Further memorandum from the Confederation
of British Industry (CBI)
CBI INITIAL REACTION TO PRE-BUDGET REPORT
NOVEMBER 1999
FISCAL STANCE
We strongly support the prudent approach taken
to the public finances. Our main rationale for this in the short-term
is concern over the imbalance in the economy between total GDP
and rather faster consumer spending, which has been apparent since
1996. If the current account deficit is not to widen further,
building up a potential problem for the future, it is important
that consumer demand slows as Treasury forecasts now suggest for
2000-2002. Consumer tax cuts would therefore clearly be inappropriate,
as would significant additions to public spending.
In a longer-term perspective, the projection
for four years of fiscal current balance surpluses, cyclically-adjusted,
might allow some scope for loosening fiscal policy when cyclical
economic conditions make this more appropriate. But the government
should continue to be cautious about assuming that the improvements
are structural rather than cyclical. It is clearly prudent to
maintain a margin against a risk of an unanticipated sharp downturn.
We will be producing in the Spring our medium-term recommendations
for public expenditure and taxes, and expressing views then about
the balance of use to which any structural margin for manoeuvre
should be put.
In terms of the economic outlook, our latest
projections published on November 25 are very similar to the Treasury's.
The key risk is that consumer demand will prove more buoyant than
expected next year, making the job of getting the economy into
better balance more difficult, and potentially adding to the pain
for the traded sector if the whole weight of any tightening has
to fall on interest rates. We would expect to be reiterating the
case for tight fiscal policy in the run up to the March Budget.
CLIMATE CHANGE
LEVY
The PBR went a significant way towards meeting
our concerns on the climate change levy, though further work is
needed on some key details. Welcome developments include the commitment
to revenue neutrality for the private sector; the increase in
money to promote energy efficiency; the willingness to encourage
participation in a domestic emissions trading scheme; and exemption
of renewables and CHP from the levy.
Early indications are that the lower rates of
levy and 80 per cent rebates for energy intensive users will significantly
reduce the exposure of some sectors to the levy. The cost of the
levy to these sectors, however, will not be removed entirely.
Equally, large and small firms in a number of sectors which are
not eligible to negotiate energy efficiency agreements still face
potentially significant net costs in some cases.
We also believe it vital that the government's
commitment to revenue neutrality extends into the future and is
delivered through appropriate NIC or other adjustments in the
light of the government's expectation that the rates of levy will
at least keep pace with inflation over time.
Priorities for Government action prior to Budget
2000 must now be to:
— Follow up actively its commitment
to consider ways of extending eligibility for negotiated agreements
beyond the current IPPC basis;
— Establish challenging yet realistic
energy efficiency targets with those sectors currently negotiating
agreements;
— Consult on how best to use both the
original £50 million to promote SME energy efficiency, renewables
and carbon trusts, and the additional £100 million set aside
to finance capital allowances for energy saving investments;
— Clarify the Government's position
on ensuring revenue neutrality over time and how it intends to
achieve this;
— Ensure that negotiated agreements
are structured in a way which is helpful to the development of
emissions trading and establish further incentives to encourage
participation in a domestic scheme; and
— Address the specific regional impacts
of the CCL, in particular in Northern Ireland—where high
electricity prices already give consumers more than enough incentives
to use energy efficiently (as acknowledged by the Trade and Industry
Committee, Ninth report, July 1999).
FUEL DUTY
ESCALATOR
We welcome the fact that the move away from
an automatic annual real terms fuel duty escalator has opened
the way to relieve competitiveness pressures on the freight sector.
We also welcome the commitment to the principle that, in future,
any real terms increases in fuel duties will be ring-fenced for
investment in transport improvements. However, we believe Budget
2000 needs to go further in meeting immediate and long-term concerns
surrounding transport.
First, it should include measures, along the
lines we set out in our PBR submission, to address the negative
impact that fuel duty rises have already had on hauliers. Any
real terms increase in fuel duties should include provision for
exemption for hauliers.
Second, the need to invest in improving the
UK's local and strategic transport networks is urgent. While the
proposed hypothecation of future real fuel duty rises is a welcome
break with previous Treasury orthodoxy, it does not address the
fundamental investment problem and the fact that tax revenues
from road user taxes already far exceed public spending on transport.
There is probably some room for manoeuvre on public capital spending
within the overall prudent fiscal position, and we believe this
should be used to increase public spending on transport in Budget
2000, irrespective of any decision on the fuel duty escalator.
Third and more broadly, we continue to believe
that a thorough and transparent review of road taxation is necessary.
This should ensure that the range of proposals now being developed
(eg new local road charges, VED and company car changes, changes
to the fuel duty escalator) comprise a consistent and effective
package in meeting the transport needs of the economy and the
environment over the long term.
