PN 4: Encouraging Enterprise, Investment and Productivity

Reforms to encourage enterprise, improve access to finance, promote investment and cut unnecessary regulation were announced by the Chancellor today, offering benefits for up to 3.8 million small enterprises in the UK. Encouraging enterprise, innovation and productivity is at the heart of the Government’s agenda. Promoting a strong enterprise culture is vital to the success of the UK economy.

Details

Regulatory reform

Unnecessary or poorly implemented regulation can be an obstacle to flexibility, restricting employment growth and competitiveness. The Government is intent on reducing the regulatory burden where it can. The package of deregulatory measures proposed in Budget 2004 will deliver significant benefits to business – combining specific measures to deliver deregulation now, with more fundamental reform of the policy-making processes to improve the quality of regulation and inspection over time, including:

• consulting on the implementation of phasing out payment via employers for Working Tax Credit;
• the Prime Minister to chair the Panel for Regulatory Accountability, which will be required to clear all new regulatory proposals likely to impose a major burden on business in the context of the overall burden of regulation and based on thorough impact assessments approved by the Cabinet Office;
• a commitment to push for a clear work programme at the Spring Council for the EU Four Presidencies Initiative. The UK has today provided a list of priority areas for regulatory simplification to the Commission;
• a formal consultation with businesses in April about the feasibility of extending common commencement dates to further areas of regulation and tax;
• a commitment to work with business to reduce the burden of inspection and the overlap between enforcement regimes; and
• progress on ongoing work to tackle deregulation in specific sectors – financial services, construction, retail and chemicals.

Venture capital schemes

Measures to modernise the venture capital schemes include:

• a temporary stimulus to investment in Venture Capital Trusts (VCTs) by increasing the rate of income tax relief from 20 per cent to 40 per cent;
  
• an increase to the annual investment limit for VCTs and Enterprise Investment Schemes to £200,000; and
  
• changes to the operation of the schemes to introduce greater flexibility and better reflect commercial realities.

Promoting more flexible investment in property

The Chancellor today launches a consultation on the most appropriate structure for a new Property Investment Fund, a UK version of the successful US Real Estate Investment Trusts (REITs), alongside the taxation of related property investment products. In addition, consultations will continue on the introduction of legislation to facilitate the removal of tax barriers to the development of a market in property based derivatives. This will encourage more efficient investment in property.

Local Authority Business Growth Incentives

The Local Authority Business Growth Incentives scheme will allow local authorities to retain a proportion of increases in business rates revenues to spend on local priorities. This provides a direct incentive to work with businesses and support economic development. Following initial decisions in the 2003 Pre-Budget Report, Budget 2004 announces further decisions on how the scheme will operate when it begins in April 2005.

The Deputy Prime Minister has today published details of the baselines, for individual local authorities, as well as proposals on how the ceilings on the amount of revenue that each local authority can retain will be calculated. These can be found on the ODPM website. The Government expects local authorities to retain an additional £150 million in 2005-06, rising to £450 million in 2007-08. This revenue will not be ring-fenced, and there will be no additional cost to businesses.

Reform of Corporation Tax

The Government is committed to a modern, fair and competitive corporation tax system that reflects the increasingly flexible and global business environment. Following the August 2003 consultation document, the Government has published draft legislation on two aspects of Corporation Tax reform which are now being taken forward with effect from 1 April 2004:

• relief for the expenses of managing investments will be available to companies with investment business, whether or not they qualify as investment companies; and
• the scope of transfer pricing and thin capitalisation rules will be amended to include wholly domestic transactions but exclude most domestic or cross border transactions undertaken by small or medium sized enterprises. Full details of this change can be found in the Budget Notes.

The Government remains committed to reform in other areas of the Corporation Tax system. Further detailed legislative proposals will be published later this year, focussing on those areas where the system may create unjustified barriers to modern commercial activity. The Government has concluded that capital allowances should be retained. It will consider further whether the capital allowances system should be modernised and will consider possible changes to the way that leasing transactions are taxed in the light of this decision.

The Government will also continue the wider-ranging dialogue on international issues that was begun during the August 2003 consultation, with a view to maintaining the competitiveness and fairness of the UK corporation tax regime and ensuring that it remains robust.

First Year Allowances for Small Enterprises

The Government is committed to encouraging investment, as a key driver of productivity and growth. In response to representations from a number of representative bodies, the Government announces the extension, for one year from April 2004, of first year allowances for small enterprises from 40 per cent to 50 per cent, to provide a cash flow boost to up to 3.8 million small enterprises when they need it most.

Research & development (R&D) tax credits

Following consultation in summer 2003, new guidelines defining R&D were published by the DTI on 15 March. The guidelines will have effect for company accounting periods ending on or after 1 April 2004. The guidelines are not intended to widen or narrow the definition of R&D, but they are clearer and easier to use. In addition to clear guidelines, a wider range of costs will also qualify for the R&D tax credit. Qualifying costs now include expenditure on software, power, fuel and water. The R&D schemes will also be modified to prevent any change in the timing of the R&D relief from companies’ adoption of International Accounting Schemes.

The Inland Revenue will continue to focus on implementation of the tax credits by producing improved guidance in support of the R&D tax credits in advance of the 2004 Pre-Budget Report, after which it will embark upon a programme to improve delivery of the credit. It also plans to issue regular information on R&D tax credits in its publication of National Statistics.

