Memorandum submitted by Edward Troup,
Head of Tax Strategy, Simmons & Simmons
I would make the following overall comments
on the Budget tax measures:
1. Imposing the majority of tax increases
on businesses rather than on employees goes against the Government's
stated aims of promoting productivity and employment.
2. Further tax measures purporting to encourage
enterprise and specific industries are introduced without providing
evidence of their likely effectiveness when at least one existing
measure (tax relief for British films) has been extensively exploited.
3. Complexity of both the personal and business
tax systems continues largely unchecked.
4. There continues to be a lack of evidence-based
policy making in tax measures and inadequate evaluation of existing
measures after their introduction.
As has been identified elsewhere, the increase
in taxes, principally through National Insurance Contributions,
is borne primarily by the business sector. It has long been argued
that elsewhere in Europe high non-wage costs and high business
taxes have discouraged employment and that the correct strategy
is to reduce taxes on business to promote employment. Put simply,
high taxes on employees do not discourage employees from working,
but high taxes on businesses discourage the creation of jobs.
The Budget changes would appear to go against that view.
The further changes to capital gains tax give
effect to the reduction of the taper period and rate for business
assets to two years and 10 per cent. I have previously expressed
concerns that this will encourage an excessive behavioural and
avoidance response and Exchequer cost. The measures to address
the current complexity of CGT are welcome but can, inevitably,
do little to correct the inherent complexity of a multi-rate system.
Evidence linking the structure of the tax as it now stands and
the aim of promoting enterprise has not been produced.
When the 10 per cent rate on the first £10,000
of profits of small companies was introduced in 2000, I expressed
concern that this would create an incentive to the small self-employed
business to incorporate unnecessarily, so as to reduce his or
her effective tax rate and to avoid NICs liability. This incentive
is further increased by the reduction of the 10 per cent rate
to 0 per cent and the increase in NICs rates which creates a sharp
divide between the treatment of the self-employed and the small
company. The Treasury should provide both an evaluation of the
effect to date of the existing 10 per cent rate and the likely
effect of the further reduction.
The introduction of the R+D tax credit for larger
companies will be welcomed. It is, however, inevitable that the
bulk of the cost of this relief will go to companies for existing
R+D. The Treasury should monitor this relief, the changes to R+D
expenditure and whether any increase can be regarded as genuinely
new spending, to establish the cost effectiveness of this measure.
The tax relief for British films was introduced
in 1997 at an announced cost of £15m pa. This was extended
in 2001 at a further announced cost of £50 million. The annual
cost of this measure is now of the order of £360 million
and the FSBR forecasts a saving of £295 million in 2004-05
from the closing of the loophole allowing television programmes
to qualify for relief. This measure has suffered the fate of too
many tax incentives, of being abused and becoming excessively
expensive with little real advantage to the UK economy.
The reform of the taxation of branches of foreign
companies is forecast to yield £650 million by 2004-05. If
correct these figures imply that profits of £2 billion or
more are currently escaping taxation. The accuracy of these figures
and the likely effect of this measure should be examined before
such a significant adjustment is made to the tax base of such
an important sector of the economy.
The reforms on substantial shareholdings, intellectual
property taxation and financial instruments etc are not only welcome
but have been very well consulted on. The model provided by the
way those measures have been introduced should be applied more
widely to business (and other) tax changes.
Countering oils fraud is expected to produce
£550 million pa in 2004-05. The Budget press notices contain
very little supporting information to these measures, and no indication
either as to the current scale of oils fraud nor the basis on
which this figure was arrived at. Predicting the yield from anti-fraud
measures is notoriously difficult. These figures should be challenged
As with other measures intended to benefit specific
sectors, the reduction of duty rates for micro-breweries is not
supported by any economic justification or evaluation of the likely
benefit of the measure. While the amounts involved are small (£15
million pa) this measure is simply the latest in an ever-growing
list of measures designed to influence behaviour or reward a particular
sector which create complexity, distortion, behavioural effects
and pressure from "me-toos".
The presentation of the Budget papers still
leaves much to be desired, with many measures inadequately described,
poorly cross-referenced and often difficult to extract from a
mass of extraneous and repetitive material.
19 April 2002