Pre-Budget Report Summary
8 November 2000
The aim of the Chancellor’s Pre-Budget Report was “to raise the long-term productivity performance and deliver greater employment opportunity and rising prosperity for all”.

Whether or not he succeeded depends on the individual and their circumstances. To help you assess if it will help you, we have produced an outline of the key announcements.

Please contact us if you would like to discuss anything in more detail or take action on any of the points raised.		 Contents
Income Tax
National Insurance Contributions
Employee Issues
Tax Efficient Investments
Pensioners
Business Measures
VAT
Stamp Duty
Transport Measures
Regeneration of Towns and Cities
Income Tax Rates
Allowances

The Chancellor announced that the personal allowances will be increased next year in line with statutory indexation. The proposed allowances are summarised below.
2001/02
£		 2000/01
£
Personal allowance
- under 65 4,535 4,385
- 65 - 74** 5,990 5,790
75 and over** 6,260 6,050
* Married couple’s allowance
- 65 - 74** 5,365 5,185
- 75 and over** 5,435 5,255
- minimum amount 2,070 2,000

**Age allowance income limit
17,600
17,000
Notes

*Qualifies for relief at 10%

**Reduce age allowance by £1 for every £2 of excess income over £17,600
National Insurance Contributions (NICs)
Rates

From April 2001, the starting point for Class 1 employees’ NICs will be aligned with that for employers and the income tax personal allowance - ie £87 per week.

The detailed NIC rates, earnings limits and thresholds proposed for 2001/02 are set out below.
Class 1 (employed)
Employees Contributions
Weekly earnings
Up to £87
£87.01 - £575
Contracted In
Nil*
10%
Contracted Out
Nil*
8.4%
on earnings above £87
Over £575
£48.80 max
£40.99 max
*Entitlement to contribution-based benefits retained for earnings between £72.01 and £87 per week.
Employers Contributions
Weekly earnings
Contracted In
Contracted Out
Up to £87
Over £87
Nil
11.9%
Salary
Related
Nil
8.9%*
Money
Purchase
Nil
11.3%*
on earnings above £87
*11.9% on earnings above £575 per week
Class 2 (self-employed)

 flat rate per week £2.00
small earnings exemption p.a. £3,955 p.a.
Class 3 (voluntary)
 flat rate per week £6.75
Class 4 (self-employed)

 profits £4,535 - £29,900 at 7%
(max £1,775.55)
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EMPLOYEE ISSUES
Capital gains tax (CGT) taper relief

CGT taper relief was introduced in 1998. It reduces the CGT charge the longer an asset has been held prior to disposal. Different rates of taper apply to business and non-business assets. Maximum taper relief reduces the effective CGT rates for a higher rate taxpayer to 10% for business assets and 24% for non-business assets.

The definition of business assets was broadened with effect from 6 April 2000 to include:
  • All shareholdings in unquoted trading companies
  • All shareholdings held by all employees (both full and part-time) in quoted trading companies
  • Shareholdings in a quoted trading company where the holder is not an employee but can exercise at least 5% of the voting rights
Most businesses are treated as trading, but investment companies and property investment companies are not. Companies which are mainly trading, but have more than an insubstantial amount of non-trading activities are also treated as non-trading.

Business assets taper is to be made available, subject to consultation, to more employees by allowing employees of certain non-trading companies to benefit. The change will be effective from 6 April 2000. However, the extension of business assets taper in this way will be subject to some restriction and it seems likely that owner managed businesses will still need to be trading companies in order that their shares qualify for business assets taper.

Enterprise Management Incentives (EMI)

The EMI scheme was introduced in July 2000. It allows small higher-risk trading companies to grant tax-advantaged share options to up to 15 key employees. Each employee can be granted options over shares worth up to £100,000 at the time of the grant.

