Summary of Taxation Provisions

In his sixth Budget, the Chancellor introduced a number of important new measures and confirmed many of the changes already announced in his pre-Budget report and in March 2002.

The biggest single revenue raising initiative was to impose a 1% increase in employers’, employees’ and the self-employed rate of national insurance contributions (NIC) from April 2003. Unlike the main NIC charge, there will be no ceiling on the 1% charge. There will also be significant changes to the system of tax credits for families and children from April 2003.

In the current year, there have been changes to the taxation of businesses and companies. The starting rate of corporation tax is reduced from 10% to 0% for the first £10,000 of profits and the small companies’ rate is reduced from 20% to 19%. There are changes to the way small businesses can account for VAT and to the rules for VAT bad debt relief.

A number of changes had been announced before Budget day, including changes to capital gains tax business taper relief.

Personal allowances 2003/04

In 2003/04, the income tax personal allowance for those aged under 65 will be frozen at the 2002/03 level (£4,615). However, the personal age allowances next year will increase to £6,610 for those aged 65-74. For those aged 75 and over, the increase will be £240 over statutory indexation.

Child and working tax credits

From 2003/04, the working tax credit (WTC) will replace the working families’ tax credit (WFTC), the disabled person’s tax credit (DPTC) and the New Deal 50+ employment credit. At the same time, the child tax credit (CTC) will replace the children’s tax credit and the income-related child elements of WFTC, DPTC, income support and jobseeker’s allowance.

The WTC will be extended to people aged 25 or over who do not have either children or a disability and who work at least 30 hours a week. It will provide a minimum income of £154 a week for a single person and £183 a week for a couple. The minimum income for a disabled person will be £194 a week.

The value of the element of CTC which replaces the existing children’s tax credit will be £545 a year, a figure which is doubled in the year following a child’s birth. Entitlement to the credit will be based on a couple’s joint income and will be gradually withdrawn if that income exceeds £50,000. The Inland Revenue will pay the credit to the child’s main carer.

The company car fuel scale charge for 2002/03 will be as follows:

Authorised mileage rates

The authorised mileage rates that an employer can pay employees free of tax and NIC for business use of their own cars will be:

The rates are based on the number of miles the vehicle is used for business purposes during the tax year.

The small companies' corporation tax rate, for profits up to £300,000, is reduced to 19% from 20% and the starting rate will be 0% from 1 April 2002. The rates are as follows:

Profits	Effective rate	Profits	Effective rate
£	to 31/03/03	£	to 31/03/02
0-10,000	NIL	0-10,000	10%
10,001-50,000	23.75%	10,001-50,000	22.5%
50,001-300,000	19%	50,001-300,000	20%
300,001-1,500,000	32.75%	300,001-1,500,000	32.5%
1,500,001 and over	30%	1,500,001 and over	30%

A consultation document to be issued in summer 2002 will consider structural reforms of the corporate tax system, including taxing corporate gains in the same way as income and aligning the treatment of investment and trading companies.

Research and development

Large companies will qualify for an additional 25% deduction from their taxable income for revenue expenditure on research and development (R&D) from 1 April 2002. So a company spending £100,000 on qualifying R&D will be able to deduct £125,000 from profits liable to corporation tax. The existing scheme for small and medium companies continues unchanged.

Capital allowances

All businesses will be able to claim a 100% first year allowance on the purchase of low-emission cars for business use. The car must be registered after 16 April 2002 and emit not more than 120g/km CO2. Cars that qualify will not be subject to the rules for cars costing over £12,000. The allowance will be available until 31 March 2008. There are also 100% allowances for designated energy-saving technologies for leasing, letting or hire.

Intellectual property and other intangibles

All companies will get tax relief for the cost of intangible assets, such as goodwill, for expenditure incurred after 31 March 2002. The relief will normally be equal to the amortisation shown in the accounts, with a 4% alternative rate. Relief will also cover the creation of intangible assets, including abortive expenditure and royalty payments.

