The Rt. Hon Gordon Brown, MP
Chancellor of the Exchequer
HM Treasury
Parliament Street
London
SW1P 3AG
21st November 2002
London Chamber of Commerce and Industry
Budget 2003 submission
This letter is the Budget 2003 submission of the London Chamber of Commerce and
Industry, prepared by the taxation committee of the chamber.
It is important that London retains its essential advantages as a focal point for
business headquarters, financial services and inward investment. Business continues
to face extraordinary compliance burdens and it should be recognised that the direct
tax rates can no longer be said to be the lowest of the major industrial countries in
Europe. Indeed, on top of this, increases in national insurance will mean that costs of
employing staff will go up at a time when business are laying off staff.
In our view there are a number of areas of the tax system that could be improved and
within the context of the comments above we set these out below. However as
mentioned in our letter to the Inland Revenue in relation to the consultation document
on the reform of corporation tax (see the enclosure to this letter) we would not
advocate changing the schedular system of taxation in the medium term until there
has been a thorough review of the issues. There have been enough changes
introduced in recent budgets to last a number of years; the length of the Finance Acts
continues to cause a great deal of concern amongst the business community and it is
for this reason that we would strongly recommend a cautious approach.
1. Reduction in Business Taxation
Firstly, and most importantly we would like to see a reduction in the taxation of
business. Such a reduction would be conducive to improving British competitiveness
in a world market. Business could operate more productively in the context of a low
tax economy. Furthermore, as well as reducing corporate profitability, high corporate
taxation is prohibitive to investment. At a time when business as a whole is stretched
and financially relatively insecure a reduction in taxation would provide a much
needed boost thus facilitating recovery and economic growth.
Lower corporate taxation has the following benefits for business:

Business would have more money available for investment. At present there is
a crisis in business investment with business investment falling by 10.8% in
the year to Q2 2002, according to ONS figures. This failure to invest in our
future will have long-term negative effects on the economy if it is not rectified
soon.

Lower corporate taxation would make businesses more competitive against
foreign competitors. This is particularly important for manufacturers who
account for a large proportion of UK exports – an industry that has been in
recession since the start of 2001.

Profit margins are higher meaning more businesses can stay in business and
consequently employ people and produce goods and services. This is
particularly important in the current economic climate because of the
economic downturn.

Businesses would have more money to invest in company pension schemes.
This is critical at the moment with the decline in the Stock Market destroying
the value of company pension schemes. Many companies have deficits on
their company pension schemes which are final salary based and many are
being forced to move over to money purchase schemes (refer to point 7
below).

The rise in National Insurance contributions will take money out of the private
sector and this needs to be rectified by a reduction in corporate taxation.

