Select Committee on Treasury Written Evidence

Memorandum submitted by the Confederation of British Industry

  1. On balance, the CBI was disappointed with the Chancellor's Autumn Statement. Instead of taking a tighter grip on the growth of government spending in the near term, the Chancellor has allowed borrowing once again to drift. And he has introduced further discretionary tax increases for the business sector. Together with the borrowing overshoots and business tax rises already seen in the recent years, the Government's fiscal policies risk deterring the very investment that is required for long-term improvements in the prosperity of the nation and its residents.

  2.  Some of the themes announced or reiterated in this year's Report were welcome and—if the aims come to fruition—could benefit the UK economy in the longer term. These include:

    —  Measures to enhance skills.

    —  Measures to support science, research and development.

    —  The public sector efficiency savings programme.

    —  Housing and planning system reforms.

    —  The proposed introduction of Real Estate Investment Trusts (REITs).

  3. However, businesses have some major reservations:

    —  The £2¼ billion per annum hike in taxes on oil company profits, coming on top of the rise in 2002 and the change in the timing of payments in the 2005 Budget.

    —  The fact that measures introduced under the headings of "building a fairer society" and "protecting revenues" aim to raise a further £11¼ billion per annum from the corporate sector by 2008-09, with the proposed planning gain supplement likely to add still further to costs.

    —  Extra borrowing amounting to a cumulative £17 billion over the five year period 2005-06 to 2009-10, compared with the Treasury's March forecast, despite a policy tightening bringing in a net £7 billion or so over that timespan.

    —  The fact that even these projections once again depend on an optimistic-looking forecast, for a strong bounceback in GDP growth in two years' time.

  4.  The CBI also notes that government expenditure is pencilled in to grow a little more slowly than GDP beyond 2007-08. This might just be sufficient to head off the need for still further discretionary tax rises, if wider economic developments unfold favourably, and so is a welcome move insofar as it goes. But the CBI would have preferred this tighter grip at an earlier stage, to eliminate the prospect of further tax rises altogether and instead pave the way for the total and business tax burdens to be rolled back in due course. And the fact that these numbers have been pencilled in does not mean that the Government is bound by them.

  5.  The remainder of this analysis is set out as follows:

    —  The revenue flow impact of confirmed new measures.

    —  Comments on specific areas of policy.

    —  An overview of the projections for the economy and public finances.


  6.  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. The tax increase for oil companies, and abolition for small companies of the zero rate corporation tax band, build to £2.8 billion in 2008-09. This far outweighs the financial "benefit" to business shown in the table—of £0.4 billion in that year—which is, in any case, largely accounted for by the freeze in the main road fuel duties and will not improve businesses' cashflow compared with the position before the PBR.

  7.  Including these measures only, the net cost to business of the PBR measures in the final year would therefore be £2.4 billion. But it would be £3.2 billion if the other assorted tax changes affecting business were included. In the event, the business tax burden could be pushed higher still as a result of the proposed planning gain supplement. Other business costs could be influenced positively by success on the deregulation front, but perhaps negatively by decisions concerning paternity and maternity rights.

Table 1


Approximate £bn yield (+) or cost (-) to the Exchequer

Half share of road fuel duty freeze
Measures benefiting SMEs1
Other measures benefiting business2
Measures benefiting business
North Sea oil profits taxation
Abolition of zero rate corporation tax3
Business tax rises
Rules for: Corporate capital losses
Life assurance companies
Corporate intangible assets
Sale of lessors
Oil valuation
Other business tax rule changes4
Other measures affecting business
Other "revenue protection" measures5
Measures benefiting households6
Spending: addition to special reserve

  1 Rise in VAT thresholds, small company capital allowances. 2 Biofuel capital allowance; duties for biofuels, road fuel gases and electricity generation; minor measures affecting oil producers and stamp duty on shares. 3 Described as "tackling tax motivated incorporation" in the Treasury report. 4 Film tax incentives, gambling machine tax rules, rules on stock lending, duty on rebated oils. Film tax changes portrayed as an incentive but raise revenues slightly. Rebated oil duties shown as small cost to government in 2005-06, with no revenue impact thereafter, but only because the steep rises implemented were already assumed and have been slightly delayed. 5 Capital gains tax rules, tobacco smuggling, income tax for assets transferred abroad. 6 Winter fuel payments, half share of main road fuel duty freeze, pensioner fuel poverty measures, tax credits rule change package, and minor measures affecting housing benefit, self-employed NICs and bank accounts. Note that the tax credit package costs the Government in 2006-07 but raises revenue in the following two years.

