Memorandum submitted by the Confederation
of British Industry
1. On balance, there was very little in
the Chancellor's Spring statement that might help business competitiveness
and stimulate investment. While the CBI welcomes a number of measures,
the Chancellor has failed to heed CBI warnings about the effect
of high taxes and help UK business in this era of globalisation.
Both taxes and spending are forecast to rise beyond what he predicted
only back in December.
2. Some of the announcements (and re-announcements)
of this year's Budget Report were welcome and will provide some
benefit to both business and the UK economy in the areas of:
Freezing of main road fuel duties
Extension of the R&D tax credit.
Progress on the deregulation agenda.
A promise to maintain dialogue on
simplifying the corporation tax system.
Promises of public sector pay restraint.
Introduction of vehicles to improve
funding for SMEs.
Overhaul of UK Trade & Investment
and City of London Strategy.
Proposals to improve procurement
in PFI contracts.
Increase in long-dated gilt funding.
Additional funding for schools.
3. However, business will have some major
Failure to reduce the business tax
Failure to restrain public spending
over the next two years, ahead of the restraint pencilled in for
the 2007 Comprehensive Spending Review.
Abolition of tax benefits available
under the Home Computer Initiative.
Failure to address tax anomalies,
specifically to help SMEs.
New "anti-avoidance" measures
which may exceed countering genuine "abuse".
Large increases in duty on rebated
fuels from September 2006.
This analysis is set out as follows:
An overview of new measures with
a specific fiscal impact.
CBI views on specific areas of policy.
An overview of the projections for
the economy and public finances.
An analysis of international tax
(A) An overview of measures with a
specific fiscal impact
4. Table 1 sets out the impact of the new
policy announcements in terms of revenue transfers between the
state and other parts of the economy. For business, the only measurable
tax "benefits" came from the freezing of the main road
fuel duties for six months and the extension of the R&D tax
credit. The cost to the Exchequer from the Climate Change Levy
reflects the signing of Climate Change Agreements in January 2006,
rather than a reduction, and ignores the distributional impact
within British business. The introduction of REITs is expected
to raise revenue in the near-term through the up-front conversion
charge. The headline business tax rise is a net £127 million
over the next three years, excluding any impact on legitimate
business activity of measures introduced under the "anti-avoidance"
TOTAL IMPACT OF BUDGET
|Approximate £ million yield (+) or cost (-) to Exchequer relative to baseline1
|Extending the R&D tax credit||0
|Real Estate Investment Trusts (REITs)||+35
|Changes to Climate Change Levy||-20
|Fuel Duty Measures2||-98
|Other Business tax measures3||-20
Measures directly affecting business
Personal taxes, tax credits and benefits
|Other tax measures4||+295
1 The baseline includes up-rating many duties and levies in
line with inflation. Hence the exchequer "loses" for
example by freezing main road fuel duties for six months, even
though there is no actual cashflow benefit to business.
2 Including increased rebated fuel duty and a half share of
the main fuel duty freeze.
3 Including: changes to venture capital schemes; changes to
group relief in corporation tax; film tax reliefs; aggregates
levy freeze; water efficiency capital allowances; landfill tax
4 Measures described as "protecting tax revenues".
5. The CBI was disappointed that the Chancellor failed
to take the opportunity to reduce the business tax burden by getting
a tighter grip on public spending. The removal of tax anomalies
and other measures to promote enterprise (SMEs), which would have
had near-negligible cost for the Treasury, were not taken up.
Instead, business has seen a number of revenue-raising measures
with only modest measures to support business competitiveness,
resulting in a higher tax burden.
BUDGET REPORT MEASURES: CBI REACTION
|Measures that the CBI welcomed||Measures of concern to the CBI
||Measures that the CBI was disappointed not to see included
|Freezing main road fuel duties for this year.|
Draft legislation to introduce Real Estate Investment Trusts (REITs).
Extension of the R&D tax credit, support for science and innovation.
A promise to maintain dialogue on the corporation tax system.
Commitment to an average pay settlement of 2.25% in the public sector.
Introduction of Enterprise Capital Funds and enhancements to the Enterprise Investment Scheme.
Overhaul of UKTI and announcement of the City of London strategy.
Proposals to improve procurement in PFI contracts.
Increase in long-dated gilt funding.
Additional funding for schools.
|Further increase in government spending and taxation relative to the December PBR projections.|
Further large increases in duty on rebated oil and gas.
Computers loaned by employers to be taxed as a benefit in kind.
Increase in the climate change levy.
