Annex A to Chapter 2:
Explaining the Tax Costings

2A.1 This annex explains how the effects of Budget measures on tax yield are calculated.

2A.2 The revenue effect of a Budget measure is generally calculated as the difference between the tax yield from applying the pre-Budget and post-Budget tax regimes to the levels of total income and spending at factor cost expected after the Budget. The estimates do not therefore include any effect the tax changes themselves have on overall levels of income and spending. They do, however, take account of other effects on behaviour where they are likely to have a significant and quantifiable effect on the yield, and any consequential changes in receipts from related taxes. These include estimated changes in the composition or timing of income, spending, or other tax determinants. For example, the estimated yield from increasing the excise duty on tobacco includes the change in the yield of VAT on that duty, and the change in the yield of VAT and other excise duties resulting from the new pattern of spending. Where the effect of one tax change is affected by the implementation of others the measures are costed in the order in which they appear in Table 2.2.

2A.3 The non-indexed base column in Table 2.2 shows the revenue effect of changes in allowances, thresholds and rates of duty from their pre-Budget levels (including any measures, such as the real increases in fuel and tobacco duties, previously announced but not yet implemented). The indexed base columns strip out the effects of inflation by increasing the allowances, thresholds and rates of duty in line with prices in this and in future Budgets (again taking account of measures previously announced but not yet implemented). Measures announced in this Budget are assumed to be indexed in the same way in future Budgets.

2A.4 In calculating the indexed base it is assumed that each year excise duties and VAT thresholds rise in November (January for alcohol) and allowances and other thresholds rise in April, in line with the assumed increase in the RPI over 12 months to the previous September. The assumed RPI increase in the year to September 1997 is 3 per cent. The commitments for real increases in fuel and tobacco duties of 5 and 3 per cent respectively are also built in.

Notes on individual Budget measures

Inland Revenue taxes

Mortgage interest relief

2A.5 The yield assumes interest rates are unchanged from current levels. There will also be a reduction in public spending of Ł50million in 1998-99 and 1999-2000 on mortgage interest relief for borrowers who are non-taxpayers.

Private medical insurance

2A.6 There will also be a reduction in public spending of Ł5million a year in 1998-99 and 1999-2000 on relief for policy holders who are non-taxpayers.

Tax Credit

2A.7 The yield is estimated from the pre-Budget forecast of dividends and allows for tax relief expected to continue through the use of individual savings accounts when they are introduced during 1999. Allowance is also made for an increase in 1997-98 and 1998-99 in foreign income dividends (which do not carry tax credits) and for a fall in corporation tax resulting from companies increasing their contributions to pension funds. From 2000-01 there will be a cost of Ł50million per year because individuals whose dividend income is partly but not taxed wholly at the higher rate will benefit from the changes.

Foreign Income Dividends

2A.8 The yield is expected to be Ł250 million from 2000-01. The costings allow for companies bringing forward some dividends to before 6 April 1999 to retain the benefits of foreign income dividends.

Double Capital Allowances

2A.9 There will be some increase in tax in later years as the balance of unrelieved capital expenditure carried forward is reduced by the higher allowances. The revenue effects include those for companies and unincorporated businesses.

Films

2A.10 There will be a cost in 2000-01 after which some companies may pay higher tax because their expenditure will have been relieved in earlier years.

Anti-avoidance measures

2A.11 The yields represent the estimated direct effect of the measures with the existing level of activity. Without these measures there could be a more significant loss of revenue in the future.