Memorandum from the CBI
The 2008 Budget included some welcome measures
amounting to a credible first step on the road to winning back
the government's enterprise credentials, after the damaging changes
to capital gains tax. But overall, this was a tax-raising Budget,
with a major focus on transport-related and other taxes likely
to impinge on the net profitability of UK-based business activity.
Nor can we lose sight of the whole raft of tax rises announced
in the previous Budget and the Pre-Budget Report, scheduled to
kick in from April and putting a further squeeze on firms at this
already turbulent economic time. We are also concerned that, despite
all of this revenue-raising, the government will borrow a cumulative
£140 billion over the next four years, up from the projected
£120 billion in October's Pre-Budget Report. And even that
is on the basis of what we regard as a fairly optimistic forecast.
THE OVERALL
IMPACT FOR
BUSINESS OF
THE NEW
BUDGET MEASURES
Overall, the Budget will be broadly neutral
in its impact on the economy this year, which is sensible in the
circumstances. But there is a net tightening next year of around
£0.8 billion, and for the year after approaching £2
billion. Given the state of the public finances, the tightening
itself cannot be criticised—indeed the CBI had argued for
a bolder tightening in the £5-7 billion per annum range.
But in contrast to the CBI proposals, the whole of the tightening
is accounted for by increases in tax. The Spending Review totals
have not been revisited and indeed the Budget package adds to
them slightly further by boosting benefits.
The new revenue-raising measures fall into three
groups:
— Environmental taxes (building to
a net exchequer gain of £1.8 billion in 2010-11). These will
affect business in general by adding to various costs, and particular
sectors—notably vehicle manufacturers—to the extent
that the full cost of the increases aimed at the final household
consumer cannot simply be passed on in full in the near term.
— Alcohol duties (£0.6 billion).
These will constrain the profitability of the drinks industry,
with Single Market competition adding to the squeeze.
— Technical tax rule changes (£0.6
billion), many under a "revenue protection" banner.
These will require further scrutiny. But amongst other things
we note that the revenue to be raised from the North Sea sector
far outweighs the cost of the modest fiscal reform to which the
Chancellor drew attention in his speech.
In total, these revenue-raising measures build
to £3 billion in 2010-11. We cannot be precise about how
the cost will be split between the "business" and "household"
sectors. But we would expect business to bare a significant proportion
in the near term[13],
through the routes identified above. International competition,
including from other Single Market countries where excise duties
are typically lower, will also make it harder for the government
to achieve its environmental, health and social objectives through
these tax-raising routes.
Just over £1 billion is to be added back
to private sector disposable income, mainly through increased
benefits and tax credits for families and pensioners. There are
a few welcome tax reforms benefiting business and its investors,
with several measures helping enterprise (see later section for
detail). But at a total value of just £80 million in the
final year, these reforms pale into insignificance (at least in
revenue flow terms) when compared with the potential impact on
business of the new Budget tax increases—not to mention
the policy changes announced last year and set to come in shortly.
Table 1
IMPACT OF THE NEW BUDGET 2008 MEASURES IN
FINANCIAL FLOW TERMS
| £bn exchequer gain (+) or loss (-)
| 2008-09 | 2009-10
| 2010-11 |
| Vehicle excise duty reforms | -
| +0.45 | +0.72 |
| Real increase in road fuel and oil duties |
-0.56 | - | +0.27
|
| Additional duty increase for biofuels | -
| - | +0.56 |
| Company cars: tax and fuel benefit charge |
- | +0.10 | |
| Capital allowances: business cars | -0.01
| +0.04 | +0.07 |
| Aviation duty increase1 | -
| - | +0.04 |
| Landfill tax and land remediation | -
| -0.01 | - |
| Total environmental taxation | -0.57
| +0.49 | +1.77
|
| Real increase in alcohol duty | +0.40
| +0.50 | +0.62 |
| "Revenue protection" package2 |
+0.75 | +0.75 | +0.65
|
| Total revenue-raising measures | +0.58
| +1.75 | +3.04
|
| Reform of North Sea fiscal regime | -0.02
| -0.02 | -0.02 |
| Reforms benefiting business investors3 |
-0.01 | -0.01 | -0.03
|
| Other reforms benefiting business4 | -0.02
| -0.03 | -0.02 |
| Total reforms benefiting business |
-0.06 | -0.07 |
-0.08 |
| Family and pensioner benefits and tax credits
| -0.58 | -0.76 | -0.96
|
| Other tax reductions5 | -0.07
| -0.12 | -0.14 |
| Total net impact | -0.14
| +0.79 | +1.86
|
1 The eventual full year impact will be nearer £0.25
billion, based on the targeted 10% increase.
