will crack down hard on those who do not.”

Cigarette smuggling

Two years ago, it was estimated that smuggling gangs, whose operations had been growing rapidly in recent years, would be supplying one out of every three cigarettes smoked in the UK by the end of 2002, if the Government had taken no action.

However, new figures published today show that – as a result of the Government’s strategy to tackle tobacco smuggling launched by the Chancellor in March 2000 – the share of the market taken up by smuggled cigarettes has been held at 21 per cent and that the growth of cigarette smuggling has therefore been stopped for the first time in a decade. In addition, the Government announced that in 2001-02:

Customs seized 2.5 billion cigarettes destined for the UK, with the new network of x-ray scanners detecting 13 tonnes of hand rolling tobacco and 325 million cigarettes, 30 per cent of all those seized at UK ports;
Customs cut the size of cross-Channel passenger smuggling by a further 25 per cent, reducing the annual revenue evaded through this type of smuggling from £1.5 billion to just £290 million in two years; and
Customs investigators have broken up 83 major organised crime gangs involved in the large-scale smuggling and supply of excise goods.

Protecting indirect tax revenues, a paper published today, explains how the same strategic approach to tackling tobacco smuggling is being applied across the excise duty regimes, with the launch of a major strategy designed to tackle the misuse of rebated fuels, and the formation of a new Joint Spirits Fraud Task Force through which the spirits industry now provides direct support to front-line Customs officers to help them detect illicit and counterfeit spirits. The paper also reviews the new package of measures announced by the Government in October to reinforce the rights of cross-Channel shoppers and strengthen the fight against cross-Channel smugglers.

Tackling VAT losses

Protecting indirect tax revenues also sets out the first ever concerted strategy to tackle the VAT revenue losses, which have a wide variety of causes from deliberate fraud and avoidance to simple error, which have been a standing feature of the VAT system for more than a decade.

Supported by the deployment of 1,000 staff to key problem areas, Customs will expand the support they give to help businesses meet their VAT liabilities, while cracking down hard on those who choose not to comply, who engage in abusive tax avoidance schemes, or who try to defraud the revenue.

This strategy is designed to reduce the proportion of VAT which goes uncollected, and produce more than £2 billion per year in additional VAT revenues by 2005-06 which – instead of being lost – will go to support increased investment and improvement in the public services. This is the Government's aim, but in line with the audited approach underlying public finances, it is incorporating a lower figure in the Pre-Budget Report public finance forecast.

DETAILS

Tackling tobacco smuggling

In March 2000, the Government launched its Tackling tobacco smuggling strategy, which is designed to put tobacco smuggling into decline by 2003, with £209 million provided for investment in almost 1,000 front-line staff and investigators, and a national network of x-ray freight scanners designed to detect bulk consignments of smuggled tobacco.

After the first year of the strategy, when Customs succeeded in slowing the previously rapid rate of growth in the UK illicit cigarette market and held its share of the total UK market to 21 per cent, the key target for 2001-02 was to slow that growth further and hold smuggled cigarettes to 22 per cent of the total UK market.

The second-year results show that Customs have exceeded their key target, restricting the illicit market share to 21 per cent, and thereby stopping the growth in the illicit market for the first time in more than a decade. Customs have also seized 2.6 billion cigarettes in 2001-02, making a total of more than 5 billion cigarettes seized in the first two years of the strategy. Of the 83 major excise smuggling gangs broken up by Customs, 60 were involved in the large-scale smuggling and supply of illicit cigarettes.

Customs have also achieved a further 25 per cent reduction in the amount of revenue evaded through the cross-Channel passenger smuggling of tobacco and alcohol, following last year’s 75 per cent reduction.

As a result of this success, cross-Channel smugglers have increasingly sought to pose as shoppers in their attempts to evade detection. In October the Government announced a new package of measures designed to be fair for honest shoppers, tough on criminal smugglers, and clear about the distinction between the two (see Notes for Editors).

