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| A summary of the Chancellor's statement on Wednesday 7 March 2001 Our Budget booklet summarises the main proposals on taxation outlined by the Chancellor of the Exchequer in his Budget Statement of 7 March 2001 and in certain other announcements. We have prepared this account especially for our clients. We outline the issues that will affect you, your family and your business and include informative comments to show you the likely effect and significance of the proposed measures. This information is prepared to help you identify areas where the Budget proposals may affect you. Please contact us for advice or to discuss any action you may need to take. |
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| Income Tax | |||
Tax rates There has been no change to the income tax rates which therefore remain as a starting rate of 10%, basic rate 22% and higher rate 40%. The bands have been extended so that for 2001/02, the 10% starting rate applies to the first £1,880 of taxable income and the basic rate applies to taxable income from £1,881 up to the new higher rate threshold of £29,400. |
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| Comment Complications in the system however continue. Savings income continues to be taxed at 20% on income in the basic rate band and 40% above that. Dividends are charged at 10% on income in the basic rate band and 32.5% above that. So much for a simplified tax system! |
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Allowances The personal allowance will rise to £4,535 for 2001/02. For those aged 65-74 the corresponding figure will be £5,990 and £6,260 for those aged at least 75. The income limit for age related allowances will be increased to £17,600. The married couple’s allowance remains available only to couples where at least one spouse was aged 65 or over before 6 April 2000. |
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| Children’s tax credit The children’s tax credit which was originally announced two years ago will be introduced in April 2001. It replaces the married couple’s and associated allowances which were withdrawn last year. It takes the form of an allowance for which relief will be given at 10%. For 2001/02 the amount is £520 ie £5,200 at 10%. As previously announced, the credit will be gradually withdrawn where the person claiming it is a higher rate taxpayer. In 2001/02, those with taxable income above £37,200 will not be eligible for any credit. |
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| Comment The Government has embarked on a publicity campaign because many people have not registered to receive the children’s tax credit. The amount of the credit for 2001/02 will, as previously hinted at by the Chancellor, be set at £10 per week. The original weekly amount suggested two years ago was £8 a week. |
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To recognise the additional costs of a new child in the first year, from April 2002 the credit will be increased by a further £10 a week, (£520 a year) for families in the year of a child’s birth. |
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| Comment The “baby credit” is designed to recognise the costs of having a new baby. The credit will be worth in total up to £20 a week or £1,040 a year for some families. |
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Working Families Tax Credit (WFTC) and Disabled Person’s Tax Credit (DPTC) The credits are to be increased from June 2001 by £5 a week. To provide further help with childcare costs, from June 2001 the limits will be increased to £135 a week for childcare costs for one child and to £200 a week for two or more children. Statutory Maternity Pay (SMP) and parental leave A package of new measures was announced: |
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| • SMP increased from £60.20 to £75 a week from April 2002 and £100 a week from April 2003; • an extension of the period of maternity pay from 18 to 26 weeks from April 2003; • the right to two weeks paid paternity leave from 2003, paid at the same flat rate as SMP; • paid adoption leave (at the same flat rate as SMP) when a child is first placed with a family, from 2003. |
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| Pensions The maximum earnings for which tax allowable pension contributions can be made is increased from £91,800 to £95,400 from 6 April 2001. Individual Savings Accounts (ISAs) subscription levels As announced in the November 2000 Pre-Budget Report, the current ISA contribution limit of £7,000 (including up to £3,000 in cash and £1,000 into life insurance) is extended for a further five years until April 2006. Originally, the limit for 2001/02 was to be reduced to £5,000 (with up to £1,000 in cash and £1,000 into life assurance). In addition, from 6 April 2001, 16 and 17 year olds will be able to open cash ISAs. 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). Changes will also take effect from 6 April 2001 which will bring the Personal Equity Plan (PEP) rules more closely in line with those applying to ISAs. |
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| Comment In announcing the extension of the £7,000 limit for ISA contributions, the Government commented that “ISAs are a continuing major savings success story”. In the first year of ISAs (1999/00) over £28.4 billion was paid into nearly 9.3 million accounts. Having said that, the Inland Revenue has identified around 85,000 investors who may have taken out incompatible ISAs. |
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| Employment Issues | |||
National Insurance Contributions (NICs) As previously announced, the starting point for employees’ NICs will be aligned with that for employers and the income tax personal allowance from April 2001. This means that the starting point for both employees’ and employers’ NICs in 2001/02 will be £87 per week. The rate of employers’ NIC will be reduced to 11.9% in April 2001. |