  8. Against the background of a further rise in the overall business tax burden, it is once again disappointing that the Government did not signal any intention to adopt some minor business tax changes put forward by the CBI, which would have benefited SMEs and entrepreneurs in particular at virtually no cost to the exchequer. Issues reiterated by the CBI ahead of this and earlier fiscal policy announcements include: the tax treatment of associated companies; the tax treatment of the incidental cost of raising equity finance; and the tax treatment of investors in small quoted companies.



North Sea oil companies

  9. The CBI is extremely concerned about the damage that could be done by the doubling of the supplementary oil revenue charge from 10% to 20%. At a time when there is so much business concern about security of energy supplies, the UK should be seeking to get as much out of the North Sea as possible. But to maximise its potential, a stable, supportive fiscal regime is crucial. By contrast, the Chancellor's move risks undermining North Sea investment and exploitation of our indigenous energy reserves. It is an approach which makes little sense as part of an integrated energy policy.

  10. The Chancellor should have noted how the precipitous changes in the North Sea fiscal regime in 2001 resulted in a significant drop-off in new entrants in 2002, and corresponding fall of exploration and appraisal activity in 2002-03. Looking ahead, the CBI's recent energy brief showed that if investment were to be hit as a result of fiscal changes, the percentage of the UK's gas needs supplied from the North Sea could fall to as low as 10% by 2020—compared with 25% if current investment rates are maintained.

Planning gain supplement (PGS)

  11. The CBI will be consulting members on the PGS and responding to the government. We note the government has indicated that it will not implement the PGS before 2008. The government's stated desire to retain revenues locally and regionally, to scale back and streamline section 106 payments, and to not charge business until development has started, are all steps in the right direction.

  12. However, the CBI still has a number of major concerns: principally the PGS is not the right vehicle as it is likely to deter development, it is a form of double taxation on development (as capital gains tax can already apply) and similar taxes have failed in the past. The government has also yet to indicate how much revenue it hopes to raise and what the local-regional-national breakdown will be.

  13. Moreover, the decision to extend the Barker Report's recommendation on PGS to non-residential as well as residential development could add complexity when it comes to assessing the value of uplift where development is for wider business objectives such as business expansion. Whilst further investment in infrastructure at local and regional level is welcome, business will need reassurance that these investments will be delivered.

  14. We are also concerned that a tax along these lines could make development of more complex or more risky sites, such as larger brownfield sites, less attractive to developers. And areas of low prosperity most in need of renewal could be made less viable for development.

Tax changes for SMEs

  15. The government has announced that it will replace the non-corporate rate and the zero per cent rate of corporation tax with a single small companies' rate of 19%. While the CBI supports simplification of the corporation tax structure, this measure will mean that companies with profits of less than £50,000 per year could face a tax increase, depending on their current distribution policy. To compensate for this the government will increase first year capital allowances to 50% for small businesses, whatever their legal form, from April 2006. However, this enhancement will only last for one year.

Duty on heavy fuel oil (HFO)

  16. The duty on HFO has increased significantly again. HFO is particularly important in Northern Ireland, where it is used by major industrial companies, including those in key sectors such as food and engineering. Many of these firms have no choice in their fuel usage due to lack of availability of natural gas, and in fact Northern Ireland is eight times more dependent on HFO than the rest of the UK. The oil is also used by the electricity generating sector. The duty rise will significantly affect electricity prices in the Province, due to contractual indexation on the price of HFO.

"Anti-avoidance" measures

  17. The package of measures ostensibly aimed at tackling tax fraud and avoidance involves potentially significant revenues (see table 1), even excluding the impact of the disclosure regime which comes into effect in April 2006. The CBI will need to examine the detail before commenting on the merits of each individual proposal in the PBR. But we stand ready to lobby vigorously against any aspects which go beyond straightforward countering of genuine "abuse".

  18. The UK is already slipping down the competitiveness league as the Chancellor raises the tax burden on business. If he now comes to be seen as "declaring war" on previously accepted principles for tax calculation, the impact will be uncertainty about the UK in the international business community. This may well persuade some companies to move operations to other economies. If the Chancellor is determined to push through this approach it is vital that business and government work together to identify any genuine problems, and to ensure that consequent changes in law or practice do not penalise longstanding, legitimate business arrangements.