Further "anti-avoidance" measures, which may go beyond countering genuine abuse.
|Reduction in the business tax burden.|
Commitment to a firmer grip on public spending.
Removal of anomalies in the tax system and other measures to promote enterprise (SMEs).
Report on the administrative cost of regulation imposed on business.
(B) Views on specific areas of policy
6. While companies will instinctively welcome the government's
commitment to further dialogue, any reform would have to enhance
the tax competitiveness of all business sectors to protect our
economy's place in the global pecking order. By contrast, further
uncertainty and change in the tax system, without achieving a
reduction in the total business tax and cost burden, would risk
making matters worse.
7. Despite a number of positive measures announced, the
Budget was a missed opportunity to address some of the more fundamental
issues preventing business growth. Following CBI lobbying, the
Chancellor announced a commitment to radically rationalise the
number of business support services. The government will also
proceed with Enterprise Capital Funds, with a further £100
million provided over the next two years. A new 30% rate of income
tax relief for investment in Venture Capital Trusts (VCTs) was
announced. While this was an increase on the 20% planned rate,
it was down from 40% currently provided. This change was part
of a package, including:
refocusing of the "gross assets test"
to £7 million immediately before investment and £8 million
increasing the minimum holding period for new
shares in VCTs to five years; and
a doubling of the annual Enterprise Investment
Scheme investment limit eligible for income tax relief to £400,000.
Better regulation agenda
8. The CBI welcomes the continued focus on implementing
the Hampton Review's riskbased approach to regulation. We believe
this can help to ensure that regulation is well targeted and result
in a more appropriate public policy environment for business.
The CBI would support a single and consistent statutory code that
focuses on enforcement principles for all regulatory bodies. However,
such a code must neither add to the complexity or cost of enforcing
regulation nor constrain the flexibility of regulators in their
day-to-day dealings with business.
9. We were disappointed that there was no cross-government
announcement on the measurement of the administrative cost of
regulation imposed on business. The government must remain committed
to this exercise and publish detailed targets across government
departments for reducing administrative burdens. HMRC, however,
did report on the tax administration burden and set targets to
reduce this over five years by 10% for forms and returns and by
at least 15% for HMRC audits and inspections. This falls short
of matching the Dutch government's 25% reduction over four years
we have called for.
10. In terms of EU regulatory reform, the Budget has
restated the measures announced during the UK's recent EU Presidency.
We hope that the European Commission's proposed list of legislation
that could be revised or dropped indicates a genuine policy shift
in Brussels. It will, as always, be implementation that counts
and that will depend ultimately on the Commission's and Member
Home Computer Initiative
11. Reaction from CBI members has been universally negative
to the announcement that tax benefits available under the Home
Computer Initiative (HCI) will not be available for new agreements
commencing on or after 6 April. The move was made without any
consultation with employers' or employees' bodies, in contrast
to the extensive consultation that preceded its creation. HCI
schemes have proved highly popular since their introduction only
three years ago, with more than 1,250 employers now operating
themthree times more than in 2004. Figures from the Home
Computing Initiative Alliance show that many more companies had
intended to roll out new schemes.
12. Many low income employees have already benefited
from the scheme, with their families gaining tooincluding
through enhancement of their children's education and IT skills.
But many of their work colleaguesalong with many otherswill
now be denied that opportunity. Many CBI members have told us
that initial roll-out has been a success, but that many more employees
were expected to take up HCI schemes over the coming years.
13. Initial claims by the Treasury that the scheme had
benefited too many higher-rate tax payers seem wide of the mark,
with research by the HCI Alliance finding that 75% of employees
purchasing computer equipment through the HCI are basic or starting
rate taxpayers, and 59% "blue collar" workers. If is
true that the HCI has been open to misuse, then the best way forward
would be for the Treasury to consult with business on how to redraw
the boundaries of the scheme to prevent that, rather than simply
abolishing it altogether.
14. Employers who invested significant time and resource
in setting up arrangements will now have to tell a disappointed
workforce that the scheme is no longer available. Much of the
investment in set-up costs will have been wasted. The abolition
will also have a severe impact on IT providers who have invested
heavily in HCI arrangements, and who had made this investment
on the understanding that tax exemptions would remain in place
for a full five years from 2004.
International trade and competitiveness
15. The overhaul of UK Trade & Investment and, in
particular, the increased focus on China and India, will be warmly
welcomed by business. UK companies need support as they seek to
establish themselves and succeed in fiercely competitive overseas
markets. But to help deliver these ambitions, previous ill-judged
cutbacks to UKTI's budget must be reconsidered.
