Summary of Taxation Provisions

In his fifth Budget – probably the last before the next general election – the Chancellor introduced a number of new measures and confirmed many of the changes already announced in his Pre-Budget Report. Most tax bands and allowances have been increased in line with inflation, except the 10p starting rate band, which rises further to £1,880. The new children’s tax credit will be worth up to £520 a year for 2001/02.

A package of VAT measures will help small and medium size enterprises. It includes increases in the limits for the cash accounting and annual accounting schemes to £600,000. Companies will be able to issue up to £3 million of share options under an Enterprise Management Incentive scheme. Companies will no longer have to deduct tax from interest, royalties and annual payments to other UK companies.

The press releases and newly introduced ‘Budget Notes’ contained much more detail than was given in the Chancellor’s speech. They are available on the Inland Revenue website www.inlandrevenue.gov.uk, and the Customs and Excise website www.hmce.gov.uk.

The following computations show the effects of the tax and national insurance changes in the Budget. In both cases, the individual is employed, contracted into SERPS, and has one child:

The basic adult credit in working families tax credit (WFTC) and disabled person’s tax credit (DPTC) will be increased by £5 a week from June 2001. The new WFTC rates, combined with the forthcoming increase in the national minimum wage to £4.10 an hour, will mean that the minimum income for a family with a full-time earner will rise to £225 a week in October 2001.

The children’s tax credit (CTC) will be increased from a maximum of £442 to £520 when it is introduced in April 2001. From April 2002, the CTC will be further increased to a maximum of £1,040 in the year of a child’s birth.

The overall ISA investment limit will be maintained at £7,000 for a further five years, as announced in the Pre-Budget Report. From 6 April 2001, 16 and 17 year olds will be able to invest up to £3,000 a year in the cash component of an ISA. At the same time, the ISA rules on investments and transfers will be extended to PEPs.

From 6 April 2001, the taxation of partial assignments of life assurance policies will be changed to ensure that any liability falls on the assignor, rather than the assignee, and that there is consistent treatment of assignments under English and Scottish Law. From 6 April 2002, life insurers will be required to provide details of the amount of chargeable gains to policyholders.

The company car fuel scale charge for 2001/02 will be as follows:

As announced in the Pre-Budget Report, the authorised mileage rates for 2001/02 will be:

A single scale of 40p a mile for the first 10,000 miles and 25p thereafter will apply to all cars in 2002/03. The authorised mileage rates are the amounts an employer can pay employees free of tax and NIC for business use of their own car.

The exemption that allows employees to travel from home to work free of tax and NICs on an employer-provided bus with 12 passenger seats or more will be extended to mini-buses with 9-11 passenger seats.

The government will consult on a proposal to simplify the taxation of small businesses by aligning their profits for tax purposes broadly with those reported in their accounts.

Changes will be made to detailed aspects of the rules introduced in the Finance Act 2000 on the chargeable gains of groups of companies. The main changes are intended to remove uncertainty about the transitional rules applying to degrouping transactions. They will also enable expenses incurred on the disposal of an asset to be relieved by the company deemed to sell the asset following an election under the new rules. The changes will be retrospective to 1 April 2000.

Businesses will be able to claim 100% first year allowances on the cost of designated energy-saving plant and machinery. Expenditure can qualify if the equipment is included in the Energy Technology List, to be issued by 1 April 2001.

Capital allowances for flats over shops

The Chancellor confirmed that 100% first year allowances will be available on the cost of renovating or converting vacant or under-used space above shops and certain other commercial premises to provide flats for rent. Expenditure will qualify for the allowance from the date of Royal Assent of the Finance Act 2001. Several criteria must be met for the expenditure to qualify. Properties constructed after 1979 and high value or large flats will be excluded.

The government has published draft legislation to replace the existing income spreading rules for creative artists with a profits averaging system. The first years that will be available for averaging are 2000/01 and 2001/02.