2 The "revenue protection" package in the Budget
Report includes measures affecting North Sea management expenses,
"disguising interest" and the controlled foreign companies
regime amongst other things. The line in this table also includes
other technical tax changes which raise revenue, most notably
VAT on staff hiring and corporation tax treatment of unclaimed
assets.
3 Enterprise Investment Scheme, Enterprise Management Incentives
and dividend tax credits.
4 VAT on commercial property, capital allowances write-off
and rules for associated companies.
5 Mainly the helpful tax changes for charities.
Source: CBI calculations based on HM Treasury Budget Report
2008 table A1.
Once again, therefore, the net result of the Budget will
be to constrain businesses' net profitability in the near term,
reducing both the incentive to invest and expand here in the UK,
and the funds readily available to finance that activity.
MEASURES ALREADY
IN THE
PIPELINE
The changes to corporation tax, business rates and capital
gains tax are to go ahead from next month on the basis already
announced, as are the various "green tax" increases
with the exception of the six-month delay in the fuel duty rise.
The "income shifting" reform has however been postponed
to allow for further consultation, which is welcome, although
the Treasury is still counting on some significant sums from this
proposal in 2010-11. The £30,000 charge for non-domiciles
will also go ahead, though some welcome concessions and clarifications
have been made (see later section).
Table 2
IMPACT OF ALL BUDGET MEASURES TAKING EFFECT IN THE YEARS
AHEAD
| £bn exchequer gain (+) or loss (-)
| 2008-09 | 2009-10
| 2010-11 |
| | |
|
| Corporation tax reform1 | +0.29
| +0.03 | +0.41 |
| Business rates restrictions | +0.95
| +0.90 | +0.90 |
| Environmental tax changes | -0.30
| +1.07 | +2.88 |
| New local authority revenue-raising powers2
| - | + ? | + ?
|
| Capital gains tax reforms3 | +0.25
| +0.30 | +0.50 |
| "Income shifting" rules | -
| +0.02 | +0.26 |
| Residence and domicile rules | -
| +0.70 | +0.50 |
| Alcohol duties | +0.40 |
+0.50 | +0.62 |
| Other revenue-raising measures4 |
+1.01 | +1.34 | +1.37
|
| Total of revenue-raising packages5
| +2.60 | +4.86
| +7.44 |
| Personal income tax reform | -2.14
| -2.34 | -2.53 |
| Inheritance tax reform | -1.00
| -1.20 | -1.55 |
| Other measures with a cost: non-business6
| -0.82 | -1.20 | -1.55
|
| business7 | -0.07
| -0.11 | -0.11 |
| Total net impact5 | -1.43
| -0.01 | +1.86
|
1 Includes an estimated +0.37, +0.82 and +1.37 from the rise
in the lower corporation tax rate. This is excluded from Budget
Report table A.11 on the grounds that the phasing in began last
April, but it is only this April that SMEs will begin to see the
effect on their bills.
2 Supplementary local business rates and the community infrastructure
levy on planned development.
3 This is the net exchequer impact. The impact on investors
in business assets will be somewhat greater.