16. At the same time, Britain's financial services sectorespecially
London's international financial marketsis critical in
providing the finance for UK companies to expand in these growing
markets. We welcome the government's desire to strengthen London's
position as the pre-eminent global financial centre. However,
given that this success cannot be taken for granted, we wish to
see action to ensure that London remains in front.
Science, technology and innovation
17. The CBI is pleased that the government wishes to
improve the effectiveness of the R&D tax credit, subject to
state aid approval from European Commission. The government intends
to extend the higher rate (150%) tax credit to companies with
up to 500 employees. The effective reduction in R&D costs
would be between 9.5% and 15% depending on the corporation tax
rate paid by the company. The CBI also supports the government's
desire to extend the tax credit to companies with up to 500 employees
that are not in profit.
18. The CBI welcomes the wider remit of the business
led Technology Strategy Board (TSB) and the government's desire
to make it more independent. We also support the intention to
merge the health research budgets into a single fund of at least
£1 billion. The intention to replace the Research Assessment
Exercise (RAE) with a metricsbased system to simplify the research
funding for universities is very much welcomed. However, it is
essential that the metrics chosen are outcome-oriented and place
more emphasis on the value of conducting research of relevance
to the UK economy (eg research collaboration with business, the
Transport and the environment
19. The CBI welcomes the further six-month freeze in
main road fuel duties, given continued volatility in oil markets
and the current level of oil prices. However, we are disappointed
that the announcement does not take into account the impact of
maintaining the differential on users of rebated fuels. From 1
September 2006 duty on rebated gas (used for some off-road transport)
will rise by 19% and rebated oil (used heavily by some businesses
in Northern Ireland) by 21%.
20. The announcement of freezes in the rates of the aggregates
levy and air passenger duty (APD) are more welcome developments.
We also welcome the creation of a new National Institute of Energy
Technologies and a fund of up to £30 million to help bring
forward innovative technologies that reduce natural resource use
and improve energy efficiency, waste and pollution management.
21. The increase in the climate change levy (CCL) rates
in line with inflation from 2007 will provide a significant additional
burden for manufacturers on top of rapidly rising energy prices.
We have seen little evidence to support claims that the CCL has
been effective in delivering emissions reductions in the commercial
business sector. The Climate Change Agreements (CCAs), in contrast,
have been effective in achieving emissions reductions and we welcome
the extension of the CCAs to heat treatment, calcium carbonate,
compressed gases and kaolinitic clay sectors.
22. We support the emphasis on involving consumers in
tackling climate change, including new measures to improve household
energy efficiency and tackle private transport, specifically:
£5 million earmarked for trialling of smart
energy meters, which have the potential to improve quality of
information on residential electricity demand and better educate
consumers about energy use;
£50 million to support the wider use of micro-generation
technologies in social housing and schools, bringing forward the
Energy Efficiency Commitment to insulate 250,000 homes and extending
the Landlord Energy Saving Allowance to encourage draught proofing
and insulation of hot water systems; and
reform of the vehicle excise duty (VED) banding
structure, including reducing to zero the rate for cars with the
very lowest emissions and introducing a new top band for the most
Property and planning
23. The modest increase in the residential stamp duty
threshold to £125,000 from £120,000 will do little to
reduce the transaction costs for first time buyers, especially
in the southern regions of England. There was no announcement
on the outcome of the Planning Gain Supplement consultation, which
remains a concern to business.
24. The CBI welcomes the move to include legislation
for REITs in the 2006 Finance Bill. Whilst the reduction in the
required distribution rate to 90% and the interest cover ratio
to 1.25, it remains to be seen if the overall structure will provide
the right operating framework. Given that the Treasury expects
to raise £320 million from REITS over the next three years,
as a result of setting an up-front 2% conversion charge, there
are questions about whether the net result will be to encourage
greater investment in property.
25. The Budget documentation under the section "protecting
tax revenues" introduces a package of measures described
as "tackling tax fraud and avoidance". The Treasury
expects these to raise revenues of just under £1.7 billion
over the next three years. Whilst we have no objection to the
countering of "missing trader fraud"a VAT evasion
issuethe CBI will be examining the detail of the remaining
measures when the Finance Bill is published. We will lobby against
any aspects of these measures, which go beyond straightforward
countering of genuine "abuse" and do not adhere to the
five policy principles we set out in our Budget 2006 submission.
