The Rt Hon Nigel Lawson MP
The Government's record[end p1]
Published by the Conservative Political Centre,
32 Smith Square, London SW1P 3HH.
First published June 1988[end p2]
Around the world, governments of all persuasions are moving tax reform up the political agenda. Everywhere it is politically difficult, yet everywhere governments persevere.
For us in the UK, it is part of the second wave of the 'eighties revolution.
First, we had to dispel the notion that the way to economic success lies through a sort of fiscal levitation. That was the abiding post-war delusion – that governments could spend and borrow their way to prosperity, and fine-tune the performance of the economy through something known pretentiously as demand management.
It may be hard to remember, but it used to be an Establishment nostrum that you need a budget deficit to get economic growth. That was the belief which lay behind the notorious letter by 364 economists in March 1981. We have given the lie to that, decisively. There can no longer be any argument about it.
Everyone – or almost everyone – now accepts that the proper role of macro-economic policy is to keep downward pressure on inflation and to maintain a stable framework in which the private sector can expand.
Our second task has been to shift attention to the enterprise culture. Our commitment to it has been there from the start but, perhaps not surprisingly, has taken a bit longer to receive the attention it deserves.
Building the enterprise culture takes many forms.
We had to give management back to the managers, so we stopped the Government from setting pay and prices through the elaborate and self-defeating machinery of incomes policies.
We had to give the unions back to their members, so we wrote into law a series of basic rights.
We had to leave businesses and their workers to accept more of the consequences of their own actions, so we increasingly took the Government out of the industrial bail-out business.
We had to get the Government off the backs of the entrepreneurs, so we abolished whole batteries of controls. [end p3]
And we had to make it possible for ordinary people to enjoy the benefits of ownership, and all that goes with it, so we gave council tenants the right to buy, and promoted the spread of share ownership.
All this, too, is now accepted as the success it has manifestly been.
Tax reform is a crucial part of the same story.
For obvious reasons, Budgets are presented each year as strings of measures, each explained in its own terms. The tax changes are invariably analysed in terms of who gains what and who loses what, while the economic section of the Budget speech is reported separately.
I make no complaint about this: indeed, I have little doubt that it is inevitable. But it has the unfortunate effect that tax reform and economic performance are seen as wholly unconnected.
Yet my main objective in reforming taxes has been to improve the performance of the economy; and that is the overriding test by which the reforms stand to be judged.
In a nutshell, our objectives have been:
to leave people more of their own money, so that they can choose for themselves what to do with it;
in particular, and so far as is practicable, to reduce marginal tax rates, so that an extra pound of earnings or profits is really worth having;
to see that, as a general rule, people's choices are distorted as little as reasonably possible through the tax system;
but to be prepared, when it is sensible, to promote tax reliefs which will help to make the economy work better.
There have been other important objectives too – simplicity, for example, and the fair deal for married women which I announced in this year's Budget. But I want to concentrate here on the main economic case for tax reform: what we have done, why we have done it, and what the results have been.
Lower tax rates
The key objective is to reduce marginal tax rates. That is what makes the extra pound worth earning, without recourse to tax dodges; and that, in the long run, is what matters for incentives. The economics are simple: if you reward enterprise, you get more of it.[end p4]
Of course, what really matters is not whether Chancellors can take a bit off this or that tax rate in any one Budget – though that is certainly not to be sneezed at. It is whether, through a series of Budgets, a climate can be created in which people feel they are living in a country where tax rates are reasonably low and likely to come down further – a country where individuals and businesses are working less for the Government, and more for themselves and their families and the causes they want to support.
The salient features of our record can be simply stated:
The basic rate of income tax down from 33 per cent to 25 per cent, and set to fall further, to 20 per cent, in due course. The top rate on earnings halved, from 83 per cent to 40 per cent.
The main rate of corporation tax down from 52 per cent to 35 per cent. The small companies' rate down from 42 per cent to 25 per cent.
The stamp duty on shares, which inhibited transactions, cut from 2 per cent to ½ per cent.