Cross border royalties

From 1 October 2002, an optional scheme will allow companies to pay royalties at a rate specified in a double taxation treaty without seeking prior clearance from the Inland Revenue. The company must have a reasonable belief that the beneficial owner of the royalties is entitled to relief from UK tax under the treaty. However, if treaty relief turns out not to be due, the payer will be liable to pay the tax that should have been deducted.

Employer-subsidised buses

The tax exemption where employers subsidise public bus services is being extended. From 6 April 2002, employees will not be liable to income tax or national insurance where an employer subsidises a bus service and the employees pay reduced or no fares.

Denying tax relief for bribes

From 1 April 2002, bribes paid overseas do not attract UK tax relief even where the bribe is not an offence in the UK.

UK branches of foreign companies

Changes to the rules for calculating the profits of a UK branch of a foreign company will limit the deduction they can claim for interest. In effect, from 1 January 2003 branches with little equity capital will be taxed as if some of their debt were equity.

Exemption for substantial shareholdings

No tax will be payable on capital gains on disposals of most shareholdings of at least 10% by trading companies and groups. The shares must be in a qualifying trading company or the holding company of a trading group. This measure took effect from 1 April 2002.

Corporation tax on exchange differences will now come under either the loan relationship rules or the derivative contract rules. New rules will be introduced for derivative contracts and the loan relationship rules for bad debts are being changed. The changes generally take effect for accounting periods beginning after 30 September 2002.

Venture capital trusts (VCTs)

Investors in VCTs will retain their tax reliefs when VCTs merge or are wound up. The new rules take effect from 17 April 2002.

Construction industry scheme (CIS)

Companies operating as subcontractors in the construction industry scheme can set off tax deducted from income against PAYE and NIC liabilities and any CIS liabilities due from their own subcontractors. The change, effective from 6 April 2002, should improve their cash flow.

Electronic filing of PAYE returns

Employers with at least 250 employees will have to file PAYE returns electronically from 2005 and those with 50 to 249 employees must do so from 2006. Employers with under 50 employees will have incentives to file electronically from 2005 and must do so from 2010.

Landfill tax

The standard rate of landfill tax is increased from £12 per tonne to £13 from 1 April 2002.

Recovery of tax debts

The Inland Revenue will be able to recover tax debts across the EU from Royal Assent to the Finance Bill. Where a taxpayer with unpaid income tax, corporation tax or capital gains tax liabilities has assets or is resident in another EU state, the UK authorities will be able to request the other state to attempt recovery. Other EU states will be able to recover tax debts in the UK.

A number of changes were announced to benefit charities:

• New incentives will encourage taxpayers to give to charity when they make their tax returns from 2003 and 2004. Higher rate taxpayers will be able to carry back their gift aid relief to the previous tax year and nominate a charity to receive all or part of the tax repayment due.
• Individuals who make gifts of land or buildings to charity may claim income tax relief from 6 April 2002. The property may be leasehold or freehold and must be accepted by the charity. A corresponding corporation tax relief for company donations applies from 1 April 2002.
• From 1 April 2002, community amateur sports clubs (CASCs) are exempt from tax on disposals of assets, on property income up to £10,000, on all interest and on trading income up to £15,000. Individual donors to CASCs are able to claim gift aid relief, inheritance tax relief and capital gains tax relief (on a no gain/no loss basis) from 6 April 2002. Business donors may also claim the capital gains tax relief and relief for gifts of trading stock and plant and machinery.
• From 1 June 2002, charities which construct a new annex to a building will qualify for zero rating on that part of the building which is used for a charitable purpose. Currently zero rating applies only if the whole annex has a charitable use.
• Certain buildings acquired on a zero rated basis for non-business charitable or residential use are subject to VAT if the building's use changes in a way that removes the zero rating during the first ten years. From 1 June 2002, a time apportioned method of calculating the value subject to VAT will be introduced.

