UK: The pre-Budget report: KPMG's tips on what to look out for

Last Updated: 1 November 1999

Next Tuesday, the Chancellor will deliver his third pre-Budget report or 'Green Budget'. If this follows the pattern set in his first two reports, there will be announcements of areas Mr Brown intends to act upon in the March Budget, together with some limited tax content. The following areas may or may not be mentioned next week.

Personal/Employment taxes:

Income tax - No change in rates likely to be mentioned, since the long-awaited 10% starting rate was finally brought in last April, with the announcement of a reduction in the basic rate to 22% next April. But Mr Brown might well indicate how he will encourage taxpayers to use electronic submission of their self-assessment tax returns, which is a government aim.

All-employee share schemes - Certain to be addressed, with the publication of draft clauses expected as part of the pre-Budget report. Mr Brown pledged earlier this year to double the number of companies offering such schemes so hopefully the draft legislation will be attractive to both listed and unlisted companies.

On the downside, Mr Brown may restrict the ability of companies to obtain corporate tax deductions for the gains that employees make on the exercise of Save As You Earn (SAYE) options through the use of QUESTs (Qualifying Employee Share Ownership Trusts). By structuring the arrangements this way companies gain a tax deduction they would not otherwise receive (as gains made by employees on the exercise of options to subscribe for new shares do not result in any charge to the P&L account). Such a crackdown has been mooted for a while but with a review of share schemes it is a real possibility now.

Stakeholder pensions - very likely to be mentioned, as the closing date for responses to the Inland Revenue's September consultative document, which proposed a single tax regime for all pensions other than final salary schemes, was October 29 - this strongly suggests Mr Brown intends to comment on this area.

National Insurance Contributions - A possible. NICs are due to be applied to all staff benefits from April, while the upper earnings limit is due to be raised from April 2001, hitting better-off employees. It is possible Mr Brown could use the Pre-Budget report to launch a long-term policy reform, such as proposing the abolition of class 2 NICs while increasing class 4 NICs as a simplification measure - (both are paid on self-employed earnings) as suggested by the Taylor report on work and benefits.

Company cars - might well be mentioned, as measures are expected in Budget 2000 detailing how the change in the company car tax regime from one based on list price to one based on carbon-dioxide emissions from April 2002 will work. With transport and the environment such topical issues at present Mr Brown could take the opportunity to set out his strategy.

Entrepreneurial/small businesses:

Reducing employer burdens - Definite as the government has already announced that it wants to use the pre-Budget report to issue proposals to help in this regard. The Working Families Tax Credit might be part of this as there has been concern over the costs to employers of administering the WFTC through the payroll system. Employer helplines set up by the Revenue may be one idea.

Enterprise Management Incentives - Certain to be addressed as the government has pledged to bring in an EMI scheme in the March 2000 Budget limited to small high-risk companies. The aim is to incentivise entrepreneurs in this sector - the Revenue issued a technical note in March 1999 setting out the scheme in some detail and it would surprising if Mr Brown did not refer to it in the pre-Budget report.

Research and development tax credit for small/medium-sized enterprises - One of Mr Brown's longer-standing interests as it was first mooted back in March 1998, but with consultation having taken place this year on a Revenue document which proposed a volume-based R&D credit for SMEs, more details are likely to be given next week.

Corporate venturing - Another cert, as the government has proposed the introduction of such a scheme from April 2000. Under this, larger companies buy stakes in smaller ones, thus providing finance and managerial expertise, but the smaller company keeps control.

Personal service companies - may be mentioned by Mr Brown as the new rules for so-called 'slave' companies have been significantly revised following business representations. They will take effect from April 2000 and could be portrayed as a successful example of government listening to business concerns.

Indirect Taxes

Aggregates - probable as the Government has been discussing a package of voluntary environmental improvements with the quarrying industry , as an alternative to legislation. The industry was given till the end of October to come up with proposals which suggests Mr Brown will cover this area in his report.

Climate change levy - A levy will be introduced from April 2001 with rates applying to different fuels to be set in Budget 2000. There have been protests from energy-intensive industries over these plans so Mr Brown will probably cover this subject.

Graduated Vehicle Excise Duty for new cars - possible as details will be announced in Budget 2000 though much detail is unlikely.

Corporate Taxes

Intellectual Property - probable as over the last two years the Revenue has been consulting on ways to update the IP tax regime to encourage innovation.

For further information, speak to your usual KPMG tax contact.

This article is intended to provide a general guide to the subject matter and should not be regarded as a basis for ascertaining the liability to tax or determining investment strategy in specific circumstances. In such instances separate advice should be taken.

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