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| Comment Although employees’ NICs only become payable once earnings exceed £87 per week, any earnings between £72 and £87 per week in 2001/02 will protect an entitlement to basic state retirement benefits without incurring an NIC liability. In particular, family companies should consider whether they are taking full advantage of this rule. |
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Company cars and fuel The existing system of taxation of company cars, based on 35% of the car’s list price, subject to business mileage and age-related discounts, continues only for one more year until 5 April 2002. The starting point for the new system which takes effect on 6 April 2002 will be the car’s list price. However, the percentage of list price chargeable to tax will depend upon the car’s carbon dioxide emissions measured in grams per kilometre. The charge will build up from 15% for low emission cars to a maximum charge of 35%. |
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| Comment The Government has recently announced details of discounts available for certain “environmentally extra-friendly cars” which may take the taxable amount below the normal minimum of 15% of list price. Furthermore, diesel cars which would normally be subject to a 3% supplement on their tax charge will have that supplement waived if the car achieves the clean level of Euro IV standard emissions. |
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As expected, the benefit in kind charges relating to provision of free fuel for private use have increased substantially. |
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| Comment The changes to the charging structure for company cars and fuel together with the changes to the authorised mileage rate regime discussed below all mean that the next year is critical for businesses to consider the most tax efficient structure for the provision of cars and fuel. For some it may mean that the company car is no longer tax efficient particularly since the business mileage and age-related discounts currently available to many company car drivers will disappear. |
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Authorised mileage rates As announced in the November 2000 Pre-Budget Report, the authorised mileage rates for employees who use their own cars for business travel will be amended from 6 April 2001 to bring benefits to those who use smaller cars for business purposes. |
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| Comment From April 2002, there will be a single, statutory, tax-free rate for cars and vans of 40p per mile for the first 10,000 miles and 25p per mile thereafter. Employees will no longer be able to claim tax relief on actual business motoring costs if these are above the statutory rate. The figures are not necessarily designed to bear much relationship to real motoring costs but to provide an incentive for people to use smaller, more fuel efficient private cars for business trips. |
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Works buses The exemption that allows employees to travel from home to work tax and NICs free on an employer provided bus with 12 passenger seats or more, is to be extended to mini-buses with 9 - 11 passenger seats from April 2002. Stakeholder pensions Stakeholder pensions will be introduced in April 2001. From the same date, a new single tax regime will apply to stakeholder and personal pension schemes. The main features of the new regime will be as follows: • possible contributions of up to £3,600 each tax year irrespective of earnings; • higher level contributions under the existing personal pension age and earnings related limits - these can continue for up to five years after earnings have ceased; • all contributions from individuals will be paid net of basic rate tax; • it will no longer be possible to carry forward unused relief; • it will still be possible to make carry back claims; • employers’ money purchase schemes may opt into this new tax regime. |
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| Comment The Inland Revenue’s comment that under the new regime “there will be no carry forward of unused reliefs since this is no longer needed for the majority of people” is unlikely to ring true for many. Individuals who have not paid the maximum possible personal pension contributions over the last six years and therefore have unused relief carried forward will need to consider paying additional contributions by 31 January 2002 at the latest to use this relief or lose it altogether. |
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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. In other words, companies can grant EMI options over a maximum of £1.5 million of their shares. The rules are to be relaxed so that there will be no maximum number of employees to whom options could be granted, simply an upper monetary limit of £3 million on the total value of shares under EMI option. |
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| Comment The changes are in response to the criticism that the scheme was too restrictive being limited as it was to 15 key employees. The changes completely alter the nature of the scheme by potentially benefiting the entire workforce rather than a small number of key employees. |