4 Mainly measures under a "revenue protection" heading.
5 Excluding the as-yet-unknown value of the new local authority
powers.
6 Mainly personal benefits and tax credits, and charity taxation.
7 Including measures benefiting investors.
Source: CBI calculations based on HM Treasury Budget report
2008 tables A1, A2 and A11.
Altogether, corporations will pay more directly in corporation
tax, business rates, transport taxes and "green" levies,
while business owners and investors will pay more in a personal
capacity due to the capital gains tax reforms and "income
shifting" rules. These measures alone will build to £4
billion per annum or more when fully phased in, before taking
into account local authorities' new revenue-raising powers and
without counting measures under the "revenue protection"
banner.
In addition, the residence and domicile rule changes threaten
the more general climate for doing business in the UK, while the
profitability of specific business sectors is likely to be squeezed
by the environmental and alcohol duty rises aimed at household
consumers. In total, the revenue-raising packages now in the pipeline
will bring in almost £7½ billion for the exchequer by
2010-11. We expect a substantial proportion of this to be effectively
borne by the business sector in the near term. By contrast, the
business share of the reforms with an exchequer cost—just
£0.1 billion out of some £5½ billion—is barely
noticeable.
On the specific measures due to come in as a result of last
year's announcements, we have already made our concerns known
on business rates, supplementary levies, capital gains tax, non-doms,
income shifting, and elements of the corporation tax shake-up—most
notably the rise in the lower rate and the phasing out of industrial
and agricultural buildings allowances with its unfair retrospective
effect. We have also been critical of the way in which transport
and "green" tax revenues paid by business are being
used to fund the government's non-business, non-environmental
priorities. The Budget has done comparatively little to allay
our concerns in any of these areas.
THE PUBLIC
FINANCES AND
ECONOMIC FORECAST
The projected path of public expenditure is little different
to that set out at the time of the Pre-Budget Report and Spending
Review. This is aside from the year just ending, 2007-08, when
there is an expected under-spend of £2.8 billion—of
which £1.8bn is unhelpfully on the capital side—and
2012-13 when the projected total has been reined in by some £3
billion thanks to the assumption of slightly lower spending growth
(1.9% per annum in real terms) after 2010-11. Firm decisions on
this will of course only be made in the next Spending Review,
and it remains to be seen whether this line really can be held.
The main difference with the Pre-Budget Report projections
can be found on the revenue side, where there is cumulative shortfall
of £21 billion over the four year period 2008-09 to 2011-12,
and a £20 billion borrowing overshoot associated with this.
Borrowing is now projected by the Treasury be £140 billion
over those four years—adding perhaps £7 billion per
annum to the subsequent annual public sector interest bill—compared
with £120 billion in the PBR and £108 billion in Budget
2007. The projections repeat the familiar pattern of successive
borrowing overshoots from one Budget to the next.
The downgrade in revenues is associated with a downward revision
in the Treasury's assumptions about economic growth. We nevertheless
believe the projections to still be a little over-optimistic,
for two reasons:
— The financial projections are based on a "cautious"
GDP growth assumption of 2½% in 2009-10. But the consensus
GDP growth forecast for 2009 is just 2%. Given the constraints
on real household disposable income and the shifting attitude
to borrowing and debt here in the UK, plus unhelpful developments
in the global economy, we would not be at all surprised to see
at least two years of clearly below-par growth.
— In 2010-11, government receipts are projected
to increase by 6.4%, which seems unusually strong given the money
GDP growth rate of 5.3%, which is no more than the long-run average.
Over the past 15 years, when money GDP growth averaged 5.6% per
year, revenue growth averaged 6.1%. It is possible that a robust
recovery in property and share prices, and/or in financial service
sector incomes, will help to boost revenues in this way. But that
is by no means guaranteed.
