Select Committee on Treasury Appendices to the Minutes of Evidence


APPENDIX 5

Memorandum submitted by the CBI

  1.  The CBI, through its direct and indirect membership, represents a broad-based constituency of firms with members across all sectors of UK business.

  2.  This paper sets out the CBI's preliminary analysis of the April 2002 Budget. The initial comments of a range of CBI members have been taken into account, but we have yet to undertake our usual, more considered analysis and discussion of the Budget's precise effects. The paper focuses mainly on the microeconomic policy announcements and proposals, which have been the focus of business concern.

SUMMARY

  3.  Prior to the Budget, the CBI had argued that there should be no further increase in business taxation, on the grounds that: businesses and their shareholders had already borne the bulk of the tax increases announced in the last parliament; businesses had also suffered from a range of other policy-related increases in costs; the business tax burden did not compare favourably with key international competitors; increases in business tax often had unforeseen and painful consequences for the economy and for individuals; and profits were currently under pressure, most notably in internationally-exposed sectors typified by manufacturing.

  4.  In the event, business has again found itself bearing a disproportionate share of Budget tax increases. The increase in employers' national insurance has caused particular concern right across the business sector. For many, it is the worst kind of tax rise as it adds straight to the cost base and is unrelated to profits. It will add to costs and hinder international competitiveness at a time when UK-based businesses are already under severe competitive pressure. It penalises employment, and penalises the provision of high-skill, high-paid jobs relative to low-skill, low-paid jobs. Businesses already facing a profit squeeze will have to find some way to pass on or offset the cost, if they are not to risk bankruptcy. Cutting numbers employed is one option; a tougher stance on pay or employee benefits (such as pension provision) a second; cutting back on other expenditures—including capital spending, training and R&D—a third. So as with other "stealth taxes", the final impact on individuals will be highly unpredictable and arbitrary, and no less "painful" than a more transparent tax increase levied directly on households.

  5.  This memorandum also covers:

    —  Other new tax increases faced by business. Though these are less high profile, they are numerous, and bring in significant revenues.

    —  Issues outstanding. The CBI continues to believe that several areas of the UK tax system are in need of fundamental review, mostly due to their impact in adversely affecting the competitiveness of UK-based businesses.

    —  On a more positive note, the Chancellor's "productivity" and "enterprise" measures. The CBI can welcome the introduction of a fairly significant and worthwhile R&D tax credit, for companies not already qualifying for the SME credit. And had it not been for the employer NICs increase, this would have been a welcome Budget for SMEs.

    —  The overall Budget arithmetic. We note that planned public expenditure is now significantly higher than previously projected, and that the financial plans are based on faster economic growth than previously assumed, on top of the discretionary increase in taxation. We regard the assumption of 2½ per cent per annum underlying growth, for the purposes of the financial projections, as still reasonably cautious. But there is clearly less margin for error built into these plans than into previous plans.

THE EXTRA TAX BURDEN AND BUSINESS

  6.  The table below shows the split between "business", "household" and "other" tax increases. It can be seen that taxes levied on business have been increased by more than taxes levied directly on individuals.

£bn Yield to Treasury
2002-03
2003-04
2004-05
Main Business Tax Changes
  
  
  
Raise employer NICs
0.00
+3.90
+4.10
Reduce SME rate of corporation tax
-0.02
-0.26
-0.45
Abolish stamp duty on goodwill
-0.05
-0.05
-0.05
Exempt gains for substantial shareholdings
-0.07
-0.13
-0.15
Reform for intellectual property
-0.07
-0.16
-0.19
R&D tax credit
-0.20
-0.40
-0.40
Raise taxation of North Sea profits
+0.10
+0.45
+0.60
Half value of non-indexation of road fuel duty
-0.20
-0.21
-0.21
Half value of non-indexation of VED
-0.04
-0.04
-0.05
  
-0.37
+3.10
+3.20
Main Personal Tax Changes
  
  
  
Freeze income tax & NIC thresholds
0.00
+0.70
+0.85
Employee & self-employed NICs
0.00
+4.00
+4.15
Working family tax credit extension
0.00
-0.25
-0.30
Child-related tax credits
-0.50
-2.45
-2.30
Half value of non-indexation of road fuel duty
-0.20
-0.21
-0.21
Half value of non-indexation of VED
-0.04
-0.04
-0.05
-0.74
+1.85
+2.14
Other tax changes (mostly "closing loopholes")
+0.21
+1.16
+2.30
Total tax changes
-0.90
+6.11
+7.64


EMPLOYERS' NATIONAL INSURANCE

  7.  The increase in employers' national insurance is regarded by many businesses as the worst possible kind of tax increase. It affects businesses of all sizes and sectors, but crucially takes no account of their profitability. It penalises employment, and in today's fiercely competitive, low profit environment businesses will be forced to take offsetting action.

  This could include:

    —  Cutting numbers employed. Or at the very least, reining back any plans to take on new staff.