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Further changes will also be made which will: • remove the requirement that options only be granted to key employees; • remove the requirement for prior approval for alteration to share capital; • offer advance assurance on whether or not a company qualifies. All-Employee Share Ownership Plans (AESOPs) AESOPs were first introduced in FA 2000. New enhancements will simplify their operation and ensure that stamp duty is not paid twice when employees buy shares from an AESOP trust. NICs and unapproved share option gains Since 6 April 1999, NICs have been charged on gains when share options are exercised outside an Inland Revenue approved scheme if the shares are readily convertible into cash. It is not easy for employers to plan for NICs on share options where the share price is volatile. Consequently, legislation was introduced last summer to allow employees to agree to pay the employer’s NIC when they make a gain on their share options. However, options granted between 6 April 1999 and 19 May 2000 were not covered. Rules will now be introduced to limit the NIC payable on unapproved options granted in this period. The liability will be limited to the gain attributable to the growth in company share price up to 7 November 2000. |
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| Corporate and Business Tax | |||
Corporation tax rates The rates of corporation tax from 1 April 2001 will be as follows: • the main rate of corporation tax will continue to be 30%; • companies with taxable profits of up to £10,000 will still be liable to corporation tax at a starting rate of 10%; • companies with taxable profits between £10,000 and £50,000 continue to benefit through a lower average rate; • the 10% rate does not apply to close investment holding companies. The Chancellor has also confirmed that the small companies’ rate will remain at 20% for the year beginning 1 April 2001 and the main rate will remain at 30% until 31 March 2003. First Year Allowances (FYAs) for energy saving investments Businesses will be able to claim 100% FYAs on their investments in designated energy-saving plant and machinery. An Energy Technology List will be published on 1 April 2001. This will define the qualifying technologies, the relevant energy-saving criteria and the products initially within the scheme. FYA for flats above shops A new scheme is introduced to enable property owners and occupiers to claim up-front tax relief on the whole of their capital spending on the renovation or conversion of vacant or underused space above shops and other commercial premises to provide flats for rent. The scheme will focus on properties in traditional shopping areas which were built before 1980. Spending will qualify for the new 100% FYAs from Royal Assent. Business gifts Expenditure on business gifts is generally not tax deductible if the cost exceeds £10. This de minimis limit is to be increased to £50 for periods of account beginning on or after 1 April 2001 for companies and for 2001/02 for unincorporated businesses. Profits averaging for authors and creative artists Currently, authors and creative artists can spread certain types of copyright and similar income, backwards or forwards over a number of years for income tax purposes. The Government proposes to replace income spreading with a simpler system that will allow authors and creative artists to average their profits over consecutive years. The first years that will be available for averaging are 2000/01 and 2001/02. |
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| Comment A similar system already exists for farmers. |
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Limited Liability Partnerships (LLPs) Proposals to prevent tax loss through investment based LLPs have been announced |
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| Comment LLPs have been developed to combine organisational flexibility with the benefits of limited liability. They are expected to be particularly attractive to professional partnerships. LLPs become available from 6 April 2001. |
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Withholding tax on interest and royalty payments As previously announced, 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, will be abolished from 1 April 2001. Similar rules which require withholding on annuities and annual payments to companies that are within the charge to corporation tax on that income will also be abolished from the same date |
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| Comment Payments to individuals will continue to be paid net of tax. |
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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. |
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| Comment 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. |
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Enhancements to venture capital schemes Changes will be made to the venture capital schemes to: • reduce the proportion of money raised under the Enterprise Investment Scheme (EIS), Venture Capital Trust (VCT) scheme and the Corporate Venturing Scheme (CVS) that must be employed within 12 months; and • relax the rules that restrict or withdraw EIS reliefs when a company returns value to investors or when an EIS company floats on a recognised Stock Exchange. |
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| Comment Money invested in trading companies through the EIS or CVS must be wholly employed by the company for the purpose of a qualifying business activity within 12 months of being raised or of the business activity starting. The proposal is to relax the requirement so that only 80% of the money need be employed within the 12 month period. Any amount remaining must be employed within the following 12 month period. |