Inheritance tax

The inheritance tax nil rate band is increased to £250,000 with effect from 6 April 2002.

Powers over trusts

Powers over trusts will be ignored for inheritance tax purposes, generally reversing the decision in the case of Melville v CIR and stopping them being used for capital gains tax planning. The change is operative from 17 April 2002, but the new provision will be treated as if it had always had effect on a person's death.

Capital gains tax business assets taper relief

For disposals after 5 April 2002, the following scale of taper relief will apply to business assets:

Complete years owned	1	2	3	4
Business assets 2002/03	50	25	25	25
Business assets 2001/02	87.5	75	50	25

Capital gains tax changes

A range of changes to capital gains tax (CGT) will be introduced including:

• From 6 April 2002, business owners can elect that incorporation relief should not apply. This could be advantageous for their entitlement to taper relief if they incorporate their business and then dispose of the shares in the new company soon after.
• Where an employee has acquired shares on the same day with different acquisition values, from 6 April 2002 he or she can choose to dispose of the shares with the smaller capital gain in priority to the shares with the larger gain. This could help employees selling shares acquired under different share option schemes.
• Some debentures acquired as a result of share or security exchanges in corporate mergers will qualify for CGT taper relief where they are disposed of after 5 April 2001.
• Trading losses of unincorporated businesses incurred from 2002/03 can be offset against taxable gains before applying taper relief.
• For disposals on or after 17 April 2002, the definition of ‘trading company’ will be based on the activities of the company, not its purposes.

Transfers of goodwill

For all documents executed after 22 April 2002, transfers of goodwill will be exempt from stamp duty. The change brings the treatment of goodwill into line with that of intellectual property.

Land and buildings

A range of measures, which will be effective from shortly after 17 April 2002, aims to limit stamp duty avoidance on commercial property transactions. These include reducing the scope of group relief and extending the penalty regime to documents executed overseas relating to UK property.

A consultative document has been published containing proposals to modernise the framework for stamp duty. Legislation will be introduced in Finance Act 2003.

Disadvantaged areas

Stamp duty will be abolished for all non-residential property transfers in disadvantaged areas once EU state aids approval is obtained.

VAT

Registration threshold

From 25 April 2002, businesses will have to register for VAT when their turnover has exceeded £55,000 in the previous 12 months or less, or is likely to exceed £55,000 in the following 30 days. The deregistration limit is increased to £53,000 from the same date.

VAT fuel scale charges

New scales apply from the start of the first accounting period beginning after 30 April 2002.

	3 month period				1 month period
	Diesel car		Petrol car		Diesel car		Petrol car
Cylinder	Scale	VAT	Scale	VAT	Scale	VAT	Scale	VAT
capacity	charge	due per	charge	due per	charge	due per	charge	due per
	£	£	£	£	£	£	£	£
Up to 1,400cc	212	31.57	226	33.65	70	10.42	75	11.17
1,401-2,000cc	212	31.57	286	42.59	70	10.42	95	14.14
Over 2,000cc	268	39.91	422	62.85	89	13.25	140	20.85

Bad debt relief

Businesses will not have to tell debtors that they have made a claim for bad debt relief from a date to be announced. Businesses that have claimed input tax on a purchase or expense will have to repay the input tax if they have not paid the supplier within six months of the date of the supply.

Annual accounting scheme

Businesses with a taxable turnover up to £100,000 will no longer have to be registered for VAT for 12 months before joining the annual accounting scheme. The scheme allows businesses with an annual turnover of up to £600,000 to make one VAT return a year instead of four and make estimated interim payments. The change takes effect from 25 April 2002.

Optional flat rate scheme

Small businesses will be able to calculate their VAT as a flat rate percentage of total turnover, simplifying the records they have to keep. In order to join the scheme, they must have an annual taxable turnover of £100,000 or less and total turnover of £125,000 or less; both figures are exclusive of VAT. The rate charged will vary according to the type of business. The scheme will be available from 25 April 2002. Businesses that join the scheme will still have to issue normal VAT invoices to business customers.

