The Scottish Government

« Previous | Contents | Next »

Listen

Nurturing Wealth Creation

Fiscal regime

Scottish manufacturers' finances are under significant pressure. This partly reflects the difficult economic climate, but policy-driven cost increases, including business tax rises, have also played a key role.

The level of exchange rates has been an additional burden and has resulted in companies facing increased competition on prices in export and home markets.

Sterling appreciated rapidly by about 25% from its 1995 low and has stayed strong ever since. A strong pound is normally associated with the volume of exports falling as well as increased import penetration.

The cumulative tax burden on UK business, aggregated over the eight-year period 1997-98 to 2004-05, has been pushed up by an extra 47 billion as a result of budget measures taken since 1997. This cost increase has serious consequences for the Scottish economy and its population.

Crucially, by inhibiting business investment, the tax burden threatens to hold back the future productivity and competitiveness of Scottish manufacturing. Comparing UK business tax revenues with those of our five most important trading partners, UK taxes on profits were higher in 2000 as a share of national income than in the US, Germany and France.

There should be no further Government-imposed business cost rises of any kind, and therefore no further business tax increases (direct or indirect) of any kind.

Priority should be given to straightforward, across-the-board reductions, not increases, in those taxes which add to the cost base - such as employer National Insurance contributions - alongside specific tax reductions required to address longstanding tax-related problems.

Research and development

The definition of research and development for tax purposes should be extended to cover innovation in product development.

This is particularly important for smaller businesses that tend to conduct research for commercial use, which does not therefore often qualify under the current definition.

Tax benefits for R&D currently only benefit Limited companies (representing 27% of businesses in Scotland). However, DTI statistics show that 60% of commercial innovations come from the SME sector, some of which are unincorporated.

Environmental taxes

There is widespread concern regarding the implications for Scottish manufacturing competitiveness of the current level of environmental taxes; any further increase must be avoided.

CBI research published in 2002 showed that environmental taxes account for a higher share of Government revenue than the EU average. The introduction of the climate change levy package has, in its first year, added significant net costs to UK manufacturing. In the UK, business contributes a disproportionately high share of the environmental tax take (just over half, or 13.7 billion).

VAT differentials

The current trial to reduce VAT to 5% in the construction sector in a number of EU countries appears to have had a significant positive impact on the sector while at the same time reducing the incentive to trade in the black economy.

Small Business Allowance

All small businesses should be treated equally and fairly by the tax system.

While measures to reduce the tax burden on small businesses are welcomed, these should also be targeted at the unincorporated sector. The current distortion is unhelpful and could, in the long term, threaten the existence of the self-employed, partnerships and unincorporated small firms.

The introduction of a zero percent starting rate of corporation tax on the first 10,000 of profits means incorporated businesses can enjoy a tax-free allowance of 14,615. Owners can then pay themselves that amount through a mixture of salary and dividends and not pay tax or national insurance contributions.

Business insurance costs

The announcement in the Pre-Budget Report of a review of employers' liability insurance is welcomed. It is hoped that this will lead to a lasting solution to the problem of high, and in some cases prohibitive, insurance costs for business.

However, it should be noted that the UK Government will receive significant windfall revenue in the form of the 5% Insurance Premium Tax (IPT). The Treasury estimates that it raised 1.9 billion from IPT in the last financial year with the same figure predicted for 2002-03. With the unexpected increase in businesses' insurance costs, there will be an equivalent rise in IPT, making the Government's estimate very conservative.

At the very least, this windfall should be returned to the business sector, through a reduction in the rate of the tax as applied to purchases of insurance by business.

« Previous | Contents | Next »