The rules that require companies to withhold tax on payments of interest and royalties to other UK companies will be abolished, as announced in the Pre-Budget Report. The proposal has now been widened to include annual payments and annuities. From 1 April 2001, a paying company will not have to deduct tax, if it reasonably believes that the recipient company is within the charge to corporation tax on the payment. Payments to individuals will continue to be made net of tax.

The upper limit for allowable expenditure on business gifts will be increased from £10 to £50. A similar change is being made for VAT. The change applies to periods of account beginning after 31 March 2001 for corporation tax and from 2001/02 for income tax. The gift must bear a conspicuous advertisement for the donor’s business and not be food, drink, tobacco or vouchers.

A loophole in the anti-avoidance rules for controlled foreign companies (CFCs) has been closed. The measure is aimed at tax avoidance schemes that exploit the exemption for CFCs that pay at least 90% of their profits as dividends to UK taxpayers. From 7 March 2001, dividends paid to banks, insurance companies and other financial institutions will not count towards the acceptable distribution exemption, if they are involved in a UK tax avoidance scheme.

The Finance Act will introduce an accelerated repayable tax credit for costs incurred by companies in cleaning up contaminated land sites. The scheme will provide an enhanced deduction of 150% for all companies. Companies that have unrelievable losses as a result of the deduction will be able to surrender them to the Exchequer in exchange for a payment. The scheme will apply to costs incurred from the date of Royal Assent of the Finance Act 2001.

The government will publish a further consultation paper in June making detailed proposals for a new tax deferral scheme for chargeable gains incurred by a company on the disposal of a shareholding of at least 20% in a trading company or holding company of a trading group. The gain would have to be reinvested in a substantial shareholding in another trading company or in business assets within the existing business rollover relief regime.

The formula used to calculate the mixer cap will be simplified for dividends paid to the UK after 30 March 2001. Foreign tax arising at more than one level in a chain of companies will count towards the final measure of relief. The rate of underlying tax paid on dividends from UK subsidiaries of overseas holding companies will be deemed to be equivalent to the current rate of corporation tax and it will be possible to make a partial claim for relief for foreign tax.

The government has published a consultation paper on a new tax incentive aimed at encouraging innovation by larger companies. The paper proposes an incremental tax credit that will increase in proportion to a business’s additional R&D expenditure above current levels.

Tax relief for expenditure on films is to be extended to 1 July 2005. The main relief allows for 100% write-off for tax purposes, on completion, of the production and acquisition costs of ‘British qualifying’ films with budgets of £15 million or less.

The proportion of money raised under EISs, VCTs and CVSs that has to be used for qualifying business activities within 12 months is being reduced. For shares issued on or after 7 March 2001, only 80% (previously 100%) need be wholly employed within 12 months of raising money or starting the business activity. Any remaining capital must be employed within the following 12 months.

For shares in EIS companies issued on or after 7 March 2001, there will no longer be a requirement that the EIS company remains unquoted for three years if investors are not to lose tax relief. Instead, the EIS company will have to be unquoted when the shares are issued and have no arrangements at that time to cease to be an unquoted company. Loss relief on unquoted trading company shares will be extended to cover unquoted companies which subsequently become quoted.

The maximum value of share options that can be granted under EMI will be doubled to £3 million and the limit on the number of employees (currently 15) will be removed. Four other changes will be made:

• The time limit for notifying the Inland Revenue of the grant of EMI options will be increased from 30 days to 92 days;

• The requirement for prior Inland Revenue approval of share capital changes will be removed;

• There will no longer be a ‘key’ employee requirement. Any employee will be eligible;

• From 6 April 2001, the Inland Revenue will be prepared to give an ‘advance assurance’ about whether a company meets the criteria for a qualifying EMI.

Legislation will remove the potential double charge to stamp duty when an AESOP trust buys shares and an employee subsequently buys those shares. The employee purchase from the trust will be free of stamp duty.