Concerning the fiscal policy framework, we accept that it
is quite reasonable to exclude Northern Rock for the purposes
of the sustainable debt rule. It would also be reasonable to say
that the economic cycle ended in 2006-07, although the Treasury
has not confirmed that this is its definitive view.
But more generally, it is clear that the fiscal framework
has not delivered the benefits that the CBI hoped for. We believe
that the spirit of the "golden rule" is consistent with
allowing—indeed encouraging—fiscal policy to be counter-cyclical.
But in practice the rule has not proved sufficiently binding.
It has not prevented the government from running a fairly significant
current budget deficit over a six-year period of robust growth,
as a result of which the Treasury has been forced to initiate
a fiscal tightening just as the economy is entering a potentially
prolonged and risk-laden downswing. Unless the fiscal framework
is strengthened, there may be nothing to stop the policy dilemma
facing the Chancellor this year from being repeated in future.
The Treasury's public finance projections
£bn approximate | 2007-08
| 2008-09 | 2009-10
| 2010-11 | 2011-12
| 2012-13 |
Spending—Budget 2008 |
586 | 618 | 646
| 679 | 710 |
744 |
| Pre-Budget 2007 | 589 | 617
| 647 | 678 | 711
| 747 |
| Revenues—Budget 2008 | 550
| 575 | 608 |
647 | 683 | 721
|
| Pre-Budget 2007 | 551 | 581
| 616 | 651 | 686
| 724 |
| Borrowing—Budget 2008 | 36
| 43 | 38 | 32
| 27 | 23 |
| Pre-Budget 2007 | 38 | 36
| 31 | 28 | 25 |
23 |
| Current surplus—Budget 2008 |
-8 | -10 | -4
| +4 | +11 | +18
|
| Pre-Budget 2007 | -8 | -4
| +3 | +9 | +14
| +20 |
Source: HM Treasury Budget Report 2008 and Pre-Budget Report
2007
ENTERPRISE MEASURES
Although the anger over capital gains tax is still simmering,
entrepreneurs and smaller businesses will recognise that the government
has made an attempt to listen. The government's new enterprise
strategy published alongside the Budget includes a number of CBI
recommendations, including on associated companies, improved access
to finance and further deregulatory commitments. Together with
the decision to delay income-shifting legislation this package
is a first step towards rebuilding the government's enterprise
credentials.
The CBI can specifically welcome:
— The decision to delay the "income-shifting"
legislation to 2009. As drafted it would have been a tax raid
on family-run businesses and would have placed an intolerable
burden on the wider SME community.
— The promised radical measures to cap Whitehall
departments' ability to impose new regulations, in particular
those affecting SMEs, by changing the culture, considering exemptions
or simplifications for SMEs and giving a stronger role to accompanying
guidance. However to date this government's delivery has fallen
short of its regulatory promises so this pledge needs to be followed
through in practice.
— Improved access to finance, with the removal of
the five year trading restriction in the Small Firms Loan Guarantee,
the injection of new capital for the current year, and stimulation
of mezzanine finance.
— Measures to improve access to public procurement
contracts, including the removal of clauses which can prevent
SMEs using factoring and invoice discounting from gaining access.
— The uplift in thresholds for the Enterprise Investment
Scheme which should encourage more investment in growth companies.
The consultation announced on the EIS covers areas that have been
raised by the CBI in its Budget submissions.
— The modification of the current rules relating
to the small companies' rate of corporation tax, where a director
or a shareholder is separately in a partnership, is welcomed as
a first step in simplifying the associated companies' rules. This
has long been sought by the CBI.
— Consideration of a nation-wide roll-out of the
innovation vouchers scheme, which encourages SMEs to interact
with universities and to undertake more innovative activity.
— Action to simplify and improve England's business
support system.
The CBI was however disappointed to see no further modifications
to the impending CGT changes, and the go-ahead for the further
rise in the small firms' rate of corporation tax.