BUSINESS RATES
The Government has gone a long way towards meeting
CBI demands for an effective transitional scheme to cushion the
impact of the 2000 Revaluation of business rates. The revaluation
generated substantial winners and losers, so it was always going
to be difficult to create the perfect transitional scheme. The
limits set on annual rate rises will be challenging for business,
but do offer considerable relief from the full effects of the
revaluation. We would have liked to see the Exchequer bearing
some more of the cost of the scheme so that businesses with falling
rate bills could see their gains more quickly. We would ask you
to keep the position of these businesses under review, considering
the case for accelerating their reductions in future Budgets.
We are particularly pleased that the Government
has responded positively to the CBI's suggestion for a review
of the arrangements for handling revaluations. Business and Government
will now work together to find a long-term solution to avoid the
inevitable turmoil which results from the current system of five
yearly revaluations.
EMPLOYEE SHARE
SCHEMES
The Government has outlined two targets for
the new all-employee share ownership scheme:
— to double the number of employers
offering all-employee share ownership; and
— to ensure that the issue of shares
is fair.
The CBI welcomes changes made to the new scheme
in the PBR, including the enhanced tax breaks, and consider these
will make it easier to operate. However, CBI members believe that
the Government's targets can only be achieved if the new scheme
is brought in as an addition to, and not a replacement for, the
existing approved schemes. Removing SAYE sharesave would effectively
restrict share ownership to middle to high-income earners and
would damage the Government's objective of fairness.
Smaller and unquoted companies are likely to
find the current proposals an improvement, but still too complex
to attract widespread take-up. (To resolve one problem, in discussions
with the Inland Revenue, the CBI has proposed developing a separate,
simple scheme for SMEs, which would avoid the need for valuations
by using a formula agreed with the Revenue to determine share
prices.) On the other hand, most of the largest UK firms already
have all-employee schemes. Therefore removing the old schemes
could result in fewer share schemes and a restriction of employee
share ownership to the better off.
SME ISSUES
Enterprise Investment Scheme
EIS is in principle a good scheme, but in practice
it is widely found to be unusable because of its complexity and
unnecessary restrictions. The CBI is finalising a detailed paper
for the Revenue, identifying problems encountered by entrepreneurs
attempting to use EIS and proposing suitable modifications. We
urge that these modifications be adopted at the earliest possible
opportunity, so that SMEs can in practice obtain the scheme's
intended benefits.
Capital Gains Tax taper relief
The CBI welcomes the announcement of a review
of the percentage thresholds for both full-time and part-time
workers, shareholdings to qualify as business assets. Indeed without
that change the rest of the favourable changes will be unlikely
to have much significant benefit. However, the review should be
extended to cover the unduly restrictive definitions of "trading
company" and "trading group", which exclude companies
or groups with significant non-trading activity. In many cases
this may well be the result of risky investment and the only logical
commercial conclusion. We also welcome the proposed five year
taper period for business assets, which better reflects the commercial
need to renew assets regularly. We will be contributing our detailed
views as the review of the initial proposals proceeds.
Capital allowances
We were again disappointed that no announcement
has been made on the future of first year allowances for SMEs.
The CBI has long argued, as have others, that these should be
made permanent if long term investment levels are to be improved.
There is little incentive to be gained from a temporary allowance
which may disappear before planned investment can be implemented.
Enterprise Management Incentive
We welcome the confirmation of the basic scheme
as originally suggested and also the extension of the number of
participants to 10. In particular we welcome the introduction
of the start of taper relief from the date of award of the option
rather than its date of exercise which is the norm for other option
schemes. This very much matches the reward to the personal risk.
We would welcome some future move in the more
widely applicable approved options scheme to remove the benefit
in kind NI imposition at the point of exercise. This is becoming
a major problem for high growth businesses.
Research and Development
We welcome the confirmation of the R&D tax
credit system and in particular that for companies nor yet in
profit. We are also pleased to see the reduction in the threshold
to £25k although we think this needs to be kept under review.
We will be pleased to help on the continuing
work on R&D definition to ensure it includes all the relevant
activity.
OTHER ISSUES
In the CBI's recommendations ahead of the PBR
we raised a number of other issues on which we proposed the Government
should announce a review or consultation period. In particular
we were disappointed that no mention was made of the examples
we raised where the present structure of UK taxation is having
a significant adverse impact on the competitiveness of particular
sectors (beyond the decision to halt the automatic escalator on
tobacco duty).
— As far as excise duties on alcohol
are concerned, there has been clear evidence of damage to the
domestic industry for several years, and an open review of potential
solutions is overdue;
— Apart from longer-running concerns
about the impact of some forms of stamp duty, there is a more
recent worry about the effect that the combination of e-trading
and moves towards a pan-European stock exchange could have on
UK government revenues from stamp duty on share-dealing, and the
potential adverse effect on activity in the City. We would urge
that the Treasury looks at this potential threat and consults
on possible responses.
November 1999
| 