There will be a reduction from 40% to 35% in the special tax charge on payments to employers out of surplus funds from tax approved pension schemes. The new rate will apply to all payments made after the date of Royal Assent of the Finance Act 2001.

By 1 January 2002, general betting duty will be replaced with a gross profits tax, using a rate of 15% applied to gross margins. The exception will be spread betting, where rates of 3% on financial bets and 10% on other bets will be used.

CAPITAL TAXES

The inheritance tax threshold will be raised from £234,000 to £242,000 from 6 April 2001.

The capital gains tax annual exemption will increase from £7,200 to £7,500 for 2001/02.

Business assets taper relief for capital gains tax will be extended to shareholdings of employees of non-trading companies. The change will be made retrospective to 6 April 2000. The enhanced relief will not be available to employees with a material interest in a non-trading company, which is taken to be a holding – together with associates of – over 10% of voting rights.

Gains in investments held by non-resident close companies will no longer be attributed to UK resident participators where:

• The resident participator has an interest of not more than 10% in the gain; or

• The gain arises on assets used outside the UK in a trade carried on outside the UK; or

• The gain would be attributed to an exempt approved pension scheme.

Stamp duty – individual pension accounts (IPAs)

Draft legislation has been published to implement the stamp duty reserve tax (SDRT) exemption for unit trusts and open-ended investment companies held within IPAs.

Stamp duty will be abolished for all property transactions in designated disadvantaged areas from the date of Royal Assent of the Finance Act 2001.

VALUE ADDED TAX

From 1 April 2001, businesses will only have to register for VAT when their turnover has exceeded £54,000 in the previous 12 months or less, or is likely to exceed £54,000 in the next 30 days. The deregistration limit is increased to £52,000 from the same date.

The annual accounting scheme will be extended to businesses with an annual turnover of up to £600,000 from 1 April 2001. Businesses already operating the scheme will be able to stay in it until their taxable turnover reaches £750,000. Annual accounting allows businesses to make just one VAT return a year and to make estimated interim payments.

The annual turnover limit to join the cash accounting scheme will increase from £350,000 to £600,000 from 1 April 2001. Businesses already in the scheme will be able to continue operating it until their turnover reaches £750,000. Cash accounting enables businesses to account for VAT on the basis of payments received and made, rather than on invoices issued and received.

The government will consult in the summer on a new optional flat rate scheme for businesses with a turnover of up to £100,000, under which VAT would be calculated as a percentage of a business’ taxable turnover. Small businesses would also be allowed to join the annual accounting scheme immediately instead of waiting for a year after registration.

The rules on zero rating young children’s clothes and shoes will be revised from 1 April 2001. The maximum sizes will be increased and separate clothing sizes will be specified for boys and girls.

Also from 1 April 2001, a wider choice of vehicles will come within the scope of the existing zero rate for motor vehicles designed or adapted for use by people with disabilities.

VAT on children’s car seats will be reduced from 17.5% to 5% from the date of Royal Assent of the Finance Act 2001. Adult cycle helmets will be zero rated from 1 April 2001 in line with children’s cycle helmets. The helmets must meet required safety standards.

VAT will be reduced to 5% for the costs of:

• Converting residential properties into a different number of dwellings;

• Renovating homes that have been empty for three years or more;

• Converting residential property into residential communal homes, such as care homes and homes with multiple occupation.

The sale of renovated houses that have been empty for 10 years or more will be zero-rated. These changes will take effect shortly after the date of the Royal Assent of Finance Act 2001.

A UK-wide grant scheme will have the effect of reducing the VAT cost to 5% on the repair and maintenance of listed buildings used as places of worship from 1 April 2001. European Union rules did not allow an actual VAT reduction.

Free admission to museums and galleries

The main national museums and galleries will be able to provide free admission and still recover the VAT on their expenditure. The scheme will be introduced by September 2001 after consultation, but museums and galleries will be able to recover VAT incurred from 1 April 2001.