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The Enterprise Package

Volume 981: debated on Wednesday 26 March 1980

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I come now to a series of measures which are intended to increase the wealth-creating vitality of our economy. That means giving greater encouragement to the processes of economic change, and improving incentives to the enterprise sector. For the mainspring of economic vitality it is now widely agreed that we must look to private initiative, widely dispersed and properly rewarded. In truth, enterprise means jobs.

Capital Taxation

I start with capital taxation, which is widely regarded, and rightly so, as a severe discouragement to those seeking to build up a business and pass it on to the next generation. We have, as I promised last year, subjected capital taxation to a thorough review. Representations from a large number of bodies have confirmed that the damage done by these taxes in their present form is out of all proportion to their yield.

There is, of course, a place for capital taxation, including, in particular, a charge on death. But change is needed. What I can do this year must be constrained by our financial position. I am, therefore, proposing changes which will be of particular help to smaller businesses. This is an earnest of our determination to make further progress when economic conditions permit.

First, the march of inflation over the years has brought far too many estates into charge to the capital transfer tax. This is a particular burden on the small business, when it passes from one generation to another, whether on death or by lifetime transfer. I propose, therefore, that the threshold for the capital transfer tax should be increased to £50,000. This will exempt from the tax at least two-thirds of the estates which would otherwise have been liable; and up to 400 fewer staff will be needed than if we had left the threshold unchanged.

A reduction in the scale of rates above the new threshold, however much that is needed, is not possible at the moment: nor are other changes I should like to have made. I am, however, making one or two minor changes designed to reduce administration.

In the case of the capital gains tax, I am fully conscious of the impact inflation has had. It can rightly be argued that the tax often falls on what are no more than paper gains. Proposals for indexation or tapering as a means of meeting this problem have been put forward on many occasions in the past. I have had both proposals re-examined but the conclusion to which I have come is that both would result in an unwelcome increase in the cost of administration—for taxpayers as well as for the Revenue—while reducing the yield of the tax to negligible proportions.

I cannot, however, leave matters as they are. I propose, therefore, to replace the present £1,000 exemption—which is progressively withdrawn above £5,000—by a straightforward allowance of £3,000. This change, which will operate from 6 April, will remove from tax half the cases at present liable, and at a reasonable revenue cost, it will reduce staff requirements by 300. As a corollary of this new proposal, there will be an exemption for the first £1,500 of gains for trust and investment and unit trusts will now be exempted from the tax, although investors in such trust will remain liable if their own gains in the year exceed the new exemption limit.

Finally, I propose to remove the present double charge on gifts, which arises from the overlap between capital transfer tax and capital gains tax, by providing rollover relief for the latter. This has been a particular source of grievance and one on which representations have been received from a large number of people.

The cost of these changes in the capital transfer tax will be £60 million in the coming year, and twice as much in 1981–82. In the case of capital gains tax, there will be no cost this coming year and a cost of £25 million in 1981–82. These figures need to be judged against the already rising yield of the capital taxes as a result of inflation.

I realise that these necessarily limited changes will fall short of what many people had hoped for, but I must ask for patience in present circumstances. Meanwhile, the benefit the present changes give to the small business should not be underestimated. Because of the 50 per cent. relief—which will remain, as will the comparable relief for agriculture—a person transferring a business worth £100,000 will pay no capital transfer tax if there are no other assets. We would, of course, have liked to bring similar help to businesses of all sizes. My proposals do give some measure of relief to everybody, but this year most assistance goes to small businesses.

As I have already indicated, there have been extensive consultations on capital taxation before the Budget. We propose to continue that process. There are, in particular, certain specialised areas, such as settled property, which require very detailed consideration.

Development Land Tax

I now turn to another tax which can inhibit development—the development land tax. In my last Budget, I reduced the rate of this tax to 60 per cent. and increased the exempt slice to £50,000. I said then that there would be no further reduction in the rate and no early increase in the exempt slice. That remains the position. Representations have, however, been made to me from many quarters that the tax inhibits development because of uncertainty about the amount of tax chargeable which can normally be ascertained only once development starts. It is important to remove obstacles of that kind if we are to make the best use of our resources. I propose to deal with this point, and the necessary legislation will be added to the Finance Bill at an appropriate stage. There will also be a number of other detailed improvements. All these changes are designed to free the market and to encourage development.