    —  A tougher stance on pay. If all of the increase in employers' NICs were passed on to employees in this way, the effect of the Budget would have been too raise the tax on personal income from employment by two percentage points rather than one. However, given today's labour market conditions, it is unlikely that businesses will be able to pass on the whole of the cost in this way. And to the extent that they do, or try, industrial relations could well suffer.

    —  Cutting other employee benefits. This could, unfortunately, include a further move towards less generous and/or less certain pension provision.

    —  Cutting back on other expenditures, possibly including capital expenditure, training and innovation. However, spending on labour-saving capital equipment is likely to increase.

  8.  As well as penalising job creation, employers' national insurance also penalises the provision of high-skill, high-pay jobs relative to low-skill, low-pay jobs.

  9.  The Government may well argue that it is "fair" to add one percentage point to employers' NICs, to equal the one percentage point increase in employees' NICs. The CBI would argue that it is patently unfair:

    —  As with other "stealth taxes", the final impact on individuals of the rise in employer NICs will be highly unpredictable and arbitrary, but no less "painful" than a more transparent tax increase levied directly on households. It is simply not possible to judge how the cost will ultimately be split between employees, customers and shareholders. And of the latter, how it will be split between high-income individuals, modest savers, and investors in funds—including people saving for a decent pension, or to repay a mortgage.

    —  Of course the tax will also be levied directly on owner-managers, and on individual employers (such as of nannies). And in the case of NICs paid by local authorities, council tax payers may well end up an extra bill too. But, again, it is difficult to assess the precise impact on individuals, and therefore virtually impossible to measure the distribution of the final cost by income group.

    —  Whereas a one percentage point increase in employee NICs is broadly equivalent to a one percentage point increase in personal income tax, a one percentage point increase in employer NICs will in total raise broadly same amount of revenue as a four percentage point rise in the main rate of tax on corporate incomes.

    —  Within the business sector, the tax is unrelated to profitability.

OTHER NEW TAXES FACED BY BUSINESS

  10.  Although many of the tax changes will occur in the next fiscal year, the boost to Government tax receipts stemming from these changes will continue to rise thereafter. In 2004-05 the changes will generate a tax rise of £7.6 billion, the majority borne by business. Whilst the additional employee NICs will bring in £4 billion, the personal sector will be "given back" around £2 billion through new tax credits. Businesses will have to bear an additional £4bn via employer NICs, only partially offset by "pro-enterprise" measures to the value of £1 billion. Moreover, another £2.5 billion will be raised from a range of other measures, mostly affecting business. Some changes (notably the 10 per cent increase in the taxation of oil profits) were portrayed openly as a business tax increase. But various other measures, portrayed as "tightening loopholes", "bringing the UK into line with international practice", or "countering avoidance", will also have their main impact on the business sector.

  11.  Specific concerns include:

    —  Tax on oil profits: The new supplementary corporation tax charge of 10 per cent on profits was both a surprise and a disappointment to CBI members, particularly as they had not been given the opportunity for prior consultation. The perceived financial risk of operating in the North Sea will be increased and it is likely that the profitability of recently completed investment projects will be adversely affected. The increase in first year capital allowances to 100 per cent may be a plus, but is not enough to balance the negative effects of the tax rise. The possible abolition of North Sea Royalty should now be speeded up, preferably without the need for a lengthy consultation process.

    —  Treatment of UK branches of foreign companies: Higher taxation due to the new treatment of UK branches of foreign companies (as though they were independent, free-standing companies) will hit firms across all sectors, the banking industry in particular. This may prompt foreign banks to review their activities here, which would be to the detriment of the City of London as a global financial centre.

    —  New rules on loan relationships, derivative contracts and foreign exchange: These new rules extend the range of financial products to be taxed. This will be a further blow to the banking and financial industry already affected by the change in the treatment of UK branches of foreign companies.

    —  Restriction of tax relief to film industry: It is disappointing that the reliefs—intended originally to "stimulate the production of UK films and to promote growth, employment, investment and opportunities in the British film industry"—will now be cut back.

    —  Stamp Duty on land and buildings—"countering avoidance". We are concerned by the measures put into place, which will "claw back" previous reliefs and will also implement penalties on certain land and property dealings.

ISSUES OUTSTANDING

  12.  Prior to the Budget, the CBI highlighted several specific tax issues deserving attention. Measures not addressed include:

    —  Stamp Duty on business property. The CBI is disappointed that stamp duty on business property and other assets was not reduced across the country, as it has been for certain disadvantaged areas. Rises in rates of this duty over the last parliament have had a detrimental effect on businesses looking to relocate or to restructure.

    —  Stamp Duty on shares. The CBI is disappointed that a review has not been established to identify an efficient method of eliminating this discrimination, to enable greater UK competitiveness

    —  Transport taxation. Although the CBI welcomes the freeze on fuel duty, we would point out that they remain the highest in the EU.

    —  VAT on tourist accommodation: The CBI is disappointed that no announcement was made to reduce VAT on tourist accommodation. We believe there is a strong case for reducing the rate from the current 17.5 per cent ideally to 5 per cent, given differentials which exist internationally.