The burden of capital taxation progressively lightened, with fourteen rates of tax on inheritance, running up to 75 per cent, reduced to a single flat rate of 40 per cent.
And five major taxes abolished altogether; the investment income surcharge, capital duty, the national insurance surcharge, development land tax, and the tax on lifetime gifts.
Lower tax breaks
The high tax rates we inherited when we first took office in 1979 were often not paid. The well-heeled and well-advised took great pains to avoid liability through the use of tax shelters. But with lower tax rates, there is both less need for tax shelters and less to be had out of them.
Reducing or eliminating them is never popular with those who benefit from the tax breaks; and reform plans in other countries have foundered on this rock more than once. But the principle is clear: as someone once said, if you want the Government off your back, you have to get your hand out of its pocket.
So long as we persevere, there is a virtuous circle to be had. Reducing or eliminating tax breaks provides increased revenue which can be used to help bring down tax rates. Lower tax rates of themselves reduce the value of tax breaks. So it is then a little [end p5] easier to reduce the tax breaks that remain. This in turn releases more money to reduce tax rates. And so it goes on.
So just as high tax rates tend to bring with them high tax breaks, lower tax rates go hand in hand with lower tax breaks.
In general, the objective should always be to charge lower rates on a broader tax base. That is the best way to improve incentives without an unacceptable revenue cost, to reduce distortions – a point I shall come back to – and to simplify the system.
Here too the key features of our record can be simply stated.
The big reductions in company taxes were made possible by abolishing stock relief and phasing out the special first year allowances for capital investment.
Income tax reductions have been facilitated in part by broadening the VAT base; by more than doubling the taxation of company cars; by ending tax relief for new life assurance policies, for foreign earnings and emoluments, for non-charitable covenants, and for new home improvement loans; by tightening the rules for taxing the UK earnings of non-resident entertainers and sportsmen; and by ending or limiting a number of other reliefs.
I have also tightened a number of the more arcane-sounding rules in the tax system, for example those affecting partnerships, dual resident companies, controlled foreign companies and offshore funds.
And I have limited the surpluses which can be built up in pension funds free of tax.
In part, to repeat, this trimming of allowances and reliefs is a matter of helping to find the revenue needed to pay for reductions in marginal rates. But it is also intended to make the tax system more neutral. That is, to reduce the extent to which the tax system biases people's choices, by making it worth their while to spend or save in some ways rather than others, purely for tax reasons.
The tax system we inherited in 1979 was not only badly biased, but biased in ways that could not but stultify the progress of the economy. It was biased against employment, biased against savings, biased against share ownership and biased against sensible business investment decisions.[end p6]
There were three main biases against employment.
First and most obviously, there was the national insurance surcharge – Labour's tax on jobs. At a time of rising unemployment, it was hard to imagine a less appropriate policy than to be levying an extra tax on extra jobs, wholly unrelated to the need to finance national insurance benefits. We reduced it in 1982, reduced it again in 1983, and got rid of it entirely in 1984.
Second, there was a bias against jobs inherent in the corporation tax system. That provided unnecessarily generous allowances – tax subsidies in effect – for investment in capital equipment even where more labour-intensive methods of production might be intrinsically more economic. I dealt with that when I reformed the capital allowances in 1984.
Third – and this is not strictly a tax matter – there was the problem of national insurance contributions, which we were obliged to raise in the early 1980s, particularly for employees, to finance the increase in expenditure on national insurance benefits. I announced a major reform of the structure of the contribution system in 1985, to make it much cheaper to employ people on relatively low earnings, and to allow them to keep more of what they earned.
I believe that, taken together, these measures have contributed significantly to the large falls in unemployment we have seen in the last two years.
The main bias against savings was, quite simply, that the income from savings was subject to a special additional tax, the investment income surcharge. With its origins in a distant past, when earned income was considered precarious and savings income certain, it had long ceased to have any real justification. It was particularly inappropriate, to say the least, at a time when our predecessors' policies had produced both high inflation and low or negative real interest rates. People had to save more and more to protect the real value of their savings. Yet they were simultaneously denied a real return and subjected to penal tax rates on their nominal receipts.