Gilt financing arrangements
26. The Chancellor announced that in future the share
of long-dated gilts would rise from just under half to around
two-thirds of total issuance, though total issuance was slightly
lower than had been expected. Whilst this will help to ease the
pressure on pension funds, it amounts to no more than a short-term
partial fix which will provide the Exchequer with lower debt servicing
27. We would like the government to undertake a serious
examination of the regulatory pressures that encourage increasingly
risk-averse investments by pension funds. These regulatory pressuresmost
recently the vicious cycle of increasing deficits due to forced
buying of long-dated giltsactually undermine the stated
goal of more secure retirements.
Public sector pay and pensions
28. We welcome the Chancellor's promise to clamp down
on public sector pay inflation, with settlements expected to average
2.25% next year. The public services need to show the same degree
of wage restraint being seen in the private sector whilst improving
productivity, which continues to lag the private sector. However,
the public sector retirement age issue has not gone away and it
is very disappointing that no mention was made of this.
Private finance initiative
29. The CBI welcomes the Treasury's proposals to improve
procurement in PFI projects, as too much money is being wasted
on delays and action is overdue. In particular we are keen to
support the new Partnerships UK Operational Taskforce in its work
on the operational phase of PFI projects. Business welcomes the
continued commitment to PFI investment and would like to see an
increased role to work in partnership with government.
Gershon efficiency review
30. Business believes that progress on the Gershon efficiency
review has been patchy. Ninety per cent of businesses do not believe
that the government will meet their targets. The government now
claims to have saved £6.4 billion as of December 2005. However,
the National Audit Office has cast doubt on the previous £4.7
billion figure of September 2005, given the difficulties in measuring
efficiency savings. Some progress has clearly been made, such
as in the appointment of professional finance directors in government
departments, but it has been slowonly 60% of these are
now in post. Despite the loss of some posts (the government claims
a 40,391 reduction), overall civil service numbers have not been
reduced. The growth in civil service numbers has merely been slowed.
31. Business is keen to see much greater use of shared
services to drive efficiency. For example, the new Ministry of
Defence HR contract with EDS, Liverpool Direct and the reforms
of the Teacher Pensions Agency show the way. The Government should
also improve on the current level of skills and abilities within
departments to ensure delivery. Existing programmes such as the
Departmental Capability Reviews and the Professional Skills for
Government programme are simply not adequate for this purpose.
Skills and training
32. The additional funding for schools is welcome, but
must be focused on raising the number of school-leavers with adequate
literacy and numeracy skills. If the UK is to compete in the global
market place we need to improve our skills basebut we produce
far too few students with high quality maths and science skills.
The announced recruitment and training of science teachers is
therefore welcome. Currently a quarter of schools do not have
physics specialists and 37% of science departments use teachers
from other subjects to teach science.
33. The CBI also welcomes the confirmation that the government
intends to take forward recommendations in the Foster Report to
reform the FE sector, but delivery will be keydetails will
be announced in a White Paper expected at the end of March. Removing
funding from failing further education courses and colleges is
a step in the right direction and business will help identify
which courses make the grade.
(C) Projections for the economy and public finances
34. The new Treasury forecasts were announced, although
there were no changes of note from the December Pre-Budget Report.
The Chancellor still expects economic growth for this year of
2.0-2.5%, rising to 2.75-3.25% for 2007 and 2008. We are sceptical
that these forecasts for 2007 and 2008 can be met, for two reasons.
Firstly, we view the degree of spare capacity in the economy as
relatively modest, precluding two years of above-trend growth.
Secondly, in the near-term we have doubts about the ability of
consumer spending and business investment to grow as robustly
as the Treasury expects. As a result, the CBI forecasts GDP growth
of 2.3% this year and 2.5% next.
35. Based on the associated forecast for tax revenues,
the Chancellor expects his "golden rule" to be met in
this current cycle. The CBI, however, remains less sanguine about
the state of the public finances.
The Chancellor still expects to meet his "golden rule"
on his extended economic cycle running from 1997-98 to 2008-09
by a margin of £16 billion. However, if we exclude the Annual
Managed Expenditure margin, which may be required for contingencies
such as further spending in Iraq, the "effective" margin
on the "golden rule" is lower.
He is also now forecasting higher borrowing for
both 2005-06 and 2006-07 than he was in December. This is partially
offset by expected improvements to other fiscal years including
2007-08, although this is helped by the robust growth forecast
about which we have doubts.
Public sector net borrowing over the 2004-05 to
2006-07 period is £3.4 billion higher than the December projections.
