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Pre-Budget Report - Appeasing the Masses?

15 November 2000 / Allison Plager
Issue: 3783 / Categories:
What lay beneath the window dressing in the Chancellor's Pre-Budget statement? Allison Plager follows the trail

It was with a real sense of déjà vu that I listened to the Chancellor's 2000 pre-Budget statement. A £5 increase for single pensioners, £8 for married pensioners, a freeze on fuels, the £7,000 limit on individual savings accounts to be maintained until April 2006, I could go on. Where had I read all this before? Then I remembered, it was in the broadsheets on Monday (yes, Monday) morning, so really, I might as well have written this article there and then, and taken the rest of the week off.

So much for Parliament. The Government sees the media as its chief means of communication and constantly demonstrates its contempt for Parliament, by 'leaking' information to the press way in advance of formal statements to the House. Perhaps it is not modern enough for them.

In his speech, Gordon Brown saved the best till last, in that the much leaked pension increases and cuts in the cost of motoring were the last two issues that he addressed in his speech. Whether he has done enough to appease pensioners and hauliers remains to be seen, but what about more specific tax issues?

Highlights from the report

In the report accompanying the speech, the Chancellor claims optimistically to have improved the tax system for companies, and lists how this has been accomplished, for instance by reducing the main and small company rates of corporation tax, reducing capital gains tax on business assets, and reforming the double taxation relief system by revising the system of on-shore pooling. Further changes are planned, however, as follow.

Withholding tax

In the report, the Chancellor admits that he is 'building on announcements made in Budget 2000', and says that in addition to abolishing withholding tax on bond interest and certain other payments, consultation will be carried out with a view to abolishing withholding tax on interest and royalties between companies within the charge to corporation tax. Thus paying companies would no longer have to deduct tax from most interest and royalties paid to other companies in the charge to corporation tax. It is intended to bring in the legislation in Finance Bill 2001.

Intellectual property

The report announces that the 'next stage in the reform of the taxation of intellectual property, goodwill and other intangible assets' is to be launched following the 80 plus responses received to the technical note published by the Revenue in June 2000. This issue is something of a never-ending story as yet another technical note for yet more (the third batch) consultation is planned, with legislation also intended for 2001.

International companies

The measure in the Budget last March relating to double taxation relief rules and multi-nationals caused considerable furore, and invoked some back-pedalling by the Chancellor before the Finance Bill was enacted. It seems that further changes are planned, with an announcement that the on-shore pooling rules to allow relief for eligible foreign tax are to be extended. However, before any changes are implemented, the Revenue is to consult with business over the detail. This whole sorry saga rather begs the question: why did the Chancellor not consult properly on this issue before the March Budget; then as he failed to do so, why go through all the cafuffle, even name-slinging, and listen only in part to what the experts said as a result of the Budget proposal, only to have to correct the situation to ensure that the appropriate relief is given.

Employee share ownership

As expected, the new employee share ownership plans are also subject to amendment, with changes to business taper relief and National Insurance aspects of the plan. With respect to capital gains tax, the Chancellor proposes to extend business assets taper relief to include employees of non-trading companies. This measure would be retrospective and apply from 6 April 2000. Since this could open the way for shares in close investment holding companies to qualify as business assets it is currently suggested, subject to consultation, that the new rule will not apply to close companies. But apparently employees of quoted investment trusts will be lucky winners by this change.

With regard to National Insurance, where companies issued share options between 6 April 1999 and 19 May 2000, they will have the option of removing uncertainty on the National Insurance bill, because of share volatility, by settling the National Insurance liability on those options based on the market values at the time of this pre-Budget report, i.e., 8 November 2000.

Enterprise management incentives, although widely welcomed when they were announced, also met with some criticism in that the limits were too small. Although fighting the criticism throughout the standing committee debates earlier in the year, the Chancellor has clearly had second thoughts, and announced a proposal to abolish the limit on the number of eligible employees (currently 15) and raise the total value of shares in the scheme from £1.5 million to £2.5 million per company. A consultation is planned, with a measure intended for inclusion in the next Finance Bill.

Individual savings accounts

Many savers and investment houses will be pleased with the Chancellor's intention to extend the current maximum annual contribution to an individual savings account of £7,000 for five more years, i.e., until April 2006. In addition, the age limit for cash investments in an individual savings account is to be reduced to 16.

There were also some changes to personal equity plans, in that the rules have been aligned to those of individual savings accounts. This will mean for instance, that part of a personal equity plan can be transferred to another manager, not just the whole.

Car mileage rates

From April 2002 it is proposed that a single mileage rate will be introduced for all private cars used for business purposes or for the purposes of an employment. The single rate will apply irrespective of the size of the car. From April 2001 interim rates will apply towards this new régime. Clearly those with larger cars will be looking to charge actual costs in the future rather than operating under the fixed rate scheme.

