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Pre-Budget Report
5.01 The Government has explained that its tax policy will be based on clear principles. These are to encourage work, savings, investment and fairness. Fairness means that the tax system evolves in ways which benefit the many, not just the few, and by ensuring that it is seen to be fair. Over time, and respecting the need to maintain a stable environment in which individuals and companies can plan their futures, the Government will therefore seek to develop a tax system which more closely matches these principles.
5.02 The Government is also keen to consult more fully on tax, whenever this can be done without causing loss of tax revenue or market disruption. To that end, the Inland Revenue, Customs & Excise and the Treasury will be issuing a code of practice on tax consultation next month, making clear the normal procedures that will be followed.
5.03 The Government has started work towards building an income tax system that is fair to all and can be seen to be fair to all: a system that will encourage people's efforts by helping to make sure that work always pays. A system that will benefit everyone, and not just the higher paid few. That is why it is committed to introducing a 10p starting rate of tax as soon as it is prudent to do so. This will help give people on lower incomes a fair reward.
5.04 The fairer tax system the Government is working towards will make sure that everyone pays their fair share of tax. But changes to the tax system are not enough to bring a fair result for everyone, including families on lower incomes. That is why, when the 10p starting rate is introduced, changes will also be made to the benefits system to make sure that all the low paid benefit from a lower starting rate of income tax. And that is why the Chancellor has asked Martin Taylor to look at the scope for streamlining and modernising the tax and benefit system. Any changes flowing from the review will also have a part to play in shaping a fairer system overall. So will the new minimum wage.
The Government's pensions review will report next year. In the meantime, for this year and next, the Government is determined to help pensioners where they need help most: with winter fuel bills.
For this purpose, a sum of £20 will be paid to pensioner households. Pensioner households who are receiving income support will be paid £50. The payments are in addition to the Christmas bonus and will be paid as soon as possible. About 7million pensioner households will benefit, of whom 1.7million (covering 2 million pensioners) will receive £50 and the rest £20. The cost will be £190million for each of the next two years.
A number of pilot projects will start next year to identify the best ways of providing more automatic help to the estimated one million pensioners not currently receiving the income support to which they are entitled. In the light of the experience of the pilots, the Government will consider how best to deliver more automatic help on a national basis.
5.05 The Government is conducting a number of inter-related reviews, looking at the whole range of incentives to encourage pensions, savings and investment. The reviews have already found some instances of good practice, but also some significant gaps. The intention is, in time, to produce a range of measures to create the right incentives across the pensions, savings and investment spectrum.
5.06 The Secretary of State for Social Security recently published, on 19 November, a consultation document on "stakeholder pensions", as part of the process of consultation on modernising the nation's pensions to encourage greater fairness and adequate provision for all.
5.07 The Chancellor announced in the July Budget his intention to consult on the introduction of a new individual savings account (ISA) to be introduced in 1999. This account will reflect the Government's core objectives: to develop a fair tax system and to promote saving, while taking account of the need for a simple tax system that raises sufficient revenue.
5.08 The taxation of savings should reflect the Government's wish to develop a tax system that benefits the many and not the few. So everyone should have the opportunity to save in a tax favoured environment. The ISA will extend the principle of the Tax-exempt Special Savings Account (TESSA) and the Personal Equity Plan (PEP), which have attracted many savers. But it will look to extend the benefits of saving beyond these investors, particularly to those on lower incomes, while ensuring a fair treatment of investors in existing tax-advantaged accounts. The Government sees the stakeholder pension and the ISA as different but complementary products. Ongoing work in both areas will take careful account of their complementary natures.
5.09 The Government is concerned that around half the population have hardly any savings. It wants to encourage more people to save. This should help them to secure their own financial welfare for the future and to underpin long-term investment. The ISA is an opportunity to spread the savings habit and to encourage long-term saving.
5.10 The Government has already received many interesting and useful contributions on the proposal to introduce an ISA. It is now keen to consult on some specific proposals and will be launching a consultative document on 2December. Its proposals will be guided by the following broad principles:
5.11 As noted in Chapter 3, the Government is also reviewing capital gains tax to produce a fairer tax, which encourages long-term investment, especially by entrepreneurs.
5.12 The tax system must be fair to future as well as to present generations. In the July Budget, the Government issued a statement of intent on environmental taxation that makes clear that the objective of securing economic growth means growth that is environmentally sustainable. Additionally, the Government is committed to exploring the scope for using the tax system, where it is effective to do so, to deliver environmental objectives.
5.13 In line with the principles of the statement of intent, the July Budget also contained a range of specific announcements relating to environmental taxes. A number of these related to reviews and potential new economic instruments, on which there is now progress to report.