Science, technology and innovation

  19. The Chancellor re-announced measures from the previous week covering stem cell research, refining the R&D tax credit and support for science and innovation. These measures are welcome.

  20. However, the CBI would like to see further improvement in this area. Innovation through research and development has historically been one of the UK's strengths, but has been in danger of being left behind in recent years. The existing tax credit scheme remains far too narrow in its remit for many companies. Improving the delivery of the credit is a step in the right direction, but its coverage needs to be widened to allow more development expenditure to qualify.

Skills and training

  21. The CBI welcomes the rollout of the National Employer Training Programme—Train to Gain. The pilot scheme was a success and a voluntary national programme for low skilled employees that provides free, flexible training is a positive step. However, to help firms make the most of this training it must not require staff to be absent from work for long periods on a one-size-fits-all basis. The training has to be applied flexibly and must take into account the day-to-day needs of business, particularly smaller firms.

The deregulation agenda

  22. The CBI is very pleased with the government's commitment to follow up the Hampton and Arculus reports, though we will be monitoring progress closely as previous deregulatory drives have not always borne fruit. We specifically support the decision not to proceed with OFR amongst other things (although it is true that a good deal of preparatory work could have been saved had the decision not to proceed been made earlier).

Real Estate Investment Trusts (REITs)

  23. The REITs concept is fully supported by the CBI. A successful REIT market—making it easier and more attractive to invest in property—should benefit not only the property industry and investors, but should also provide wider benefits to UK business. Delivering the right structure, however, will be crucial and the government must continue to work with industry on setting the right operational framework. The Government must also avoid setting an onerous conversion charge that could discourage take-up of the new vehicles.

Housing and the planning system

  24. The principle of local authority incentives for housing growth is another positive move, as is the merging to the Regional Housing and Planning Boards, though we will need to see more details. There is a series of consultations in this area, which the CBI will be looking into. We are pleased the Chancellor has appointed Kate Barker to lead an investigation into the ineffectiveness of the planning system, which is currently a major inhibitor to growth. It is to be hoped that the government acts quickly and decisively on her findings.

Short-term energy supply

  25. We welcome the inquiry into the behaviour of European energy markets to find out why gas supplies have been diverting away from the UK. This is an urgent matter, as this diversion is damaging UK business by the day.

Main road fuel duties

  26. We support the continued freeze in main road fuel duties, which is fully justified given continued volatility in oil markets and the rise in the oil price recorded during 2005.

Energy-saving measures

  27. The increased £35 million for the Carbon Trust, to provide interest-free loans for SMEs for the introduction of energy saving measures, was called for by the CBI.


  28. The new Treasury forecasts show economic growth (relative to the March 2005 Budget) cut for this year to 1¾% (from 3-3½%) and shaved to 2-2½% (from 2½-3%) for next year. This places the Chancellor broadly in line with private sector forecasters in the near term.

  29. However, the CBI remains less sanguine than the Treasury about the state of the public finances. There will be an extra £17 billion of borrowing over the 2005-06 to 2009-10 five-year period relative to the March Budget projections. This is despite the net policy tightening worth some £7 billion over that timespan. And even this projection relies on a significant bounceback in economic growth in 2007 and 2008, which we regard as on the optimistic side.

  30. The CBI had recommended that the Chancellor take a firmer grip on the growth of public expenditure, to head off any need for further discretionary tax increases, and to pave the way for the overall and business tax burdens to be gradually rolled back in due course. We are pleased that slower growth of spending has been pencilled in beyond 2007-08 (and also welcome the Chancellor's stated commitment to contain public sector paybill growth in the short term). But it is unclear whether these plans will be sufficient to avert a further fiscal policy tightening, and of course the government is not bound by these projections.

  31.  Table 2 sets out just how far the public finances have been allowed to drift in recent years. Spending plans for the present financial year (2005-06) have been subtly ratcheted up since 2002 by a cumulative £9 billion. That is on top of the extra £26 billion unveiled in that year's Budget. At the same time, revenues are set to come in £11 billion lower than projected in 2002, even though money GDP is on course to come in almost exactly as envisaged at that time (on the basis of the "cautious" growth assumption). As a result, the government will borrow some £20 billion more this financial year than planned three-and-a-half years ago.

Table 2


Total managed expenditure in 2005-06, £1 billion
by revenues
by borrowing

2001 Budget plan
2002 Budget plan
2005 Pre-Budget Report estimate

December 2005

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