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Tax relief for cleaning up contaminated land The Government proposes to encourage the clean up of contaminated land by introducing an enhanced tax relief for the costs incurred by companies in cleaning up land they acquire in a contaminated state. The main features of the proposed scheme are that it would: • apply to land acquired as either trading stock, or as a fixed capital asset of a trade or Schedule A letting business; • apply nationwide; • cover only remediation and connected expenditure that is additional to normal site preparation costs; • provide an enhanced deduction of 150% for all companies. The scheme will apply to costs incurred from the date of Royal Assent. Review of small business taxation The Government is starting a consultation process to simplify the way in which small businesses are required to calculate the tax due on their profits. The main simplification will arise by aligning the profits of small businesses for tax purposes much more closely with those reported in the accounts. It is likely that some adjustments will still be required but the aim will be to create a simplified system for most small companies and unincorporated businesses. “Small” is likely to be defined as for a “small company” in the Companies Act, ie - one that has at least two of the following features: • a turnover of not more than £2.8m; • balance sheet assets of not more than £1.4m; • no more than 50 employees. In addition the Government wants to consult on whether it would be desirable in looking for simplification, to consider: • removing the special tax rules for rental income and other investment income and using the commercial accounts basis; • allowing commercial depreciation instead of tax capital allowances for the majority of business assets; • taxing capital profits (and allowing capital losses) on the basis shown in the accounts, as already happens for loan relationships. Other changes Other changes will be introduced to amend and clarify some of the business measures introduced in the FA 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; • changes to the way in which the mixer cap is calculated; • anti-avoidance legislation relating to corporate debt, financial instruments and foreign exchange gains and losses; • consultation on the extension of research and development tax credit aimed at encouraging innovation by larger companies. |
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| Capital Gains Tax | |||
Annual exemption The CGT annual exemption for 2001/02 will be £7,500. For most trusts the exempt limit will rise to £3,750. Rates of tax Capital gains continue to be treated as the top slice of income. For 2001/02, rates continue to be aligned with those applying to savings income - ie tapered gains are charged at 10% where gains plus total income do not exceed £1,880; 20% between £1,881 and £29,400; and 40% on any balance. 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 extended 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 asset taper is to be made available to more employees by allowing employees of certain non-trading companies with shares in their employer company to benefit. The change will be effective from 6 April 2000. However, the extension of business asset taper in this way will be subject to some restriction, namely that employees can only benefit so long as they do not own more than 10% of the company. |
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| Comment The extension of business asset taper to more employees is a welcome move. It means that employees of many non-trading companies will now qualify. Remember that business asset taper means that any gain on a disposal of a business asset acquired before 6 April 1998 will be charged at a maximum effective CGT rate of 20% in 2001/02 and only 10% from 6 April 2002 onwards. |
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Company gains: a new rollover relief The current business asset rollover relief regime applies to both companies and individuals. It enables gains on certain assets (land and buildings, fixed plant, machinery, goodwill etc.) to be deferred by rolling them over against the cost of replacement assets. Shares have not previously been included in the range of assets which qualify for rollover relief. The Government continues to consult on the precise nature of the relief but, as currently envisaged, rollover relief would be extended to include companies’ substantial shareholdings (20% or more) in trading companies. Companies qualifying for the relief would include all non-close companies and close companies provided they are either trading or a member of a trading group. |
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| Comment The inclusion of shares as a qualifying asset for rollover relief purposes is a welcome move, particularly the suggested inclusion of close trading companies. |
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Chargeable gains of companies Legislation will be introduced to clarify detailed aspects of rules introduced last year in relation to chargeable gains of groups of companies. The main changes will: • remove uncertainty about the transitional rules applying to degrouping transactions; • enable expenses incurred by a company on the disposal of an asset to be relieved by the company deemed to sell the asset following an election under the new rules. |
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| Excise and Other Duties | |||
Fuel duties Rates of duty on petrol and diesel are reduced from 6pm on Budget day as follows: • a 2p per litre reduction on ultra-low sulphur petrol; • a 2p per litre reduction until 14 June 2001 on unleaded petrol; • a 3p per litre reduction on ultra-low sulphur diesel. In addition, the abolition of the separate duty rate on lead replacement petrol and super-unleaded will from 6pm on Budget day, give a reduction of up to 5p per litre on these fuels. Vehicle Excise Duty (VED) There are several changes to VED: • from 1 July 2001, the £55 VED discount for small engined cars registered before 1 March 2001 will be extended to cars with engines up to 1549cc. This will be backdated to November 2000; • from 1 March 2001, all new cars registered in the UK will pay their VED by reference to their carbon emissions; • all car, bus and motorcycle VED rates will be frozen until Budget 2002; • from 1 December 2001, the many existing lorry VED rates will be replaced with seven broad rate bands; • from 1 April 2001, VED for tractors and other similar vehicles will be abolished. Haulage industry The Government has created a ring-fenced fund of £100 million to support modernisation in the haulage industry. Alcoholic drinks Duty on spirits, beer and wine has been frozen. The Government will be considering over the coming year whether to introduce a reduced rate of duty on the beer produced by small breweries. Tobacco products Tobacco duties will be increased in line with inflation with effect from 6pm on Budget day. Betting duty A radical reform of betting duty will be undertaken. The Government expects the changes to be introduced no later than 1 January 2002. Under the new system, the current General Betting Duty on total stakes will be replaced with a 15% tax on bookmakers’ gross profits, defined as the difference between the stakes laid with them and the winnings they pay out. The effect will be that punters will pay no tax under the new system. |