ENVIRONMENTAL MEASURES
The new environmental measures announced in the Budget will
raise a net £1.8 billion in 2010-11, taking the total net
impact in that year—of all transport and "green"
measures now in the pipeline—to £2.9 billion (tables
1 and 2). Within the latest package, the main focus is on fuel
and vehicle-related taxes, with vehicle excise duty reform bringing
in a net £0.7 billion in 2010-11 and removal of the lower
excise duty rate for biofuels, £0.6 billion. The road fuel
duty increase due in April has been postponed for six months,
but a new above-inflation increase was announced for 2010-11.
That year will also see a further rise in aviation tax, on top
of the £0.5 billion net increase unveiled in the Pre-Budget
Report.
While the CBI believes that tax reform can have a legitimate
role to play in achieving society's environmental objectives,
we believe that the government is approaching the matter in completely
the wrong way. Our view is that the primary aim of environmental
taxes should be to change behaviour, and not to raise revenue.
Where revenues are in the event raised as a side-effect of well-designed
and objectively-justified tax reforms, they should be either be
used specifically for environmental purposes, or balanced by offsetting
tax reductions so that the overall burden is left unaffected.
In the latter case, green tax revenues raised from business should
be offset by other tax reductions for the business sector.
The CBI is therefore particularly disappointed that these
reforms have not been carried out on a revenue-neutral basis.
The revenues raised from business will not be used to fund "green"
initiatives, nor balanced by offsetting reductions in other business
taxes. Indeed revenue-raising appears to be a major motivating
factor. We note that, for example, the government has already
made an assumption about the revenues to be raised from the new
aviation duty, well before the structure of the tax has been determined.
On the specific issues, we have a range of views:
— The decision to delay the 2p increase in fuel
duties will be a welcome relief to hard-pressed hauliers, businesses
and other motorists, particularly since oil has leapt from $60
a barrel when the increase was announced to $104 today. The further
half a pence rise from 2010 needs to be kept under review. In
the longer term the government needs to level out the playing
field for UK hauliers to compete with their foreign counterparts
who enjoy far cheaper fuel prices.
— As it stands, air passenger duty is a very blunt
instrument and ineffective as a green tax. That is the reason
the government gave for its decision to consult on an alternative
"per flight" tax, which in principle could indeed be
more effective if well-designed. But the Budget announcement that
tax revenue from the new duty will increase by 10% in the second
full year of operation seems to confirm fears that the government
sees this primarily as a revenue-raising exercise, rather than
a genuine attempt to change behaviour. This increase is likely
to be less obvious to the individual consumer than it would have
been had the existing "per passenger" tax been retained,
and as such can be thought of as another element of the government's
"stealth tax" agenda.
— While we welcome the broad approach on green taxation
in relation to cars, the pace and scale of the proposed new car
taxes will present a sting in the tail for some manufacturers.
The fact that this move will raise £735 million by 2010-11
will not build confidence in the government's green measures.
Both business and the wider public could buy in far more easily
to the environmental agenda if "carrots" as well as
"sticks" were used in the government's attempts to force
behavioural change.
— The target that all new non-domestic buildings
should be zero carbon by 2019 is the right sort of ambition—the
CBI's climate change task force highlighted buildings as a major
area of potential. Defining what constitutes zero carbon, and
how we get there, poses major challenges which need to be properly
addressed in the consultation.
— Concerning the ambitions to help low income households
with their fuel bills and to reduce the use of plastic bags, the
CBI recognises that action of some kind is desirable. But we remain
concerned at the threat of legislation and believe that the better
approach would be for the government and private sector to work
together to seek voluntary solutions.
RESIDENCE AND
DOMICILE
The CBI can welcome the fact that the government has recognised
and acted on several of the concerns in this area. Worthwhile
changes to core aspects of the proposals include leaving alone
gains and income from assets in trusts kept offshore, and pledging
to avoid double taxation issues. All of this will soften the impact.