36. We are disappointed that the Chancellor has again
failed to get a tighter grip on public spending ahead of the Comprehensive
Spending Review window commencing in 2008-09. The tax burden will
continue to rise rather than be reduced on the government's projections,
which will erode the UK's international competitiveness further.
In the year ahead it will be 38.0% of GDPthe highest since
1985-86. It is projected to level off at 38.7% of GDP by 2008-09up
from 38.5% of GDP in the December PBRwhich would be the
highest since 1984-85.
THE BUDGET AND THE PUBLIC FINANCES1
|HMT forecast of PSNB2
Of which: Rise in planned
|Fall in projected|
Due to Economy
|Due to Budget decisions4|
1 For 2007-08 onwards, figures are available to the nearest
£ billion. Some calculations may be affected by rounding.
2 Spending and revenue figures are equally biased upwards
due to data revisions, for example the inclusion of the BBChowever,
these modest impacts are offsetting, so have no impact on the
3 A negative figure implies a rise in revenues.
4 A positive figure implies a negative yield to the Exchequer.
(See Table 1 for a breakdown.)
(D) International tax comparisons
37. The CBI Budget 2006 submission urged the Chancellor
to reduce the UK business tax burden to help business competitiveness
and to stimulate investment. We highlighted that not only had
the rise in the UK tax burden since 1997 exacerbated the pressures
facing business, but that this was at a time when our competitors
were taking tax competitiveness seriously and reducing taxes.
The net result has been a deterioration in the UK's international
tax competitiveness, which is set to worsen on current government
Business tax burden
38. Latest international comparisons are only possible
for 2003, for the "basic" business tax burden comprising
profits taxes, employer taxes, business rates, and business transport
39. On this basis, the UK burden was then 8.5% of GDPabove
Ireland (7.4%) and the US (6.9%). Interestingly, profits taxation
in Ireland raised 3.8% of GDP compared with our 2.8%, "despite"though
arguably because ofits very low corporation tax rate (Note
Ireland reduced its corporation tax rate to 12.5% in 2002 from
38.5% in 1996).
40. If this measure of the burden were pushed up to 10.2%
of GDP by 2006-07, as government plans imply, it would overtake
the Netherlands (8.6%) and Germany (9.0%), leaving France (12.4%)
as the only one of our top five trading partners with a higher
burden on this measure. Considering that even France reduced its
corporation tax rate to 34.4% in 2005, the current UK standard
corporation tax rate of 30% is no longer so competitive.
MAJOR BUSINESS TAXES AS % GDP (2003)
|Business profits taxes||2.1
|Employer NICs & payroll taxes (ex Government)
|Business rates and similar taxes||1.7
|Business share of road fuel and vehicle duties
Source: OECD Revenue Statistics (2005) UK 2006-07
is CBI estimate based on Budget Report 2006 figures.
Total tax burden
41. Between 1996 and 2004, the average overall tax burden
of the OECD group of 30 countries barely changed, to end at 36.3%
of GDP. Over the period 11 countries cut their tax burdens, including
every G7 member except the UK, as well as key UK trading partners
Ireland and the Netherlands. While the UK raised its tax burden
over that time, 15 other OECD members cut theirs, including all
of the six other G7 states. As a result of the various shifts,
the UK tax burden has moved from being clearly below the OECD
average (34.7% of GDP versus 36.2%) to barely below it (36.1%
42. The UK has slipped from having the 12th lowest tax
burden of the 30, to the 16th lowestalong the way being
"overtaken" by Germany and Canada amongst others. This
deterioration in the UK's international tax competitiveness has
seen it slide down the OECD tax table from a "low-to-medium
tax" economy to a mid-table "medium tax" economy.
43. Through to 2007-08 if the other OECD countries held
their total tax burdens at 2004 levels, while HM Treasury's target
was met, the UK would fall to 19th place with total taxes accounting
for 38.5% of GDP. The UK tax burden would be around two percentage
points of GDP higher than the average, four points higher than
Germany and half as much again as in the US.
TAX REVENUES AS % GDP (COUNTRIES LISTED BY 1996-2004 CHANGE)
|Total tax burden
||Rank out of OECD 30
1 For Slovakia, the 1998 figure is used.
2 For Greece, Poland, Japan, Australia and Portugal,
the 2003 figures are used.
3 HM Treasury Budget Report 2006, this would leave the
UK 19th if all other countries' burdens were left unchanged.
Source: OECD Revenue Statistics 2005.
CBI Economic Analysis Group
27 March 2006
It is extremely difficult to add in an appropriate share of property
transfer tax, miscellaneous green levies, etc. However, these
are in any case comparatively unimportant. Back