Geoffrey Howe reduced the investment income surcharge in his first Budget. I got rid of it altogether in mine.
The surcharge did not apply to capital appreciation, which was taxed on a quite different basis from ordinary savings [end p7] income. And, for higher rate taxpayers, the marginal rate of capital gains tax was much lower than the marginal rates of income tax – even after the investment income surcharge had been abolished. This, too, discriminated against ordinary income-yielding savings.
Any higher rate taxpayer who could choose had an incentive to convert income into capital gains, and to invest savings for speculative gain rather than steady income. I cannot believe that this was healthy.
In 1985, I eliminated the tax advantages of converting savings income into capital appreciation through the device known as bond washing. That measure wiped out a whole avoidance industry at a stroke. And, though there was some nervousness at the time, it did so with no damage whatever to the gilt-edged market.
In this year's Budget, I have gone a good deal further, and made the marginal rates of capital gains tax the same as the marginal rates of income tax. And that puts paid to another distortion. In general, you no longer face a higher marginal tax rate if you work for a company than if you speculate in its shares.
These changes can only help to promote more sensible savings and investment decisions. They will encourage people to judge between alternative uses of funds according to the return they offer, rather than their tax advantages.
In 1982 Geoffrey Howe introduced an important measure of indexation into the taxation of capital gains. In this year's Budget I completed the process, so as to eliminate finally the taxation of inflationary or paper capital gains, which was both an injustice and an economic own goal.
It was an injustice because the paper gains were simply a reflection of the hyper-inflation of the 'seventies. They represented no real appreciation whatever to people who held land or shares. So to tax them was to eat into the real value of the original investment.
It was an economic own goal because people with paper gains would simply sit on their assets to avoid paying an unjust and penal tax.
Eliminating the tax on paper gains ends that needless distortion. People who have been sitting on pre-1982 assets are now able to sell them without incurring a penal tax bill, and so turn them to more productive use.[end p8]
The biases against share-ownership affected the willingness both of companies to sell shares and of ordinary people to buy them.
Companies were inhibited because the tax system made it much cheaper to borrow than to raise equity finance. That was essentially a function of the difference between the rate of corporation tax and the basic rate of income tax. Since we first took office this gap has been eliminated altogether for small companies and virtually halved for large companies.
Companies also had to pay a discriminatory impost called capital duty when they raised equity. I abolished that in this year's Budget.
And anyone buying shares had to pay a 2 per cent stamp duty. I halved that to 1 per cent in 1984 and halved it again to ½ per cent in 1986. Despite that, the revenue from stamp duty on stocks and shares has actually increased.
At the same time, ordinary people found it less attractive in tax terms to buy shares directly than to save through the life assurance and pension funds. Institutional saving attracted tax relief which was not available for direct equity investment.
To some extent, we have levelled down. I ended relief for premiums on new life assurance policies in 1984.
To some extent, we have levelled up. I introduced tax relief for Personal Equity Plans in the Budget of 1986. I have consolidated the reliefs available for equity investment in smaller companies through Geoffrey Howe's innovatory Business Expansion Scheme, which I shall come back to. And we have developed tax incentives to foster the spread of employee share schemes.
I do not pretend that these measures have brought about anything like parity of treatment. But I do believe that they have complemented our hugely successful privatisation programme in helping to treble the number of share owners in this country.
The bias against sensible business investment decisions arose because the old capital allowances produced an incentive to undertake projects with no economic return whatever, simply to save tax. The unwritten rule was ‘never mind the quality, feel the tax relief’.
So we saw higher rate taxpayers going into things like container leasing, simply to generate paper losses which they [end p9] could set against other income, and so reduce their tax bills. Geoffrey Howe closed that particular loophole in 1980.
