Select Committee on Environmental Audit Minutes of Evidence

Further memorandum from the Confederation of British Industry (CBI)



  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.


  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).


  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.


  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.


  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.


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.


  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

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