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Pre-Budget Report
27 November 2002
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:
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 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.
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.
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:
The Government is also taking further steps to ensure that UK businesses can compete effectively in global markets, including by:
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.
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:
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:
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 details of the Government’s work to build UK skills and raise productivity are set out in the separate press notice, HMT 3.
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:
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:
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.
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:
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:
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:
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:
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:
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:
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:
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:
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 details of the Government’s environmental strategy are set out in the separate press notice, HMT 2.
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.
HMT 2 An economic strategy for delivering environmental protection and tackling waste
HMT 3 Developing skills in the UK workforce
REV/HMT 1 Income tax allowances and national insurance contributions
REV/HMT/C&E 1 Enterprise Britain: supporting small business, entrepreneurship and innovation
REV/C&E 1 A modern and competitive business tax system
C&E 1 Protecting indirect tax revenues
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HMT 2
27 November 2002
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:
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.
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.
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.
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.
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.
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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HMT 3
27 November 2002
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:
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.
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 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.
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.
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:
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.
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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Department for Education and Skills
REV/ HMT 1
27 November 2002
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.
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.
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.
The Paymaster General, Dawn Primarolo, today set out the level of national insurance contributions in 2003-04.
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.
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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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 |
|
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
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:
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:
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:
The complementary business-university collaboration review will:
To encourage small business investment and cut red tape, the Government will:
To help new and growing small businesses gain access to finance and business support services, the Government will:
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:
Businesses in the 2,000 Enterprise Areas already benefit from:
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.
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.
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:
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.
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:
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.
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 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.
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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REV/ C&E 1
27 November 2002
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:
In addition to these steps, the Government is also:
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:
Further information on other business tax reforms is provided in the separate press notices REV/ HMT/ C&E 1 and C&E 1.
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.
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:
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:
The main proposals are:
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.
The Reform of Corporation Tax, published in August 2002, sought views on three potential additional reforms. These were:
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.
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.
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.
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.
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.
Measures announced today to protect the revenue and prevent tax avoidance include:
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.
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.
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.
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 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.
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
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.”
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:
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.
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.
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, a paper by Customs published today:
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:
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.
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.
The key measures which will deliver the VAT strategy are as follows:
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:
To strengthen the action taken against smugglers, the Government also announced that:
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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