Taxes are stifling independent enterprise in other ways as well. For many years, the fashion both in Government and in industry was to favour mergers and amalgamations. No doubt mergers have brought advantages in some cases, but it is now quite clear that the fashion for industrial elephantism was greatly exaggerated. I believe that there are cases where businesses are grouped together inefficiently under a single company umbrella. They could in practice be run more dynamically and effectively if they could be "demerged"—I apologise for that word, which has now become part of the jargon—and allowed to pursue their own separate ways under independent management. The present tax rules can in practice effectively discourage demergers of that kind, by charging the assets of the "demerged" company to advance corporation tax and income tax as distributions.

I propose to bring forward, during the passage of the Finance Bill, measures to ease the tax charge on distributions of that kind, subject to certain safeguards, and where they are concerned solely with the genuine splitting off of independent trades within the corporate sector. My colleagues and I would welcome any views which those outside Government might have on these proposals. It may be that further measures will turn out to be justified.

Specific Measures to encourage small businesses

I now turn to measures specifically designed to improve the tax environment in which the small business lives and works.

Any business, but particularly the new small business just starting up, needs somewhere to operate. An imaginative and helpful new venture in recent years has been the development of estates of small industrial workshops for separate letting to small businesses. I propose to bring in a small workshops scheme which will enable industrial buildings allowances at the rate of 100 per cent. to be claimed on the construction of small industrial buildings. The scheme will run for three years, and will simplify the present administrative arrangements. I shall also make provision for industrial buildings allowance to be given on the construction of industrial buildings rather than on their first lettings. In addition to my own proposals, my right hon. Friend the Secretary of State for the Environment intends to consult on relaxation of planning controls over changes of use as between light industry and warehousing for small units. My right hon. Friend the Secretary of State for Industry intends to make £5 million available to build 1,000 new nursery factory units in assisted areas in co-operation with the private sector.

New businesses, and particularly new small businesses, also need capital. Many people with capital to invest might be ready to back enterprising ventures if they knew that losses could be offset against taxed income, instead of only against capital gains. I propose that, through a new venture capital scheme, losses on equity investment in unquoted trading companies, incurred after 5 April 1980, may be set off against income.

Next, I propose to relax the conditions for tax relief for interest paid on money borrowed for investment in, or lending to, a close company. The present rules require an investor to have worked for the greater part of his time in the company's business. I propose to abolish that condition, and thus provide added incentive for outside investment in small firms.

Just as important as attracting new capital from the outside is the generation of new capital from the inside, in the form of profits which are retained in the business. The tax system has now contained for more than 50 years a series of provisions under which a close company may be required to justify the amount of profits which it wished to retain in the business, undistributed. Following last year's reduction in the rate of income tax, I now propose important changes, including the abolition of the apportionment of trading income both of close trading companies and of members of trading groups. These changes will cut out a thicket of complex tax provisions, which are time-consuming for the small trading business, and a real impediment to growth.

However, if small companies are to generate the funds to finance their expansion, they must first earn profits and then be left with sufficient of those profits after payment of tax. Better profits must come through improved efficiency and greater productivity. That is a matter for industry itself and not for Government. But Government can help by reducing the tax burden. I propose, therefore, to cut the small companies rate of corporation tax to 40 per cent.—that is no less than 12 points below the full rate of 52 per cent.—and at the same time to raise the qualifying limits to £70,000 for the full relief and £130,000 for the marginal relief.

My next proposal is designed to help the unincorporated small business. It is important that the self-employed should be able, with tax assistance, to make adequate provision for their retirement. I am, therefore, raising the limits on retirement annuity relief. The normal percentage of earnings qualifying for tax relief will rise from 15 per cent. to 17½ per cent., and the ceiling on the premiums qualifying for relief will also be abolished.

Other changes

I also propose some minor measures affecting business taxation. Following consultations with industry, I propose that the costs of raising business loan finance should be allowed for tax purposes. Relief will also be given for pre-trading expenses of a business, provided that these expenses would have been allowable if the business had been trading when they were incurred. Certain changes will also be made in the tax deduction scheme for the construction industry—the 714 scheme—which will lighten the administrative burden of the scheme and change certain features which at present operate harshly.

As the last element in my package to help small businesses, I am making certain changes in the arrangements for VAT, in order to ease the administrative burden. I propose that from midnight, the registration threshold for VAT should be increased from £10,000 to £13,500. The de-registration limit will also be increased from 1 June. At the same time, I shall be increasing from £50 to £250 the relief from payment of tax on stocks and assets when a person de-registers.

Despite the severe financial restrictions, we are thus giving help to smaller businesses at many, many points where the system bears too hard. Individually, relatively few of the measures could be described as of major importance, but taken together they represent a significant step forward in making this country one in which enterprise will be properly rewarded and thus flourish again. Together they will cost about £160 million in a full year.