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| Comment The largest UK bookmakers have said that as a result of these changes they will relocate their offshore operations to the UK. |
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Aggregates levy A levy of £1.60 per tonne will be introduced on 1 April 2002 to sand, gravel or crushed rock extracted in the UK or imported into the UK. |
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| Value Added Tax and Miscellaneous Matters | |||
VAT thresholds The VAT registration limits increase, in line with inflation, with effect from 1 April 2001 as follows: • the threshold for compulsory registration will be £54,000; • the threshold for voluntary deregistration will be £52,000. VAT cash accounting scheme The turnover limit will be increased from £350,000 to £600,000 from 1 April 2001. Businesses already operating the scheme will be able to continue to use it until their annual taxable turnover exceeds £750,000. |
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| Comment This increase is intended to help more small and medium sized enterprises (SMEs) manage their VAT whilst easing their cash flow burdens. |
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VAT annual returns The upper turnover limit for filing VAT returns on an annual rather than quarterly basis will be raised from £300,000 to £600,000 from 1 April 2001. Businesses already using the scheme will be able to continue to use it until their annual taxable turnover exceeds £750,000. |
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| Comment This increase is introduced to allow at least 100,000 more businesses to benefit from lower compliance costs. |
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VAT annual accounting scheme Subject to consultation, a lower SME turnover limit of £100,000 is to be introduced under which qualifying SMEs will be able to: • use an optional ‘flat rate scheme’ - ie calculate VAT liabilities as a percentage of turnover and avoid having to account internally for VAT on all purchases and sales; and • enter the annual accounting regime immediately rather than having to wait until they have been registered for one year. |
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| Comment Such a scheme could be of considerable help to many small businesses, although the percentage rate set would need to be very low to provide any real incentive. |
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VAT and the regeneration of towns and cities A package of measures is introduced to encourage the creation of additional homes: • reduction in the rate of VAT to 5% for residential conversions with effect from the day after Royal Assent; • removal of the VAT burden from 1 August 2001 on developers who sell renovated houses which have been empty for at least ten years. |
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| VAT - other changes The following changes will be made: • a reduced rate of 5% will apply to children’s car seats with effect from the day after Royal Assent; • certain pedal cycle helmets will be zero rated from 1 April 2001; • the rules relating to the zero-rating of children’s clothing and footwear will be updated and simplified from 1 April 2001 to recognise the increasing size of children; • from 1 April 2001 the minimum number of seats for zero-rating on passenger transport will be reduced from 12 to 10; • the limit below which businesses can give away gifts VAT-free increases from £15 to £50 for gifts made on or after 8 March 2001. Stamp duty Further increases in stamp duty were widely expected but these did not materialise. No changes to rates were announced. The detailed rates are set out on page 16. However, an exemption on all property transactions in the most disadvantaged parts of the UK was announced. Film tax relief The closing date for film tax relief is to be extended from 1 July 2001 to 1 July 2005. Landfill tax Landfill tax will increase from £11 per tonne to £12 per tonne from 1 April 2001. |
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| Comment This is in line with the intention to raise the standard rate of landfill tax annually by £1 per tonne up to £15 in 2004. |
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Museums Certain national museums and galleries that do not charge the public for admission will, under a new scheme, be able to recover input tax on purchases. This will come into effect by 1 September 2001 with eligible bodies still able to claim input tax incurred from 1 April 2001. Climate change levy Minor changes have been made which will be introduced with effect from 1 April 2001. Community investment The Government is to consult on a proposal for a new tax credit for community investment. The goal is to help transform the most disadvantaged communities. The aim of the tax credit would be to attract greater flows of private investment into enterprises in these communities. |
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The Budget proposals may be subject to amendment in the Finance Bill which is expected to be published in March/April and receive Royal Assent during the summer. Clients are therefore advised to consult us before taking any action as a result of the content of this summary. Top of Page |