5.14 A consultation paper on options for helping to deal with water pollution(1) is being issued on Thursday 27 November by the Department of the Environment, Transport and the Regions. This will outline a number of possible instruments, including water pollution charges linked to the nature and amount of pollutants discharged to our watercourses. The potential for charges, or another instrument, in relation to pesticides and nutrients is also explored. Views are sought so as to feed into consideration for the Spring Budget.
5.15 Linked to this, the Deputy Prime Minister has commissioned research to test the feasibility, and develop specific proposals, for the kind of water pollution charging scheme outlined in the consultation paper. This work will proceed in stages, but again with a view to informing proposals for the next Budget.
5.16 It was announced in the July Budget that research would be carried out to assess the environmental costs attached to quarrying, and in particular the supply of aggregates. As the statement of intent recognises, tax is only one instrument. Others include regulation and the research will consider the extent to which planning consents and regulation currently address environmental costs. The research has now been commissioned and the work is already underway. It will report in the new year and inform consideration of whether there is a case for further measures, which might include new tax measures.
5.17 A Customs & Excise review of the operation of the landfill tax is underway. The issues for examination include the impact of the tax in reducing the amount of waste sent to landfill; the scope of the exemptions; the level of tax; and whether the current two rates are sufficient to distinguish between different wastes. Contributions to the review, by the end of November, have already been invited from interested parties.
5.18 A report is being published tomorrow on the effects of a reduced rate of VAT for schemes helping the less-well-off insulate their homes and keep warm.(2) The Spring Budget will introduce a 5 per cent reduced rate of VAT for the installation of energy saving materials carried out under certain Government- funded energy efficiency schemes. This combines effective targeting of those least able to keep warm, ease of administration, and legal certainty.
5.19 The Government also intends to explore the possibility with European Union partners and the European Commission for a reduced rate of VAT for a broader range of energy saving materials.
5.20 The Chancellor confirmed in the last Budget that a scheme would go ahead to reduce, by up to £500, the vehicle excise duty paid by lorries with clean exhausts. The scope of this proposal was also extended to include buses. The aim is to encourage lorry owners and bus operators to introduce technologies such as "particulate traps" or to switch to gas power. In conjunction with the Department of the Environment, Transport and the Regions, consideration is being given to how such a scheme might operate. A document outlining proposals will be issued shortly. The next Budget will return to this measure.
5.21 As regulations relating to the standards of new vehicles have tightened, emissions of many pollutants can be expected to fall over the next 10 years. However, as recent urban smog episodes demonstrate, environmental concerns continue. Transport is also the fastest growing source of CO2 emissions. The Chancellor will return to transport tax issues in the next Budget, in the light of the international environmental discussions at Kyoto led by the Deputy Prime Minister and of the review of National Air Quality Standards.
5.22 A wide range of tax reviews are currently in progress, many of them working towards possible measures in the Spring Budget. Several have already been discussed in the earlier chapters of this document, notably the tax-benefit review in Chapter 4 and the capital gains and corporation tax reviews in Chapter 3, as well as the pensions, savings and various environmental tax reviews and projects outlined above. But several others are in progress, also intended to create a fairer, simpler tax system, where people pay a fair share and what Parliament intended them to pay.
5.23 The broad intention behind the systems of direct tax and VAT in the UK is that they should apply widely and generally. Businesses and individuals should all be taxed on their profits, income and gains; VAT should be borne on all taxable supplies of goods and services to non-business consumers and exempt businesses. Yet there has been a succession of tax avoidance schemes and tax planning devices which have deferred, reduced or eliminated tax liabilities. Parliament's intentions have been frustrated.
5.24 These schemes and devices lead to a greater share of the overall tax burden falling on the majority of taxpayers. One person's successful tax dodge is another person's higher tax bill. If left unchecked, this creates unfairness for the many while the few get away with paying much lower tax bills than they should. In the end, the system will fall into disrepute among those who find themselves shouldering the increased burden. That is not a situation this Government can tolerate. It is essential to reinforce the principle of fairness in taxation and public confidence in the tax system. The tax system must be tightened to counter avoidance and other tax abuses.
5.25 There will always be some legitimate scope for people who wish to ensure that they organise their business or private affairs in a tax-efficient way. But there is a limit to what can be regarded as acceptable behaviour in minimising tax bills. That limit is breached when people take advantage of tax breaks in a way that Parliament had not intended, or when they use contrived tax avoidance schemes, or blatantly exploit loopholes in the law, or hide or distort the facts. Those who do so must be prepared for Customs & Excise and the Inland Revenue to clamp down on them, often before their schemes have matured.