More generally, we saw the tax system feed a culture in which businesses were given every incentive to buy more and more plant and machinery, whatever its purpose, but not, for example, to spend money on improving the design of their products, or on research or on training their employees. This was a classic way to misallocate resources. I abolished this discriminatory tax subsidy in 1984.
The old capital allowances also made it more attractive for some companies to lease assets than to own them, again purely for tax reasons. The 1984 reforms put an end to that too. And so far from knocking leasing on the head, the reforms helped to unleash such a flood of profitable activity – on a genuine and non-tax-induced basis – that the leasing companies have just had their best year on record.
Promoting flexible markets
These are all examples of changes which have reduced the distortions between different sorts of economic activity. Some call this greater neutrality. Some call it levelling the playing field. It is in fact part of our wider policy, to get the Government off people's backs and out of the market place: leave them their own money and let them choose what to do with it, without too much nudging from the tax man.
But as long ago as 1984, when I introduced my first radical reforming Budget, I made it clear that I had no intention of removing all the distortions in the tax system. The purist tax reformer – the level playing field fanatic – will be disappointed by this. There are those who would have a Chancellor drive his steamroller up and down the pitch, until he has levelled out every hummock and filled in every hole. But I do not believe that this extreme should be our aim. While the general presumption should invariably be in favour of fiscal neutrality, in practice there will always be a place for some carefully considered tax incentives.
The main economic reason is this. The Government's objective is to improve the performance of the economy. In general, that is best served by levelling out tax reliefs and trusting to the free play of the markets. But in some cases, the markets in this country have suffered from long years of ossification. To take the two most striking examples, the labour market was allowed to become notoriously rigid, and the market for private renting [end p10] verges on the non-existent. If some modest tax relief can help to complement our other policies to get these markets working better, that is a prize worth taking.
In short, well-directed tax relief can help to promote developments which can make the economy more flexible, adaptive and dynamic.
That is why, for example, I extended the Business Expansion Scheme to private renting in this year's Budget. The lack of privately rented accommodation in this country is still a crying disgrace, which plainly inhibits the mobility of labour. Nicholas Ridley is tackling it through housing legislation. I judged it worth complementing that by offering a new tax incentive for a limited period of five years.
That is also why I introduced tax relief for profit related pay in 1987: again, a desirable carrot to get more flexibility into the labour market. Interestingly, the biggest response so far has been among small firms, confirming that these are in many ways the spearhead of the enterprise culture.
Limiting the value of reliefs
But while some tax reliefs can play a worthwhile role, the general presumption against them means that, as time passes, every relief must be reviewed with a critical eye. Is this one still needed for the purpose for which it was devised? Is that one now being used more as a tax planning device than for its original purpose? Is the other one showing diminishing economic returns in relation to the amount of revenue forgone?
Perhaps I could illustrate the process by reference to the Business Expansion Scheme.
When we came into office, small business was in the doldrums; and it was still difficult, if not impossible, for small and medium sized companies to raise venture capital. So Geoffrey Howe introduced the Business Start-up Scheme, which developed into the Business Expansion Scheme. That has provided tax incentives which have helped substantially to promote new businesses, to the great benefit of the economy.
I subjected the Scheme to a searching review by independent consultants from Peat Marwick, before deciding to make it permanent in the Budget of 1986.
Meanwhile, the spread of the enterprise culture, fostered by this and other policies, has brought forth a dramatic growth in the venture capital industry, from almost nowhere when we took office to over £1,000m. of investment a year. Thus much of [end p11] the original purpose of the Business Expansion Scheme has now been fulfilled. I therefore took steps in the 1988 Budget to place a limit on the amount any one company can raise through the Scheme each year, so as to concentrate BES money in future on the smaller companies, where the need still exists.
And in extending the Scheme to private renting, I have explicitly limited the relief to five years.