    —  VAT on property refurbishment: The CBI is disappointed that no announcement was made to reduce VAT on property refurbishment from its current rate at 17.5 per cent. We would have liked to see a reduction to 5 per cent, to narrow the differential that exists with new buildings which have a zero rating.

    —  SME issues: A number of positive measures to promote enterprise, identified by the CBI, were left out of this Budget:

      —  Exemption from stamp duty for shares in smaller companies

      —  An extended definition of R&D for tax purposes

      —  Enhancement of SME capital allowances

      —  A new scheme for individuals investing directly in smaller quoted companies, which do not qualify for inclusion in the Enterprise Investment Scheme

      —  Change to the corporation tax treatment of "associated companies".

    —  Excise Duties on alcohol and tobacco: Whilst the CBI welcomes the freeze on beers, wines and spirits (a large subsection of the alcohol category), duties on both alcohol and tobacco remain significantly higher than other Single Market countries.

CHANGES WELCOMED BY THE CBI

  13.  The Budget did, however, include a number of positive measures for business:

    —  R&D tax credit. The CBI welcomes the new R&D tax credit to complement the SME tax credit already in place. We are particularly pleased with the result of the consultation process—the confirmation of a simple volume based tax credit. We also welcome the headline rate of the tax credit at 25 per cent, which will cut R&D costs by 7.5 per cent.

  —  SME measures: The following changes are all welcomed by the CBI, particularly as we had strongly recommended many of these:

      —  £30 million funding to help small companies to reach the Investors in People Standard

      —  The cut in the small companies' corporation tax rate from 20 per cent to 19 per cent

      —  The introduction of zero-rate band corporation tax (on first slice of profits), though this will need to be widened in future to be really worthwhile

      —  VAT simplification, involving the introduction of an optional flat rate scheme, and reform of the annual accounting scheme

    —  Corporation tax changes: The CBI welcomes the changes for substantial share sales and intellectual property, plus the abolition of stamp duty on goodwill. These are measures which we had previously flagged up and we are pleased that they are now in place.

    —  Change to Climate Change Levy (CCL): The CBI is pleased by the exemptions for the CCL for electricity generated from good quality combined heat and power, and from coal mine methane. Nonetheless, much more change needs to be implemented in the use of the CCL.

OVERALL APPROACH TO PUBLIC FINANCES

  14.  The table below sets out how the new Budget plans compare with the previous plans as set out in the November 2001 Pre-Budget Report. We would need to carry out a much more detailed analysis of these figures before being in a position to comment authoritatively. For now, we simply note that planned public expenditure is significantly higher than previously projected, and that the financial plans are based on faster economic growth than previously assumed, on top of the discretionary increase in taxation. We regard the assumption of 2½ per cent per annum underlying growth, for the purposes of the financial projections, as still reasonably cautious. But there is clearly less margin for error built into these plans than into previous plans.

BUDGET 2002 VERSUS PBR 2001 FINANCIAL PROJECTIONS

  
  
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
Old projections
  
  
  
  
  
  
  
£bn
Spending
393.7
418
445
465
488
511
  
Tax revenues
367.3
381
400
421
442
465
  
Total revenues
391.2
406
430
452
474
497
  
Borrowing
2.5
12
15
13
13
13
  
GDP
998
1,046
1,099
1,150
1,205
1,263
As % GDP
Spending
39.4
40.0
40.5
40.4
40.5
40.5
  
Tax revenues
36.8
36.4
36.4
36.6
36.7
36.8
  
Total revenues
39.2
38.8
39.1
39.3
39.4
39.3
  
Borrowing
0.3
1.1
1.3
1.2
1.1
1.1
New projections
  
  
  
  
  
  
  
£bn
Spending
392.2
418
455
481
511
539
  
Tax revenues
370.3
386
417
443
468
492
  
Total revenues
390.8
407
442
468
494
520
   
Borrowing
1.3
11
13
13
17
18
  
GDP
1,000
1,051
1,108
1,163
1,222
1,284
As % GDP
Spending
39.2
39.8
41.1
41.4
41.8
42.0
  
Tax revenues
37.0
36.7
37.6
38.1
38.3
38.3
  
Total revenues
39.1
38.7
39.9
40.2
40.4
40.5
  
Borrowing
0.1
1.1
1.2
1.1
1.4
1.4
Differences
  
  
  
  
  
  
  
£bn
Spending
-1.5
0
10
16
23
28
  
Tax revenues
3.0
5
17
22
26
27
  
Total revenues
-0.4
1
12
16
20
23
  
Borrowing
-1.2
-1
-2
0
4
5
  
GDP
2.0
5
9
13
17
21
As % GDP
Spending
-0.2
-0.2
0.6
0.9
1.3
1.5
  
Tax revenues
0.2
0.3
1.2
1.5
1.6
1.5
  
Total revenues
-0.1
-0.1
0.8
0.9
1.0
1.2
  
Borrowing
-0.2
0.0
-0.1
-0.1
0.3
0.3





 
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