The Government is proposing to relax the EMI rules so that there would be no maximum number of employees to whom options could be granted, simply an upper monetary limit of £2.5m (increased from the current £1.5m) on the total value of shares under EMI option. This could completely change the nature of the scheme. Currently it is ideal for rewarding a small number of key employees. If the new proposal is enacted, the scheme could benefit the entire workforce.
TAX EFFICIENT INVESTMENTS
ISAs

A number of measures to build on the success of ISAs have been announced. These include:
  • Extending the current ISA £7,000 contribution limit (including up to £3,000 in cash and £1,000 into life insurance) for a further five years until April 2006. This limit was to reduce for 2001/02 to an overall £5,000, of which no more than £1,000 could go into cash and £1,000 into life insurance.
  • Allowing 16 and 17 year olds to open a cash ISA from 6 April 2001. The contribution limits will be the same as for cash ISAs held by those aged 18 and over (ie £3,000 a year until April 2006).
Alignment of PEP rules with ISA rules

The main changes to be made, which will take effect from 6 April 2001, are as follows:
  • There will no longer be a distinction between general and single company PEPs and all PEPs will follow the same rules. Investors will be able to merge their existing general and single company PEPs if they wish.
  • Investments which qualify for inclusion in PEPs will be the same as the less restrictive range which can be included in ISAs. This means that PEP investors will, in the future, be able to invest in the listed shares of companies based anywhere in the world. They will also have access to a wider range of investment funds, corporate bonds and gilts.
Sales of ISAs and stakeholder pensions

CAT ISAs and stakeholder pensions may be available through High Street and internet savings supermarkets early next year. The Financial Services Authority proposes to modernise the rules about the way some investment products are sold. The main change will be to allow investment advisers currently restricted to selling the products of a single company to offer products from a range of providers.
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PENSIONERS
Pension Credit

The Government’s long-term aim is to introduce a Pension Credit from 2003 to reward low and modest income pensioners, and alongside this, introduce tax changes in 2003 to benefit older taxpayers.

Interim measures

A number of measures are being introduced ahead of this:
  • An increase in the Winter Fuel Payment, from £150 to £200 this winter.
  • A rise in the basic state pension of £5 a week next year and £3 a week the year after for a single pensioner, and of £8 a week next year and £4.80 the year after for pensioner couples. This means raising the basic state pension to £72.50 a week in April 2001 and £75.50 a week in April 2002 for single pensioners. For couples the amounts will be £115.90 a week in April 2001 and £120.70 in April 2002.
  • An increase in the Minimum Income Guarantee (MIG). From April 2001, the new, simplified MIG will be £92.15 a week for single pensioners and £140.55 a week for couples rising to at least £100 for single pensioners and £154 for a pensioner couple from April 2003.
BUSINESS MEASURES
Enhancements to the competitiveness of the UK’s tax system have been announced. The measures are all subject to consultation and are aimed at the larger business.

Withholding tax on interest and royalty payments

The Government intends to abolish the requirement to deduct tax at source from most payments of interest or royalties between companies where the recipient company is within the charge to corporation tax on that income. This change would apply from 1 April 2001. Payments to individuals will continue to be paid net of tax.

Intellectual property, goodwill and other intangible assets

The Revenue has published a further Technical Note setting out the options for reform of the taxation of intellectual property, goodwill and other intangible assets. The aim of the reform is to align the taxation of intangibles with the accountancy treatment so far as possible in order to simplify the system and to provide relief for a wider range of business expenses.

Taxation of gains on disposal of substantial shareholdings

The consultation on a new relief for gains on the disposal of substantial shareholdings held by companies is to continue. The Revenue’s proposal is to allow a company making a gain on the sale of a substantial investment in another company to be deferred by reinvesting the proceeds into another shareholding or other business asset.

Other changes

Other changes will be introduced to amend and clarify some of the business measures introduced in the Finance Act 2000. These include:
  • Extending the on-shore pooling rules for double taxation relief to allow relief for rates of foreign tax paid up to 45% even if these arise at several levels in a chain of companies overseas
  • Adjusting and simplifying the calculation of foreign tax for double taxation relief purposes, so that it applies in all cases as originally intended
  • Clarifying the changes to the treatment of inter-company transfer of assets for capital gains
  • Simplifying the legislation concerning corporate debt, financial instruments and foreign exchange gains and losses
Construction Industry Scheme

Following a review of the Construction Industry Scheme (CIS) undertaken this year, the Government has decided to extend the scope of electronic data exchange. As a first step, more subcontractors will be able to qualify for the CIS5 certificate. This will remove the requirement for them to present a certificate in person, and will allow contractors to provide details of payments electronically to the Inland Revenue.

