Over the past year I have received many representations about surplus advance corporation tax. ACT is paid by companies when they pay dividends. It serves two purposes: first, to discharge the shareholders' basic rate income tax liability; and, second, as a payment towards the company's own corporation tax liability. But some companies paying dividends out of foreign profits taxed abroad find that they are now paying more ACT than they can set against United Kingdom tax.
That is a significant problem for those affected. But it is also highly complex, and huge amounts of revenue are potentially at stake. A satisfactory and lasting solution will need to address the ways in which different national systems of corporation tax interact. This is currently the subject of a review sponsored by the European Commission, and it is clearly an issue to which the Government will have to return.
Its importance is of course increased by the abolition, from 1 January 1993, of fiscal frontiers within the European Community. That will give British business access to the largest home market in the world. But it will also necessitate a number of technical changes to our VAT and excise systems. As I announced last October, one consequence of the single market is that businesses which import from other European Community countries will pay VAT on those imports later than they do now, giving some 90,000 businesses a welcome cash-flow benefit.
This change will add substantially to the PSBR in 1992–93. I therefore announced last year that, from this autumn, the largest VAT payers—those who paid over £2 million in VAT in 1990–91—would be required to submit VAT returns monthly rather than quarterly as now. It has been put very forcefully to me that the requirement for monthly returns would place an undue administrative burden on the businesses concerned. I have listened carefully to these representations, and I now intend to take steps to allay the concerns raised by those affected.
I have asked Customs to implement a system of monthly payments on account for these large businesses, but I propose to allow them to continue to submit returns quarterly. This will avoid the requirement to fill in VAT returns every month, while still offsetting the cost to the Exchequer of postponed accounting for imports. Compared to my original proposal for monthly returns, payments on account will cost the Exchequer some £200 million in 1992–93, with a corresponding benefit again to the businesses concerned. I will introduce legislation to establish the basis for these new arrangements.
I also propose to introduce legislation to prevent the business tax rules from being manipulated to secure an unjustifiable tax deferment when rent is paid between connected persons. The manipulation which has already occurred has involved tax of some hundreds of millions of pounds. This loophole will be closed immediately.
I have one change to make to the business expansion scheme. It has been put to me that the BES could play a valuable part in helping to ease the problem of mortgage repossessions. At present companies can use the BES to acquire empty repossessed houses, but there are complications if the houses are still occupied. I propose to make it easier for the BES to be used for mortgage rescue schemes where owner-occupiers in difficulties wish to stay in their homes as assured tenants. This will add to the impact of the measures I announced in December to help the housing market.
But I have also looked closely at the entire rationale behind the business expansion scheme, which is an exceptionally generous tax relief. When my right hon. and learned Friend the Member for Surrey, East (Sir G. Howe) introduced it in 1983, the venture capital industry was in its infancy, and there was concern that the investment needs of small firms were not well understood and provided for.
The BES has been extremely successful. Over £2 billion has been raised and invested in qualifying schemes of all kinds. And Britain now has a venture capital industry the equal of that anywhere in the world, outside the United States. But the provisions of the business expansion scheme have become ever more complex; and nowadays only a small part of the total invested goes to small businesses.
As my right hon. Friend the Member for Blaby (Mr. Lawson) made clear when they were introduced, the BES provisions for assured tenancies were intended to expire at the end of 1993. I have decided that it is unnecessary to continue the business expansion scheme beyond that date, not only for assured tenancies, but for other investments as well. BES will therefore come to an end on 31 December 1993. As I have said, it has fulfilled a useful purpose. But its removal will significantly improve the neutrality of the tax system; and some 45 pages of complex legislation will be removed from the statute book.
As a result of my announcement today, there is likely to be some acceleration in investment, which will be welcome. In the long run there will be substantial savings, perhaps £130 million a year.
Last year, I made it clear that I was concerned about the position of the British film industry and that I would consider carefully any further proposals that the industry brought forward. I have done so. Although a special tax regime already exists, the industry has long argued that the provisions for writing off expenditure do not fully take account of their special circumstances, and in particular of the cash flow problems that may be caused by the sometimes lengthy gap between the completion of a film and its release. I propose two measures to alleviate the position.
First, relief for pre-production expenditure will be available as it is incurred; and, second, production expenditure will be available for write-off at a fixed rate of one third each year, on a straight-line basis, starting immediately on the completion of the film. This will have a cost of about £5 million in the first year, and around £15 million in 1993–94.