Partial exemption

Businesses that are partially exempt from VAT will have to adjust the input tax deductible under the standard method, if that amount is substantially different from an attribution based on the use of purchases. ‘Substantially’ is defined as £50,000 or more, or at least half the value of the residual input tax but not less than £25,000. The adjustment, which affects input tax incurred after 17 April 2002, must be made at the end of the business’s VAT year.

From 1 June 2002, partially exempt businesses that produce printed matter for use within the business will no longer have to account for VAT when the value exceeds the registration limit.

Extensions of the reduced rate

The reduced 5% rate will be extended to new types of conversions and renovations from 1 June 2002. They include converting a non-residential property into a care home or multiple occupancy dwelling, converting certain other buildings into multiple occupancy dwellings and renovating or altering care homes and multiple occupancy dwellings that have been empty for at least three years. From 1 June 2002, additional types of heating equipment will qualify for the 5% rate where it is installed in the homes of people who qualify for certain government or local authority grants.

Invoicing

Changes will be made to the requirements that VAT invoices must satisfy. Sending invoices electronically will also be made easier. The measures are in line with an EC Directive and will come into effect in phases between 1 April 2003 and 1 January 2004.

Imports

Relief for import VAT will be extended to goods coming into the UK from other EU member states from the date of Royal Assent to the Finance Bill. The supplier and purchaser must both be VAT registered.

National insurance contributions (NICs)

From 2003/04 there will be important changes to NICs.

• For employees and employers, there will be an additional NIC of 1% for all earnings above the NIC starting point which will be frozen at £89 a week in 2003/04. The NIC rates are:

• For self-employed people there will be an additional class 4 NIC of 1% for all profits above the lower profits limit, which will be frozen at £4,615 a year in 2003/04. This will mean that NICs will be charged at a rate of 8% on profits between the lower and upper profits limit (£30,420 a year in 2002/03) and at 1% on profits above the upper profits limit.

Class 1 (Employees)

Contracted into State Second Pension S2P/serps (rates based on total earnings)
	2002/03			2001/02
Employee	No NICs where earnings			No NICs where earnings
	are up to £89 a week			are up to £87 a week
Employer	10% NICs on £89.01- £585 a week			10% NICs on £87.01- £575 a week
	No NICs on the first £89 a week			No NICs on the first £87 a week
	11.8% NICs over £89 a week			11.9% NICs over £87 a week
	2002/03			2001/02
Earnings	Weekly	Monthly	Annual	Weekly	Monthly	Annual
limit or threshold	£	£	£	£	£	£
Lower limit (LEL)	75	325	3,900	72	312	3,744
NICs start	89	385	4,615	87	378	4,535
Upper limit (UEL)	585	2,535	30,420	575	2,492	29,900
Contracted-out S2P/SERPS rebate			2002/03		2001/02
Reduction on weekly band earnings			£75.01-£585		£72.01-£575
Employer rate reduction
Salary-related scheme			3.5%		3.0%
Money-purchase scheme			1.0%		0.6%
Employee rate reduction			1.6%		1.6%

Class 1A: On car &fuel benefits and most other taxable benefits: 11.8% (11.9% 2001/02)
Class 2 (Self-employed)	2002/03	2001/02
Flat rate	£2 pw £104 pa	£2 pw £104 pa
If earnings are over	£4,025 pa	£3,955 pa
Class 4 (Self-employed)	2002/03	2001/02
Flat rate	7% (max £1,806.35)	7% (max £1,806.35)
On profits	£4,615-£30,420 pa	£4,535-£29,900 pa
Class 3 (Voluntary)	2002/03	2001/02
Flat rate	£6.85 pw £356.20 pa	£6.75 pw £351.00 pa

The summary has been prepared very rapidly and may contain errors for which we cannot be responsible. The proposals are in any event subject to amendment before the Finance Act is passed.

2001 Budget Summary