Annex A to Chapter 6 Explaining the costings


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

The general approach

6A.1 The revenue effect of a Budget measure is 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 may 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 effect on the yield, and any consequential changes in receipts from related taxes. 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 6.1.

6A.2 The non-indexed base column in Table 6.1 shows the costs of allowances, thresholds and rates of duty which applied before this Budget (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.

6A.3 In calculating the indexed base it is assumed that each year excise duties rise in November (January for alcohol) and allowances and thresholds rise in April, in line with the assumed increase in the RPI over 12 months to the previous September. The increase in the year to September 1996 was 2.1 per cent. The commitments for real increases in fuel and tobacco duties of 5 and 3 per cent respectively are also built in. The RPI assumptions are 2 1/2 per cent, 2 per cent and 2 per cent for September 1997, 1998 and 1999 respectively.

Notes on individual Budget measures

The numbers below refer to lines in Table 6.1.

Inland Revenue taxes

The costs of the following measures in a full year, against an indexed base, are:

1£1,140 million
2£110 million
5£70 million
7£1,700 million.
3,4The increases in allowances and limits are rounded according to statutory rules after being increased in line with the rise in the all items Retail Prices Index in the year to September 1996.
14The yield in 2000-01 is £3,100 million.
15The yield increases over the next 10 to 20 years. The actual amounts depend on future investment levels.
17The yield in future years is likely to be less than £200 million per year.
18 to 21The 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.

Customs and Excise taxes

28Costings assume an implementation date of 1 May 1997; the effective date however depends on EC agreement on the necessary derogation.
38Costings assume an implementation date of 15 May 1997; the effective date however depends on EC agreement on the necessary derogation.

Revenue effects in

1996-97

A number of Budget measures have non-negligible revenue effects in the current financial year, 1996-97. These are summarised below:

Measures in 1996 Budget which have non-negligible revenue effects in the current year
£ million
yield (+)/cost (-) of measure
Changes from an indexed base
1996-97
26 VAT: bad debt relief30
29 VAT: "unjust enrichment" and statutory interest-60
33 Beer, wine and cider-15
34 Spirits-10
36 Tobacco30
37 Petrol and diesel35
40 Minor oils35
Total -15

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[Prepared November 1996]