However, damage has been done to the UK's reputation for tax stability
and as a country which actively wants to attract talent and capital.
And this is not the end of the story as new draft legislation
will need to be carefully scrutinised when issued.
When the legislation is finalised over the coming weeks it
must be crystal clear, especially in relation to double taxation,
in order to rebuild confidence in the system. This is particularly
important if the welcome assurance that the regime will not be
changed for several years is to have its desired effect of delivering
certainty. Then it will be a case of waiting and seeing what the
fall-out of the whole process and final proposals will be. The
CBI is however pleased that number of concerns identified by us
will be acted upon, and initial discussions with HM Treasury have
identified a number of points which they will pursue with HM Revenue
& Customs.
Some key points emerging from the Budget are:
— On creditability of the £30,000 charge against
US and other tax, we understand that official US views are unlikely
to be given until the actual UK legislation is seen. However the
government has taken US private sector legal opinion and believes
it can now draft the UK legislation in such a way as to gain US
acceptance.
— The £30,000 charge will be per individual
whereas the CBI suggested that it should be per family. However,
the increase in the qualifying age to 18 is welcome.
— The increase in the de minimis threshold from
£1,000 to £2,000 is also welcome.
— On residence day counting the government has also
listened to CBI concerns, with days to be counted only where a
person is in the UK at midnight. The government has also agreed
with the reasoning about the need to exempt travellers moving
around the UK in transit.
— We are also pleased at the pledge for no further
changes during this Parliament or the next.
— The legislative details relating to trusts will
warrant careful scrutiny and initial CBI discussion with HM Treasury
has identified a number of points for the government to consider
further.
— New provisions based on current VAT rules for
temporary imports will prevent income tax and capital gains tax
charges arising in relevant situations in relation to works of
art. This is sensible.
— The CBI's concerns about employers' PAYE position
have now been recognised. PAYE will not apply in the first year
and, as suggested by us, there will now be consultations with
business on practical issues before any attempt to impose it.
OTHER TAX
ISSUES
Financial products avoidance: The government has deferred
introduction of new "principles-based" legislation to
counter tax avoidance in relation to financial products from April
2008 to April 2009 to allow time for further refinement, as called
for by the CBI.
Reporting errors: The increase in the limit below which errors
in indirect tax returns can be corrected on the return for the
period in which they are discovered, rather than by a separate
voluntary disclosure, responds to CBI requests in previous Budget
submissions.
Simplification: The fact that there are 107 new technical
tax proposals, with HMRC Budget Notes running to 270 pages, does
not support the Chancellor's claims to be moving towards a simpler
tax system.
PUBLIC EXPENDITURE
AND RELATED
POLICIES
Public service reform: The Budget Report contains a welcome
recognition of the importance of competition in delivering better
quality public services and improving value for money. The Chancellor's
words on reform, like the Prime Minister's earlier in Budget week,
are a good sign but the government will need to be judged on its
actions.
Science in schools: "Project Enthuse", and a £6
million campaign to promote science in schools, will be welcomed
by business. Too many companies have serious problems recruiting
individuals with science skills. Inspirational teachers are key
to encouraging more young people to study science, while high
quality careers advice is vital to show them that these subjects
open doors to well-paid and interesting careers.
Skills: The expansion of "Train to Gain" and the
introduction of skills accounts should ensure public funding follows
the needs of employers and employees more closely. The focus must
be on developing the economically valuable skills that the UK
needs to compete. The announcement of additional funding for intermediate
skills and adult apprenticeships is welcome, as employers' skills
needs are often at these higher levels.
17 March 2008
13
In the longer term we would expect most if not all of the cost
to be passed to UK residents in their capacity as employees and
consumers, as with all tax increases in today's world of cross-border
capital mobility. Along the way, the UK's capital stock would
fall below what it would have otherwise have been, constraining
achievable productivity-and thus pre-tax wage levels too. Back
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