The first change will be to reduce the turnover test for a CIS5 to £1 million. This will take effect from the end of November. The second change will be to allow partnerships to qualify for CIS5 certificates on the same basis as companies. This change requires IT changes so cannot take effect before April 2001.
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VAT
Small and medium-sized businesses (SMEs)

A package of measures will be introduced for SMEs with effect from April 2001. These will include:
  • Increasing the VAT threshold in line with inflation.
  • Increasing the cash accounting scheme turnover limit of £350,000 to £600,000. This should help to ease the cash flow burden for more SMEs.
  • Increasing the upper turnover limit for filing VAT returns on an annual, rather than quarterly, basis from £300,000 to £600,000.
Consultation on a ‘flat rate scheme’. Under such a scheme, SMEs will be able to calculate their VAT liabilities as a percentage of their turnover and avoid having to internally account for VAT on all their purchases and sales. The scheme would be designed to generate broadly the same amount of VAT payable, but would be simpler to use.
STAMP DUTY
Electronic conveyancing

The Electronic Communications Act, which came into force earlier this year, will remove the need for transactions in land and buildings to be on paper.

The Government will introduce legislation to modernise the stamp duty rules to deal with electronic transfers of land and buildings.
TRANSPORT MEASURES
Road fuel duties

All road fuel and other oil duties will be frozen in the 2001 Budget.

The duty on Ultra-Low Sulphur Petrol (ULSP) will be cut by a further 2p per litre thereby widening its differential with standard unleaded petrol to 3p per litre. This cut is conditional on the oil companies guaranteeing nationwide access. Furthermore, the level of duty on Ultra-Low Sulphur Diesel will be considered, with a cut of 3p per litre likely.

Vehicle Excise Duty (VED)

A reduced VED rate (amounting to a £55 discount) for ‘small’ cars was introduced in June 1999. Subject to discussions with motoring organisations, the threshold for the reduced rate will be increased from 1,200cc to 1,500cc backdated to November 2000. As a result, over a third of existing cars will qualify for the lower rate.

Authorised mileage rates

The authorised mileage rates for employees who use their own cars for business travel will be reformed from April 2001 to bring benefits to those who use smaller cars for business purposes. The Government will consult on the introduction of a new system from April 2002 which will pay a single mileage rate to all drivers.

The authorised rate for bicycles introduced in 1999 will be increased from 12p to 20p per mile.

Haulage industry

VED for lorries will be reformed by reducing the rates (by up to 50%) and restructuring the system of bands. Transitional arrangements whereby VED fees for this financial year are rebated will be introduced as a first measure.

Some form of lorry road-user charging such as a ‘vignette’ will be introduced. The main objective of this would be to ensure that foreign hauliers contribute towards the road and environmental costs in the UK.

The Government will create a ring-fenced fund of £100 million to support modernisation in the haulage industry.

Farmers

VED on tractors and other similar agricultural vehicles will be abolished.
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REGENERATION OF TOWNS AND CITIES
The Urban Task Force published a report in 1999 and made 105 recommendations aimed at reversing urban decline and attracting people back into cities, towns and urban neighbourhoods.

The Government plans to introduce a number of measures in the 2001 Budget in response to the Urban Task Force report:
  • Abolition of stamp duty for all property transactions in Britain’s most disadvantaged communities
  • Immediate tax relief to property investors for their clean-up costs - instead of having to wait until the land is sold
  • 100% capital allowances to property owners for the costs of converting redundant space over shops into flats for letting
  • A package of VAT measures to encourage the creation of additional homes including:

    - cutting the VAT rate to 5% for residential conversions; and
    - removing the VAT burden on developers renovating and selling houses which have been empty for at least 10 years
Disclaimer - for information of users
This summary is published for the information of clients. It provides only an overview of the Pre-Budget Report, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this summary can be accepted by the authors or the firm.
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