I turn now to business taxation. The major reform of business taxation, which I introduced in 1984 and which was completed in 1986, has given us one of the lowest corporation tax rates in the world. This has encouraged overseas companies to invest in Britain and, most important of all, has greatly improved the quality of investment by British firms. It is a crucial part of an environment in which company profitability has recovered to its highest level for some 20 years. It has succeeded in its objectives.
I do not, therefore, propose any further changes to the structure of corporation tax. And the main corporation tax rate for 1988–89 will be unchanged at 35 per cent. But I do have some changes to propose to specific aspects of business taxation.
British exporters have done extremely well in recent years, thanks to major improvements in efficiency and quality. But no exporter could honestly claim that his success hinges on the fact that the cost of entertaining overseas customers is tax deductible, whereas business entertainment generally is not. I therefore propose to simplify the system by making all business entertainment non-deductible for tax purposes, including for VAT.
In conjunction with my right hon. Friend the Secretary of State for Energy, I propose to restructure the tax regime for the new generation of southern basin and onshore fields so as to relate tax liability more closely to profitability. Accordingly, my right hon. Friend will shortly be bringing forward legislation to abolish royalties, from 1 July, for all such fields. At the same time, I propose to reduce the petroleum revenue tax oil allowance for these fields. This will mean the end of royalties for all future fields.
The Building Societies Act 1986 gives building societies the power to convert themselves into companies, if they so wish. At present, however, they would face a heavy, and unintended, tax charge if they did so. I propose to rectify this.
I have two changes to propose to the tax arrangements for Lloyd's. The first meets the only point that Lloyd's have raised on last year's legislation on reinsurance to close. The second will benefit both Lloyd's and the Inland Revenue by simplifying the administrative arrangements for taxing Lloyd's members.
I also propose to simplify the section 482 rules for companies that wish to migrate overseas, so as to bring these rules broadly into line with those of most of our major competitors. In future, companies will be resident in the United Kingdom if they are incorporated here. Subject to that, instead of having to ask for Treasury consent, companies will be free to migrate, provided only that they pay their tax first.
I now turn to a number of proposals to give further help to small businesses and new businesses, whose encouragement is a central theme of Government policy. Since 1979, the rate of new business formation, net of failures, has averaged 500 a week. This shows beyond any doubt the continuing vigour of this sector, which is such an important source of enterprise, of innovation, and of new jobs.
Many new businesses have been greatly assisted by the business expansion scheme, which has now been running for nearly five years. During that time, it has enabled new and expanding companies to raise equity finance
amounting to some £150 million a year. However, the rapid growth of the venture capital market since 1983 has meant that companies seeking relatively large amounts of equity investment can now raise these readily, while smaller companies looking for more modest amounts can still find it difficult to do so.
To improve the targeting of the BES, I therefore propose to introduce a limit of half a million pounds on the amount that any company can raise under the scheme in any one year. Investment should thus be better directed at the smaller and newer businesses, particularly those outside the south-east of England, which can still find it hard to raise equity finance in other ways. In the special circumstances of the ship chartering industry, however, the limit will be £5 million.
I have one further proposal affecting the business expansion scheme.
One of the key reasons for our economic transformation has been the reform of the supply side of the economy.
The tax relief that I introduced last year for profit-related pay will, in time, help to increase pay flexibility and to improve the working of the labour market. But if successful firms are to expand further, and create still more jobs, we also have to make it easier for people to move to where the new jobs are.
For years, the shortage of private rented accommodation has been an obstacle to labour mobility. The Government's proposals to deregulate new rents are already going through the House. Deregulation will, over time, substantially increase the supply of housing for rent. But this will not happen overnight, and there is a case for a special incentive to speed up the process in the early years.
I therefore propose to extend the business expansion scheme to include companies specialising in the letting of residential property on the new assured tenancy basis.
The BES is well suited to this task. Since full tax relief is given immediately, it should bring forward new investment straight away. And we will be building on success.
The limit for this type of investment will be £5 million a year for any one company. Since the relief is specifically designed to provide an extra stimulus in the early years of deregulation, it will run only for investments made before the end of 1993.
This change will powerfully reinforce the impact of decontrol in reviving the private rented sector of housing in Britain.
In last year's Budget I raised the ceiling for capital gains tax retirement relief from £100,000 of gain to £125,000. But I believe it is necessary to do more to help the small business man whose wealth is tied up in his business, and who is faced with the disincentive of a heavy capital gains tax bill when he sells up on retirement. I therefore propose to extend capital gains tax retirement relief so that, on top of the total exemption, half of any gain between £125,000 and £500,000 will also be completely free of tax.
While on the subject of capital gains tax, I propose to extend rollover relief to a group of assets whose common characteristic is that they barely existed when the present list of qualifying assets was drawn up. They are milk quotas, potato quotas, satellites and spacecraft. I know that this will be warmly welcomed in the farming and extra-terrestrial communities alike.
Lastly, on the small business front, I propose to increase the VAT threshold to £22,100, the maximum permitted under existing European Community law.
Throughout my time as Chancellor, I have been on the look-out for taxes to abolish. Abolition is clearly the simplest variety of reform. I have already abolished the national insurance surcharge, the investment income surcharge, development land tax and the tax on lifetime gifts.
At present, companies have to pay a capital duty of 1 per cent. whenever they raise new capital — whenever, for example, a new company is formed, or an existing company sells new shares to the public. This is undesirable on two counts. It is a burden on companies which need to secure external finance for expansion; and it discriminates against equity capital as compared with debt finance and bank borrowing.
Capital duty is a relatively recent impost which had to be introduced in 1973 in compliance with our obligations under European Community law. But the relevant Community directive has now been amended. Accordingly, I propose to abolish capital duty with effect from midnight tonight.
At the same time, I propose to get rid of the unit trust instrument duty, a similar though much less substantial tax, which is levied at the rate of ¼per cent. on all assets put into a unit trust. I know that the unit trust movement will welcome this minor relief, and I trust that the benefit will be fully passed on to investors.
The cost of abolishing these two taxes will be of the order of £100 million in 1988–89. Not counting minor imposts, the demise of capital duty brings the number of taxes that I have abolished up to five: an average of one a Budget.