The ultimate absurdity is a proposal to introduce a mileage rate of 20 pence for cycle use on business trips apparently without a shred of statutory authority for not taxing a clear benefit of run away proportions per mile. Bikes of course do not have mileometers, so presumably you have to guess how far you have gone by how out of breath you are when you arrive to see the client.

Value added tax

Some reforms to VAT as it applies to small and medium sized enterprises were also announced by the Chancellor. For instance, the Chancellor intends to extend the cash accounting scheme by increasing the turnover limit from £350,000 to £600,000. He plans to raise the upper turnover limit for qualification to file VAT returns annually rather than quarterly from £300,000 to £600,000.

There was also an announcement of consultation for a possible flat rate scheme, whereby small and medium sized enterprises could calculate their VAT as a percentage of turnover, rather than accounting for VAT on all purchases and sales. A lower small and medium sized enterprises turnover limit would apply for this scheme of £100,000. This could be a considerable help to many small businesses, but one imagines that the percentage would have to be very low to provide any real incentive perhaps 4 per cent or less.

The Chancellor also said that he had asked the European Commission to agree to a cut from 17.5 per cent to five per cent in VAT on repairs to churches. This will no doubt help the many ancient church premises up and down the country, but for many the greater problem is VAT on extension work.

Urban regeneration

The Chancellor had announced in the Budget 2000 that he hoped to encourage business investment in urban regeneration by providing stamp duty relief for new developments on brownfield land. In his pre-Budget statement he confirmed that there would be complete exemption from stamp duty for all property transactions in the most disadvantaged communities, to take effect from April 2001. There would furthermore be an 'accelerated payable tax credit' for the costs incurred in cleaning up contaminated land sites. Further measures include a reduced rate of VAT for the cost of converting residential properties into flats; an adjustment to the zero rate of VAT to provide relief for the sale of renovated houses which have been previously empty for ten or more years; and immediate tax relief to property owners when they convert empty space above shops into residences.

Modernising

The over-used word 'modernising' was used in the report with respect to stamp duty and the construction industry scheme. As regards stamp duty, it was announced that legislation would be included in the next Finance Bill to allow electronic dealing.

As part of its review of the construction industry scheme, the Government has decided to increase the scope of electronic data exchange from the end of November 2000. More companies are to be allowed to qualify for CIS5 certificates, as the turnover criteria is to be reduced from £3 million to £1 million. Partnerships which also meet the criteria will also be able to qualify.

There it is

So this in essence is what was contained in the pre-Budget report. In terms of his speech, these tax measures took up little time. They constitute the bread and butter, in that they in part correct earlier bad legislation, accept ideas for improvements to existing legislation, or confirm plans for future legislation. There is little that is new or innovative in the report.

Other consultations announced related to limited liability partnership taxation and corporate debt. There were also the usual announcements relating to personal allowances, namely that these would rise with inflation, and confirming that employees' and employers' National Insurance starting points for 2001-02 would be £87 a week. See Tables 1 and 2 [from Pre-Budget press release REV1] for details.

Table 1: Income tax personal and age-related allowances 2001-02

2000-01 2001-02

Personal allowance (age under 65) 4385 (+150) 4535

Personal allowance (age 65-74) 5790 (+200) 5990

Personal allowance (age 75 and over) 6050 (+210) 6260


Married couple's allowance* (aged less than 75 and born before 6th April 1935) 5185 (+180) 5365

Married couple's allowance* (age 75 and over) 5255 (+180) 5435

Married couple's allowance* - minimum amount 2000 (+70) 2070


Aged income limit 17,000 (+600) 17,600

* Married couple's allowance given at the rate of 10%.

Table 2: National insurance contributions

Item 2001-02

Lower Earnings Limit, Primary Class 1 £72 per week

Upper Earnings Limit, Primary Class 1 £575 per week

Primary Threshold £87 per week

Secondary Threshold £87 per week

Employees' primary Class 1 rate 10% of £87.01 to £575 per week

Employees' contracted-out rebate 1. 6%

Married women's reduced rate 3.85%

Employers' secondary Class 1 rate 11.9% on earnings above £87 per week

Employers' contracted-out rebate, salary-related schemes 3%

Employers' contracted-out rebate, money-purchase schemes 0.6%

Class 2 rate £2 per week

Class 2 Small Earnings Exception £3,955 per year

Special Class 2 rate for share fishermen £2.65 per week

Special Class 2 rate for volunteer development workers £3.60 per week

Class 3 rate £6.75 per week

Class 4 rate 7%

Class 4 Lower Profits Limit £4,535 per year

Class 4 Upper Profits Limit £29,900 per year

The jam of the report took up well over half the Chancellor's time, and clearly the Chancellor knew the headlines would come from here. Pre-electioneering may be a trifle strong, but he is evidently aware that vote winners are not made by a little tinkering with share option plans.

 

Issue: 3783 / Categories:
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