Nigel Lawson: the tax-reforming chancellor

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Nigel Lawson was appointed chancellor of the exchequer in 1983. He delivered six Budgets from 1984 to 1989 before resigning in October 1989, following policy clashes with the prime minister.

Lawson proclaimed that his 1984 Budget ‘…will be a radical, tax-reforming Budget. It will also significantly reduce the overall burden of tax…

‘My proposals for reform are guided by two basic principles: first, the need to make changes that will improve our economic performance over the longer term; second, the desire to make life a little simpler for the taxpayer.

‘But I am well aware that the tax reformer’s path is a stony one. Any change in the system is bound, at least in the short term, to bring benefits to some and disadvantages to others. And the disapproval of the latter group tends to be rather more audible than the murmurings of satisfaction from the former.’

The big 1984 reform was to company taxation. The main corporation tax rate was cut from 52% to 35% and the small profits rate cut to 30%. This was partly paid for by reducing tax relief on plant and equipment from full expensing to 25% reducing balance allowances. Initial allowances on industrial buildings, which had supported a programme of new manufacturing plants, were withdrawn. The relief for inflation gains on inventory (stock relief) was withdrawn.

The Budget also removed the investment income surcharge; withdrew life assurance premium relief for new policies; and extended the composite rate scheme (a simplified form of withholding tax) to banks as well as building societies. Capital transfer tax (levied on lifetime gifts as well as on estates) was cut from 75% to 60%.

VAT was introduced on hot takeaway food, simplifying the comparison with restaurants, and on building alterations, removing the distinction from already taxable repairs. Finally, the employers’ national insurance surcharge was abolished.

There was little change in 1985, mainly due to the large cost of the year-long miners’ strike, although development land tax was abolished.

Reform returned in 1986, with the start of a programme of cutting the basic rate of income tax, initially from 30% to 29%. Lawson announced the abolition of capital transfer tax on lifetime gifts and its renaming as inheritance tax.

Personal equity plans – the forerunners of today’s ISAs – were introduced to encourage wider share ownership. A Green Paper was published to discuss options for the reform of income tax for married couples.

Budget 1987 brought modest change. Company capital gains were to be taxed at corporation tax rates. Companies formed before 1965 (when corporation tax was introduced) had been allowed up to an extra year to pay their corporation tax, which unsurprisingly had been exploited. The advantage was abolished and the introduction of pay and file for companies announced, as part of modernising the tax collection process.

Profit related pay was introduced, which was turned by advisers into a clever way to boost employee take-home pay without cost to employers, during the economic challenges of the early 1990s. The chancellor’s ambition that employers would share profits with all employees was never realised.

The VAT cash accounting scheme and annual returns were introduced. As with most Lawson Budgets, the VAT registration limit was introduced to the maximum permitted under EU rules.

Inheritance tax bands were simplified with a reduction from seven bands to four, although the range of rates (30%–60%) remained.

Finally, the next instalment of income tax basic rate cuts was announced, with a cut to 27%.

Nigel Lawson’s final reforming Budget was delivered on 15 March 1988 and focused on personal taxation. The final basic rate tax cut – to 25% – was delivered, and a new ambition of 20% set for the future.

More reform of inheritance tax was announced, with an enhanced nil rate band of £110,000 and a new flat rate of 40%, instead of the 30-60% rates previously.

The major announcement, though, was the introduction of independent taxation from April 1990. It seems strange to us today that the income of a married woman would be taxed on her husband – but that of course had prevailed since the 19th century. The new system gave every individual a personal allowance but to ensure that married men did not pay extra tax, the married allowance was retained and initially given to the husband, subject to the ability to transfer. The reform cost over £500m in 1990/91.

Capital gains tax rates were aligned with income tax rates. This was a cut for basic rate payers but an increase for higher rate taxpayers. It was accompanied by a rebasing to 1982 values to remove inflation from tax. The speech noted that some taxpayers had the ability to choose whether to receive capital gains in place of income – an issue which remains highly topical.

Finally, Lawson set the higher rate of tax at 40%, abolishing the five higher rates (up to 60%) that previously existed.

The 1989 Budget brought little of significance, not least because of the increasingly difficult economic climate.

How should we assess Nigel Lawson’s tax reforms? There can be no doubt that delivering tax reform is much easier when there is money available. His major reforms to income tax and inheritance tax live on. Personal equity plans became TESSAs and are now ISAs. Linking the rates of capital gains tax and income tax lasted a decade, until Gordon Brown introduced taper relief and Alistair Darling brought in the 18% rate in 2008. Corporation tax remained on the path set by Lawson until recently, when the rate increased, and full expensing returned. His use of Green Papers to discuss potential changes could easily benefit the reform process today.