Moreover, it is an important feature of our tax reform that the value of all the allowances and reliefs in the system falls as tax rates fall. If we had retained Labour's tax rates, mortgage interest relief, for example, could now be worth about £3,000 a year to a top rate taxpayer – assuming the present £30,000 limit and present interest rates. Instead, on the same assumptions, it will be worth a maximum of about £1,200 this year.
I have stressed that the objective of tax reform is to help bring about a more efficient economy, with more freedom of choice. And the proof of the pudding is in the eating.
We have created the conditions in which individuals and businesses can flourish and prosper.
As companies have become ever more profitable, they have come to pay increasing amounts of tax, even though their tax rates are lower.
As individuals have become ever more prosperous, they too have come to pay more tax on their higher earnings, even though their tax rates are lower.
It is the economist's dream: to reduce tax rates to improve incentives, yet to do it without unacceptable sacrifices of revenue.
Over the past decade, we have cut tax rates markedly. Yet so far taxes and national insurance contributions still amount to a higher proportion of national income than when we first took office.
At the beginning, we could afford to reduce income tax rates only by raising VAT, because we simply had to get the public sector borrowing requirement down. We had to accept increases in national insurance contributions to finance increases in spending on benefits for the pensioners and the unemployed. And our oil revenues were still rising. So it is not difficult to see why taxes and national insurance contributions rose as a [end p12] proportion of our national income, even though we cut income tax rates significantly.
But over the past five years, I have been able to make large reductions in the rates of direct taxation without having to impose very much in the way of offsetting increases in indirect tax rates. There has been no increase at all in the rates of national insurance contributions – indeed there have been reductions for the lower paid, financed by abolishing the ceiling on employers' contributions. And oil revenues have been falling substantially – from almost 3 per cent of national income five years ago to less than 1 per cent now, and from about 7½ per cent of total tax and national insurance revenues five years ago to about 2 per cent now. Yet despite all this, total taxes and national insurance contributions amount to only about 1 per cent less of our national income than they did when I became Chancellor in 1983.
The moral is simple. Tax reform has helped to give us a better performing economy. And a better performing economy has given us higher revenue for any given tax rates.
So we have put paid to another post-war nostrum: that you need high tax rates to finance the welfare state. I trust this year's Budget will mark the final break with this myth.
But although the size of the tax and national insurance burden has not changed much, and indeed is still clearly too high, the result of the reforms I have described is that the burden is now much better distributed.
I would single out three changes in particular, all of which have promoted both efficiency and equity.
First, the tax on companies has been shifted decisively from employment to profits. As a proportion of total taxes and national insurance contributions, revenue from the national insurance surcharge and employers' national insurance contributions is down about 4½ percentage points, compared with the position when we took office; while revenue from corporation tax is up a little more than that.
Second, the tax on individuals has been shifted decisively from income to spending. Again as a proportion of total taxes and national insurance contributions, the revenue from income tax is down about 8½ percentage points; the revenue from VAT is up about 7 percentage points.
Interestingly, the share of VAT continues to rise, even though there has been no change in the rate since 1979 and no significant change in the coverage since 1984. That is partly because we have taken measures to ensure that the tax is [end p13] properly collected; partly because people have chosen, quite naturally, to spend their rising incomes on higher consumption; and partly because spending on the items to which VAT applies tends, on the whole, to be more buoyant than spending on the items which are zero rated.
Third, income tax has been shifted from the great mass of the population to the better off. In Labour's last year, with their nine higher rates of tax, plus the investment income surcharge, the top 5 per cent of taxpayers bore 24 per cent of the total income tax burden. In 1988–89, in spite of the reductions in the Budget, the top 5 per cent are expected to shoulder 28 per cent of the total burden.
And despite the fact that the total income tax burden has been substantially reduced, to the great benefit of ordinary taxpayers, it looks likely that the single higher rate in 1988–89 will yield at least as much revenue, as a proportion of total taxes and national insurance contributions, as the nine higher rates and investment income surcharge did in 1978–79.
So we have put paid to yet another part of the conventional wisdom: the idea that a progressive income tax system requires a steeply rising schedule of marginal rates.