Protecting indirect tax revenues

Protecting indirect tax revenues, a paper by Customs published today:

explains why it is essential to tackle those who abuse the tax system to protect the revenue required for investment in essential public services, and to protect the competitiveness of legitimate businesses; and
reviews the way in which the Government's successful strategic approach for tackling fraud has been applied across its excise regimes, based on accurately assessing the problem, setting clear objectives for tackling it, identifying the measures and resources required to achieve those objectives, and delivering them.

Protecting indirect tax revenues also sets out the Government’s new strategy to reduce the long-standing VAT revenue losses caused by fraud, avoidance, non-compliance and the failure of businesses to register for VAT.

These losses - measured as the proportion of the VAT that should be collected - rose fastest in the early 1990s, but have stabilised over the past six years at 12 to 14.5 per cent. The Government is determined to reduce this shortfall using the same strategic approach that it has applied successfully in relation to losses in the excise duty regimes.

The Government believes that businesses that abuse the tax system must not be allowed to compete unfairly with those who abide by it. It also recognises there is a difference between those businesses which have genuine difficulty complying with the VAT rules, and those which deliberately bend or break them.

The new VAT strategy is therefore based on an integrated approach which will continue to improve the service that Customs offers to businesses, make it simpler and less costly for them to comply with the requirements of the VAT system, and crack down hard on those who continue to abuse the system through fraud, abusive avoidance schemes and persistent non-compliance.

The strategy will be supported by the deployment of more than 1,000 staff to the key problem areas over the next three years, with which Customs will:

reinforce their efforts to tackle VAT Missing Trader Fraud, by speeding up the identification and challenge of bogus traders attempting to complete intra-Community transactions and disappear without paying over the VAT due to Customs;
increase the number of challenges brought against existing abusive tax avoidance schemes, and identify and challenge new schemes before they can be widely marketed; and
combine increased support, education and advice for compliant and newly-registered businesses with a range of specific measures to target, prevent, deter and punish businesses which choose not to comply or fail to register when they should.

The strategy will seek to stop the long-term growth in the losses as a percentage of the VAT that should be collected, and cut them to 12 per cent by 2005-06, thereby reducing the size of the problem to the levels of ten years ago. The measures contained in the strategy are designed to produce more than £2 billion per year in additional revenues by 2005-06. This is the Government's aim, but in line with the audited approach underlying the public finances, it is incorporating in the Pre-Budget Report finance forecast a lower figure of £1.4 billion per year by 2005-06.

To accompany Protecting indirect tax revenues, the Government has also placed in the libraries of the Houses of Parliament a technical paper, setting out the methodology which has been used to produce estimates of leakages within the VAT system, and updating the methodologies relating to estimates of fraud in the excise duty regimes.

NOTES FOR EDITORS

Copies of Protecting indirect tax revenues are available on the Internet at the addresses below. Copies of relevant earlier papers, Tackling tobacco smuggling (published 22 March 2000) and Tackling indirect tax fraud (published 27 November 2001) are also available at these addresses.

Copies of Protecting indirect tax revenues and Customs' technical paper on the methodology of its estimates, Measuring indirect tax losses, are also available on request from: Analysis Division, HM Customs and Excise, 7th Floor Central, New King's Beam House, London SE1 9PJ.

Summary of the VAT strategy

The key measures which will deliver the VAT strategy are as follows:

the deployment of 1,000 staff both to enhance existing efforts in the key problem areas and provide the resources for the new activities described below;
a new out-reach programme designed to get businesses, especially newly-registered ones, into a sustained pattern of voluntary compliance;
a broader-based, intelligence-led, risk-based approach to tackling non-compliance, based on improved analysis of the patterns of non-compliance, and targeting of resources on high-risk sectors of the economy;
an increase in the use of deposits and guarantees to secure timely VAT payments from businesses with histories of persistent non-compliance;
· a one-off, short-term scheme where unregistered businesses operating above the VAT threshold will be able to obtain relief on their penalties if they come forward for registration voluntarily;
followed by a tough crackdown – alongside Inland Revenue – on those businesses who continue operating above the registration threshold but outside the VAT system;
· the recruitment of a number of new highly-specialised anti-avoidance experts with proven ability to identify and shut down legislative loopholes and abusive tax avoidance schemes;
the inclusion – alongside the Regulatory Impact Assessments which accompany new legislation – of a specific avoidance impact assessment, explaining the elements included to prevent avoidance and the steps taken to make the legislation avoidance-proof;
a substantial increase both in the speed with which avoidance schemes are identified, and in the number of schemes challenged;
a stepping up of efforts to prevent bogus traders from registering, identify those already on the register, stop their frauds before they grow, and recover VAT Missing Trader debts from the fraudsters; and
the use of Customs’ specialist investigators, with proven track records in dismantling organised criminal operations, to target the gangs behind Missing Trader Fraud.