5.26 The Government is committed to detecting, deterring and preventing tax avoidance. Since the last Budget, the Inland Revenue has been carrying out a wide-ranging review of tax avoidance. This has identified many areas where there may be scope for tightening the law and closing loopholes. Action on some of those areas will be announced in the next Budget.
5.27 With new structures and more resources now being given to anti-avoidance, Customs & Excise are also reviewing and improving their procedures for finding, reporting, preventing and countering avoidance. As a result, a number of reviews are being taken forward leading towards action in the Spring Budget or even earlier.
5.28 But although there will always be a need for specific legislation targeted at known avoidance schemes, this is no longer a fully satisfactory response to the continual inventiveness of tax planners. As requested by the Chancellor in the July Budget, the Inland Revenue and Customs & Excise have been looking at a more strategic approach to countering tax avoidance through general anti-avoidance legislation. This would be a major development of tax law and it raises difficult practical issues. Officials are continuing to discuss these issues with representatives of business and the tax professions. Such legislation would be proposed only after a full consultation exercise. On the basis of the work done so far, it may be possible to publish draft clauses in the summer.
5.29 In parallel with other changes to combat tax avoidance announced in the July Budget, the Chancellor said that he intended to modernise the transfer pricing and controlled foreign company regimes, with prior consultation on the detail. Consultative documents have been issued in respect of the changes proposed to both regimes and discussions are now well under way with interested parties. The necessary legislation will be included in the next Finance Bill.
5.30 The July Budget announced a review of the North Sea fiscal regime. This is being conducted by the Inland Revenue, Treasury and Department of Trade and Industry. The aim of the review is to ensure that an appropriate share of North Sea profits is being taxed while continuing to maintain a high level of oil industry interest in the future development of the UK's oil and gas reserves.
5.31 Following the announcement, there has been wide consultation with the oil industry about the existing fiscal regime. Oil industry representative bodies, oil and gas producing companies and others have provided their views both in writing and at a number of meetings. The representations received have been very helpful in establishing the industry's current views, and are now being considered along with our analyses of the profitability of North Sea oil and gas fields. No decisions have yet been taken about any changes which might emerge from this review.
5.32 It was always intended that self assessment for companies would follow the introduction of self assessment for personal taxpayers. The Government has decided that self assessment will apply to companies' accounting periods ending on or after 1 July 1999. Announcing this now means that companies and their advisers will have certainty, as well as further time to prepare for the change. There will be consultation about the further legislative changes that will be needed to cater for self assessment for companies.
5.33 The start of self assessment for companies will coincide with the introduction of payment of corporation tax by larger companies in quarterly instalments, discussed in Chapter 3. Quarterly instalment payments will bring them closer into line with when individuals pay their tax. And it will bring us closer into line with practice in other major industrial countries.
5.34 The aims of the Review of Charities' Taxation are to seek a simplified taxation system for charities, and to inform the Government of the views of charities for any future European review of VAT social reliefs. The review covers direct and indirect taxation as well as business rate relief, although the main focus is on VAT. Suggestions for improvements to the system are still being received from charities, businesses and other interested parties, and some key contributions are not expected until shortly before the closing date for initial consultation of 1 December. These will be carefully considered by Customs & Excise, the Inland Revenue and the Treasury, with a view to producing a consultative document for publication in Spring 1998.
5.35 A report on alcohol and tobacco smuggling and fraud is being prepared by Customs & Excise for the Financial Secretary by 31 December 1997, in consultation with the trade and other government departments. The review is considering measures which include strengthening and extending customs controls and procedures, increasing customs powers, an increased civil penalty and more consistent application of criminal penalties, and requiring clearer identification of products both on commercial documentation and on packaging where destined for sale in the UK. The review is also considering how closer working with the trade, police, Benefits Agency, and other government departments and agencies can improve effectiveness in combating revenue fraud.
5.36 This chapter, along with the previous chapters which discussed the review of tax and benefits systems and capital gains and corporation taxes, has sought to outline the principles underlying the Government's approach to developing a fairer tax system. In the process, this Pre-Budget Report has outlined a further major reform of corporate taxation and described progress in a wide range of tax reviews and work that are likely to lead to measures in the Spring Budget. This should not, however, be taken as an indication of all the tax areas where the Government may act in the Budget. In some cases - for instance, where consulting on tax measures could cost the exchequer loss of revenues due to forestalling, or disrupt markets - it may not be appropriate to give advance notice, and in other areas policy may well develop between now and the Spring. But the intention has been, wherever it is sensible to do so, to use this Report to develop greater openness in the development of tax policy, to further consultation, and to encourage a national debate on what should be done to create a fairer tax system.