Moreover, the share of revenues from stamp duties and from capital taxes paid by individuals – in great part by the better off – has risen by a full percentage point.
In short, we are now raising the money to finance public expenditure in a way which imposes much less of a drag on work and effort and enterprise. And that will continue to pay dividends in the years ahead.
The low tax society
That is the economic benefit of low tax rates; but there is a wider benefit too. Because a low tax system is an acceptable tax system.
For almost fifty years, from the outbreak of the Second World War, Britain was a high tax country. Top rates were seldom below 60 per cent, usually very much higher. Left to their own devices, such penal rates of tax would have crippled the economy completely.
Did anybody seriously think, when the decades of high taxation reached their pinnacle of absurdity between 1976 and 1978, that any investor would really pay at the top rate of tax, 98p in the pound, the rate that applied during those dismal years? No, the economy had to develop its own survival [end p14] mechanisms, with avoidance techniques, fiddles and downright illegal evasion. That could only bring the system into disrepute.
We have now brought the top rate down to 40p in the pound, which most people will regard as reasonable. So for the first time in our adult lives, Britain is a low tax country. People will take time to adjust, but it is fair to expect that the tax system will gradually recover the legitimacy of which it was deprived during a period when it was hijacked by the social engineers. And that will be a momentous change.
I believe, too, that in the final decade of this century, the acceptability of the tax system will be further enhanced by the far-reaching reform I announced in this year's Budget to provide independent taxation of husband and wife from 1990. For the greater part of two centuries, ever since the time of the Younger Pitt, a married woman's income has been treated as if it were her husband's. That cannot possibly have engendered respect for the tax system in recent years. Scrapping this outdated rule will be a major milestone, and a very welcome one.
Indeed, we may well come to look back on the 1988 Budget not only as the one which finally marked the end of high tax rates in the UK – a historic turning point if ever there was one – but also as the Budget which marked the end, at long last, of the second-class status of married women.
I said at the outset that the main test by which our tax reforms stand to be judged is their success in helping to improve the performance of the economy. I have offered my own account of the progress to date, and I believe it speaks for itself.
There is still a good way to go. But all the evidence is that we are going down the right road.
Not the least of this evidence is that other countries are doing the same. Reducing income tax rates, in particular, has become part of the new international consensus of the 1980s. The Americans are doing it, and so are the Canadians. The Japanese are doing it, and so are the New Zealanders. Many other countries have also made reductions, or intend to do so. And many leading countries have reformed their corporate taxes along the lines I did in 1984, reducing the rates and reducing the distortions introduced by special investment allowances.
Pretty well everywhere you go, tax reform is now seen as an essential (though difficult) instrument for improving economic [end p15] performance. And it has played a critically important part in Britain's economic renaissance.
But this is only the beginning. Economic policies take years – often generations – to have their full effects.
And tax reform, like other reforms we have introduced, is in the end about changing the very culture of this country. There can be no doubt that this is happening, and will continue for years to come.[end p16]
This appendix sets out the main tax reforms which the Government has made since 1979. The dates refer to the Budget in which a measure was announced; not all were introduced in the same year.
Reforms tax by tax
Basic rate reduced in stages from 33p in the pound to 25p in the pound.
New objective of 20p in the pound set in 1988 Budget.
Personal allowances up by over 25 per cent in real terms.
Top rate of tax reduced from 83 per cent to 40 per cent. All other higher rates – there were nine in 1978–79 – abolished.
Starting point for higher rate tax up over 15 per cent in real terms.
Investment income surcharge of 15 per cent abolished in 1984.
Capital gains tax
Indexation introduced in 1982, and extended in 1985; in 1988, all gains rebased to 1982, so no taxation of ‘paper’ gains.
Rates aligned with income tax in 1988.
Inheritance tax/capital transfer tax
Tax abolished on lifetime gifts made more than seven years before death in 1986.
Threshold more than doubled in real terms.
Fourteen rates of tax on death in 1979, now replaced by single rate of 40 per cent.