Lower corporate taxation helps attract inward investment to the UK. The UK’s
share of inward investment fell sharply in the first half of the year. In the six
months to June 2002 the UK won 16% of Europe’s inward investment projects
down from 22% in the same period of 2001, according to Ernst & Young.
2. Reducing compliance
2.1 The payroll system
The payroll system is complex and has become more so over recent years. National
insurance was extended to include most benefits in kind and the rates of tax will
increase. The operation of tax credits through the payroll system imposes further
burdens. We urge there to be a reappraisal of the system so that business is able to
operate under less stringent circumstances.
2.2 Treasury Consent
The Treasury consent provisions and its potential criminal sanctions are outdated. It
is understood that the Revenue want to retain S.765 Income and Corporation Taxes
Act to obtain information on certain transactions. This information could be provided
as a part of the self-assessment process.
2.3 Cross-border interest
The ability to pay cross border royalties and deduct tax at the appropriate tax treaty
rate without formal clearance, as set out in S.96 Finance Act 2002, should be
extended to the payment of interest.
3. Holding company issues
3.1 Tax exemption on overseas dividends
Although the new on-shore pooling provisions have benefits they are highly complex.
Also the interaction of the controlled foreign company legislation and double tax
relief provisions are not straightforward. We are in favour of the introduction of an
exemption system, which places no restrictions on the deductibility of financing and
other costs of acquiring underlying subsidiaries. Such a system would meet recent
European Court of Justice decisions and would be simpler to operate.
3.2 Cross-border EU group relief
The extension of loss relief to losses incurred by EU subsidiaries, being offset against
a UK parent company’s profits, should naturally follow on from the recent AMID
case. We would therefore request that the Finance Act 2003 contain provisions to
introduce such relief.
3.3 Management expenses and “tax nothings”
As mentioned in our response to the Inland Revenue’s consultative document on the
reform of corporation tax, it is reasonable for enterprises to obtain deductions for
costs that are genuinely expended for the purpose of carrying on business. In addition
to the “tax nothings” mentioned in our letter (namely costs on raising equity finance,
costs of abortive capital expenditure, costs on leasehold acquisitions) we would draw
attention to “management expenses” which are presently disqualified. In certain cases
companies are unable to obtain deductions for such costs where the company is
neither regarded as carrying on a trade nor undertaking investment activities. This is
anomalous and should be rectified.
4. Business Activities: Trade and investment
More generally the tax system should not make a distinction between investment and
trading activities where it is clear there is an active business. Not only should this
reduce the possibility of “tax nothings” as mentioned above, but we would also urge
that this distinction be eliminated in both the taper relief and corporate substantial
shareholding disposal provisions. It seems to us that companies carrying out genuine
business activities should also be the subject of full benefits under these provisions.
More specifically, in connection with the substantial shareholder provisions the
exemption should also apply to earn-out receipts where the vendor does not retain
ownership over the shares.
5. Enterprise Management Investment Scheme
5.1 Overseas companies with UK operations
As pointed out in previous budget submissions, it is not possible for a foreign
company which sets up a UK subsidiary to take advantage of the Enterprise
Management Incentive Scheme. In our view the absence of this form of option
arrangement to overseas companies deters inward investment.
5.2 Limitations of the scheme
The scheme is hedged with extensive anti-avoidance provisions, which discourage
firms from taking advantage of it. The Inland Revenue do not offer any model
scheme rules or form of option agreement; this is unhelpful since a company can then
be exposed to penalties if at a later stage the Revenue believe there to be defects in
drafting. Further, the scheme is restricted to certain UK trading activities. In our
view the scheme should be extended more generally to active business operations.
6. Stamp duty on share and property transactions
London continues to be strongly challenged as a global leader in share dealings. Its
position as a leading trading centre would be enhanced if stamp duty were no longer
imposed on share dealings. This would be welcomed by London’s financial services
sector at a time when the market is not buoyant and competition between trading
centres is intense.
More generally we view the trend of increases in stamp duty on property transactions
as unwelcome and urge there to be no more increases in real terms for the foreseeable
future. This comment equally applies to whatever form of taxation that will replace
stamp duty.
7. Pension savings
We note with alarm the CBI’s estimates of the effect of the abolition of the dividend
tax credits previously refunded to pension scheme funds (which took effect in 1997).
This has contributed to companies closing their final salary pension schemes. New
tax incentives are required to encourage pension saving. For example, there could be
a national insurance credit which rewards employers for contributing to their staff’s
pensions. There are currently a number of pensions tax regimes covering
occupational pension schemes, approved personal pension schemes and unapproved
schemes. This needs to be reviewed, as well as modernising pension annuities to
introduce more flexibility and money back guarantees.
8. Extension of tax depreciation
As set out in our letter to the Inland Revenue in relation to the reform of corporation
tax, we would welcome an extension of tax depreciation to assets not covered by
capital allowances. In our view this does not mean that there should be a radical
change to the schedular system of taxation or to the taxation of capital gains.
9. Summary
In general terms we would welcome improvements to the existing system of taxation
as set out above. In our view a wholesale change to the schedular system and capital
gains regime is not necessary in the medium term. Indeed there are a whole host of
issues that need to be addressed in relation to the more recent provisions (e.g.
intangible assets and substantial shareholding disposals) before any wholesale
changes are made to the basis of taxation. The latter should be reviewed as a longterm objective which requires more consideration and consultation.
Piers Merchant
Campaigns Director
Enc.