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Friday, 18 May, 2001, 13:51 GMT
The burden on business

Companies complain that they are paying higher taxes and suffer from more regulations, despite Labour's attempt at a business-friendly image.


BACKGROUND

More than ever, Britain's politicians want to be seen as friends of business.

The demands of Britain's wealth creators - for a stable economy, low taxes and the minimum of government interference - are central to the programmes of the three main parties.

Before the 1997 general election, the Labour Party, for so long the sworn enemy of big business, succeeded in wooing the country's industrial leaders.

But are there signs that Labour's love affair with business is turning sour?

Chancellor Gordon Brown's decision to grant independence to the Bank of England, has been credited with helping to deliver the stable platform for growth long-demanded by business, and the Conservative Party has quietly dropped its opposition to the move.

But Labour's efforts to deliver on taxation and regulation have proved more problematic.

Both the Confederation of British Industry (CBI), which welcomed Labour with open arms in 1997, and the British Chambers of Commerce, have recently criticised Labour for raising business taxes and increasing regulation.


THE TAX BURDEN

Overall tax revenues from business have increased under Labour.

This is partly due to an economy which has grown ahead of expectations. Higher profits result in more tax going to the government.

Gordon Brown has reduced the headline rate of corporation tax - the levy government extracts from company profits - from 33% in 1997 to 30%, among the lowest in Europe.

The rate for smaller companies has been cut from 23% to 21%.

Mr Brown has also pledged that more small companies will be taxed at the basic 10p rate to encourage entrepreneurs.

But - in common with most of Britain's competitors - he has widened the tax base, closing a number of long-standing tax loopholes.

In 1997, Mr Brown abolished dividend tax credits for pension funds, boosting the Treasury coffers by 5bn a year, according to the independent Institute for Fiscal Studies.

In 1998, the chancellor changed the way corporation tax is paid, abolishing Advance Corporation Tax and introducing quarterly payments, raising an additional 2bn a year during a four-year transition period.

These two measures more than outweigh the 3bn cut in corporate tax rates.

Labour has also tried to crack down on tax avoidance by business.

In his March 2000 Budget, Mr Brown launched ambitious plans to clamp down on offshore tax shelters, preventing UK companies from 'mixing' their overseas income with UK profits in order to pay the average tax in both countries.

And small business consultants have been fighting the IR35 regulations which treat them as employees for tax purposes.


CONSERVATIVE PLANS

The Conservatives have pledged to significantly reduce the tax burden on business.

They would scrap Labour's Climate Change Levy - or carbon tax - which is due to come into effect in April this year.

The tax, which is expected to raise about 1bn a year, is designed to penalise heavy producers of greenhouse gases, although most businesses will see an increase in their gas and electricity bills.

The Tories have argued that the net effect of the Climate Change Levy is that big energy-users will re-locate to other countries, leading to no overall reduction in emissions.

But as the carbon tax is to be offset against a 0.3% reduction in employers' national insurance contributions, it is difficult to see how abolishing it would lead to an overall reduction in the tax burden.

The Tories have also pledged to cut 200m from the cost of the business rate, and so have the Liberal Democrats. But Labour plans to allow councils to increase business rates have been scrapped.

In the longer term, the Conservatives want to reduce inheritance and capital gains taxes, which would help many small business owners.


RED TAPE

Successive governments have largely failed to stem the rising tide of regulations affecting business.

Labour has pledged to cut 50 pieces of legislation through its Regulatory Reform Act. The government's Regulation Task Force, under Lord Haskins, has argued the case for more self-regulation.

The government has also tried to clamp down on 'gold plating' of European legislation.

And it has pledged to make government departments review the impact of new laws after three years.

But Labour's commitment to the social chapter and extending rights for working families, such as maternity and paternity leave, has increased red tape, critics say, and led to compliance problems for many businesses.

Labour's manifesto says that "we will work with business and employees to combine flexible working with the needs of business."

And it is considering introducing the right of advance consultation with workers over plant closures "appropriate to national traditions, with a timely discussion of problems."

The Conservatives plan to tackle red tape by setting a regulation budget for each government department, which will be reduced year-on-year.

William Hague has also pledged to establish a de-regulation unit at the centre of government.

All three parties have discussed introducing 'sunset clauses' into new regulation, which expire after a certain length of time unless renewed by parliament.


BOOSTING INVESTMENT

Gordon Brown has offered tax breaks to companies which invest in innovation and new technology in an effort to boost Britain's productivity, which lags behind its major competitors.

In comparison to some of its competitors, the UK's workforce is poorly-trained and under-productive, with factories suffering from a chronic lack of investment.

And there is a concern that the UK is falling behind on research and development (R&D) compared to other countries.

Small firms have been given tax credits for their R&D investment, and Chancellor Gordon Brown has agreed in principle to extend this to multinationals.

But critics claim offering tax breaks - as opposed to grants or loans - is too expensive and unlikely to be taken up by enough businesses to make a difference.

So far the productivity of UK companies has not risen as fast as those of its competitors abroad.



SMALL BUSINESS BURDENS

The burden of tax and regulation weighs heavily on Britain's small businesses and the country's four million self-employed people.

Small firms say they don't have the time or resources to deal with the paperwork generated by VAT, Health and Safety legislation, building and other regulations imposed by Whitehall and, increasingly, Europe-wide through Brussels.

They say they also have difficulty complying with employment laws and tax regulations designed for much larger enterprises.

Labour has allowed small businesses to opt out of stakeholder pensions, the working time directive and - for companies with less than 20 employees - union recognition.


But the payment of welfare benefits through the tax system continues to hurt small companies.

More than 90% of government revenue is collected by the business community, chiefly through the Pay As You Earn (PAYE) and VAT systems.

And initiatives such as the Working Families Tax Credit (WFTC), student loans and the Child Support Agency have extended industry's role as the government's unpaid tax collector.

In 2003 Labour plans to replace WFTC with an employment tax credit - for people on low incomes who don't have children - and a childcare tax credit, which is likely to increase the burden on small businesses further.

The Tories and Liberal Democrats both say they will pay the WFTC as a straightforward benefit. The Tories claim this will save business 10m a year in administration costs.

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