Business and agricultural reliefs improved.[end p17]
Major restructuring in 1984:
rate reduced in stages from 52 per cent to 35 per cent;
most 100 per cent first year capital allowances phased out;
stock relief withdrawn.
Small companies rate reduced from 42 per cent to 25 per cent, same as basic rate of income tax.
Companies also benefit from rebasing of capital gains to 1982, and indexation of gains since then; as for individuals, capital gains taxed at same rate as income.
Dual rate of VAT replaced by single 15 per cent rate in 1979.
Base broadened, to include hot take-away food and building alterations in 1984, and advertising in newspapers and periodicals in 1985.
Options introduced in 1987 for small businesses to move to cash accounting to ease cash-flow problems, and (starting in 1988) to annual accounting to ease compliance burden.
Rate on shares halved to 1 per cent in 1984, and again to ½ per cent in 1986.
Maximum rate on land, houses and other buildings halved to 1 per cent in 1984, and threshold raised.
Capital duty and unit trust instrument duty abolished in 1988.
Several minor duties abolished in 1985.
Development land tax
Abolished in 1985.
Surcharge abolished in 1984.
Themes and objectives
Promoting enterprise and participation
Business Expansion Scheme introduced (Business Start-up Scheme 1981, enlarged into BES 1983). Subsequently revised to improve targeting, particularly limitation to £500,000 raised per company per year in 1988.[end p18]
New all-employee share scheme introduced in 1980; successive improvements to that and 1978 profit-sharing legislation.
Employee share option scheme introduced in 1984.
Personal Equity Plans introduced in 1986.
Tax relief extended to new personal pensions in 1987.
Reducing tax reliefs and tax breaks
Life assurance premium relief abolished for new policies in 1984; tax relief for pre-1984 policies reduced in line with basic rate of income tax.
Tax on company cars increased by 150 per cent in real terms.
Commercial woodlands taken out of income and corporation tax in 1988, ending notorious abuse.
Mortgage interest relief withdrawn from home improvement loans in 1988.
New covenants, other than to charity, taken out of tax system in 1988.
New rules introduced in 1986 to limit surpluses which can be built up in pension funds free of tax.
Introduced limit on size of tax-free lump sums, and on tax relief on fast-accrual pensions, in 1987.
Taxation of married couples
Independent taxation of husband and wife from April 1990 (legislation in 1988 Finance Bill), following two Green Papers.
Tax penalties on marriage abolished in 1988 Budget.
Improvements in tax regime for charities and charitable giving in successive Budgets, including:
reduction in minimum period of charitable covenants from 7 to 4 years in 1980;
gifts to charity exempted from stamp duty in 1982 and CTT/inheritance tax in 1983;
employers given tax relief on salary costs of employees seconded to charities in 1983;[end p19]
new Payroll Giving Scheme, to enable individuals to give regularly to charity with tax relief, in 1986;
abolition of limit on higher rate relief for covenanted donations by individuals, in 1986;
tax relief for company donations, in 1986;
extension of VAT concessions for charities, especially for the disabled, in 1986.
Improving tax administration
Computerised Pay-As-You-Earn, to be followed by taxation of the self-employed.
Simplified administration in a number of ways e.g. giving mortgage interest relief at source (MIRAS), extending composite rate to the banks, and taking maintenance payments and non-charitable covenants largely out of tax.
Set up Keith Committee to investigate enforcement powers of the Revenue departments; gradually implementing recommendations.
Planning for the 1990s: legislated for ‘pay and file’ system for corporation tax, to be implemented when new computer system is operational.
Countering tax avoidance
Tax charged on profits of investment in certain offshore funds in 1984.
Tax charged on certain controlled foreign companies in 1984.
Tax advantage in bond washing (conversion of income into capital) eliminated in 1985.
Restriction on use of losses by dual resident companies in 1987.
Unapproved share schemes: simplified and retargeted tax provisions affecting acquisition of shares by employees in 1988.