Gift Aid and day admissions

The Government recognises the concerns expressed in representations from charities about possible changes to Gift Aid and will continue to discuss with charities the best way forward. Charities will have until mid-June to feed in their views to the Inland Revenue. It aims to announce the results of the consultation around the time of Spending Review 2004.

Investment in the film industry

The tax relief for British qualifying films, which is due to expire on 1 July 2005, will be replaced by a new relief for production expenditure incurred that can either be offset against profits or surrendered to the Treasury for a cash payment. The new relief will typically provide filmmakers with 20 per cent of the production budget compared with the 15 per cent they typically receive under the existing Section 48 relief. The Government is currently reviewing the treatment of co-productions, involving production expenditure both in the UK and outside the UK, with a view to creating a tighter definition of British Qualifying Status. The Government also wishes to consider the scope for the new relief to improve the proportion of British films produced being distributed. Following further discussions with the industry and other stakeholders, full details of the new relief will be published in the summer.

Reducing VAT compliance costs for business

From 1 April 2004, the VAT registration threshold will be increased in line with inflation from £56,000 to £58,000, keeping 5,000 of the smallest firms out of the VAT system. This remains the highest threshold in the EU.

From 1 April 2004 the turnover ceiling for businesses wishing to use the VAT annual accounting and cash accounting schemes will be increased from £600,000 to £660,000, making the scheme available to an additional 13,000 small firms.

North Sea exploration

As announced at the 2003 Pre-Budget Report, as a further measure to encourage investment to help maximise recovery of economic UK oil and gas reserves, the Government will introduce an exploration expenditure supplement (EES) of 6 per cent per annum for up to 6 years, effective from 1 January 2004. The EES will maintain the value of the 100 per cent exploration and appraisal allowance over time for new North Sea companies.

Loan relationships and derivative contracts regimes

The Government proposes to make a number of changes to the loan relationships and derivative contracts regimes to ensure that they operate as intended, provide greater certainty for business, and remove opportunities for avoidance. These are in addition to the measures helpful to the Venture Capital Industry and companies in administration announced at the 2003 Pre-Budget Report. Full details can be found in the Budget Notes.

Notes for Editors

Regulatory Reform at EU level

The Government is working with counterparts in Ireland, the Netherlands and Luxembourg to help drive forward regulatory reform in the EU over the next four EU Presidencies. Their proposals were discussed by European economics and finance Ministers on 9 March and will be highlighted at the Spring European Council on 25-26 March. As part of this, the Government has consulted with business and other stakeholders about areas where EU law is too complex – and has today submitted a list of overly complex regulations to the European Commission.

Common commencement dates

Common Commencement Dates are consolidated implementation dates for changes to regulation, intended to provide business with greater stability and enhance compliance with regulatory changes. The DTI is currently piloting the use of two common commencement dates a year for employment regulation. The consultation to be carried out from April will consider the feasibility of applying the common commencement date principle to other areas of regulation and tax, and will ask business to consider which areas of regulation should be included in such an approach to maximise the benefit to them. To consider the potential application to environmental regulations, DEFRA will conduct a study to run in parallel with this consultation.

Sector-specific measures

The Business Regulation Team at the Cabinet Office Regulatory Impact Unit has been considering the impact of regulations on the three sectors identified by the Chancellor in Budget 2003: environmental services, construction and transport. The reviews are progressing well, and specific measures flowing from the reviews include plans to establish new industry/cross-government forums on policy and regulation development for the construction, chemicals and retail sectors. These groups will give early warning of, and provide and opportunity for industry to express its views on, emerging policy and regulatory proposals emanating from the UK and EU. Following concerns expressed by the construction industry on unreasonable delays in payment, the Government will review the operation of the adjudication and payment provisions in the Housing Grants, Construction and Regeneration Act 1996 to identify what improvement can be made.

Promoting more flexible investment in property

The consultation published today Promoting more flexible investment in property considers how the legal and tax elements of a new Property Investment Fund might be structured, in order to improve the efficiency and flexibility of investment in property and encourage access to property investment for smaller investors. The deadline for consultation responses is 16 July 2004.

Reform of Corporation Tax

The consultation document Corporation tax reform was published on 12 August 2003 and took forward the Government’s programme of building a modern and competitive tax system.

The August 2003 consultation sought views on proposals for taking forward reform in the three main areas set out in the August 2002 consultation document:

• rationalisation of the way in which the schedular system taxes different types of corporate income to provide more flexibility in the way in which losses from one activity can be set off against profits arising from another;
• changes to the tax treatment of trading and investment companies to remove outdated restrictions and facilitate group restructuring; and
• changes to the tax treatment of capital assets to reduce distortions in the tax system.

The consultation also addressed the reform of corporation tax in its wider international context and recognised the influences of a competitive business environment, international agreements and legal developments.

Gift aid and day admissions

A special statutory exemption allows certain heritage and conservation charities to offer free admission in return for a donation which attracts Gift Aid. This was an unintended side effect of the Gift Aid legislation and it was announced in the Pre-Budget Report that the Gift Aid scheme would be amended following discussions with charities on the best way to do this.