Cross-Channel smuggling

To protect the rights of honest cross-Channel shoppers to bring back as much tobacco as they want, for their own use, the Government announced in October that:

the indicative levels for tobacco would be increased from 800 to 3,200 for cigarettes (equivalent to 6 months supply for the average smoker), and from 1 kilogram to 3 kilograms for hand-rolled tobacco;
a new step-by-step guide to the appeals process would be published, and a review launched to simplify the present appeals and complaints system; and
the burden of proof on the individual to show that goods are for their own use would be replaced with new legislation, obliging Customs to satisfy themselves that goods are for a commercial purpose, and setting out the factors officers may consider in order to come to such a view.

To strengthen the action taken against smugglers, the Government also announced that:

there will be more prosecutions of large scale and regular smugglers;
Customs will prosecute anyone who commits violence against Customs staff;
while small-scale first time offenders will be offered their vehicle back for a fee equivalent to the amount of duty which has been evaded, large scale and repeat offenders will have their vehicle seized, and not restored; and
cross-Channel operators will be challenged to step up the part they play in cooperating with Customs to catch smugglers, by providing accurate and timely information, both to Customs and the public.

The full text of the speech on 29 October 2002 by John Healey is available on the Customs and Excise site.

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Pre Budget Report 2002 index

Steering a steady course: Delivering stability, enterprise and fairness in an uncertain world

MAINTAINING MACROECONOMIC STABILITY

MEETING THE PRODUCTIVITY CHALLENGE

Promoting enterprise and entrepreneurship

Promoting enterprise in disadvantaged areas

Improving UK skills

INCREASING EMPLOYMENT OPPORTUNITY FOR ALL

BUILDING A FAIRER SOCIETY

Support for families and children

Promoting saving throughout life

A modern and fair tax system

MEETING INTERNATIONAL OBLIGATIONS

DELIVERING HIGH QUALITY PUBLIC SERVICES

PROTECTING THE ENVIRONMENT

NOTES FOR EDITORS

HM Treasury

Inland Revenue and HM Treasury

Inland Revenue, HM Treasury and Customs and Excise

Inland Revenue and Customs and Excise

Customs and Excise

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AN ECONOMIC STRATEGY FOR DELIVERING ENVIRONMENTAL PROTECTION AND TACKLING WASTE

DETAILS

Waste

Aggregates levy

Pesticides

Aviation

Fuel duty

Modernising road haulage taxation

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DEVELOPING SKILLS IN THE UK WORKFORCE

DETAILS

Post-16 participation in education

Modern Apprenticeships (MAs)

Employer Training Pilots

Migration

NOTES FOR EDITORS

Skills and productivity

Improving UK workforce skills

Migration and the UK workforce

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INCOME TAX ALLOWANCES AND NATIONAL INSURANCE CONTRIBUTIONS

Tax allowances

National insurance contributions

DETAILS

Tax allowances

National insurance contributions

For employers and employees:

For the self-employed:

For share fishermen:

For volunteer development workers:

For those paying voluntary contributions:

NOTES FOR EDITORS

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ANNEX

* Married couple’s allowance given at the rate of 10 per cent

National insurance contributions

ENTERPRISE BRITAIN: SUPPORTING SMALL BUSINESS, ENTREPRENEURSHIP AND INNOVATION

DETAILS

An increase in the threshold for the default surcharge for VAT

NOTES FOR EDITORS

Enterprise Britain: A modern approach to the enterprise challenge

The innovation and business-university collaboration reviews

VAT flat-rate scheme

Reforms to the VAT penalty system

Starting up in Business