UK: The Pre-Budget Report, 9 November 1999

Last Updated: 12 November 1999

On 9 November 1999 the Chancellor of the Exchequer presented his Pre-Budget Report or ‘Green Budget’. This gave details of progress on a number of issues which the Government is reviewing with a view to changes in the tax system.

In many cases the details given added little to previous announcements. We draw attention here to the most significant areas where new information was made available.

Personal taxation

Personal allowance and basic rate of income tax

The basic personal allowance will be increased from £4,335 to £4,385 from 6 April 2000. A 22% basic rate of income tax from 6 April 2000 was announced at the time of the March Budget.

Starting rate of tax

From 6 April 1999 (ie, retrospectively) the 10% starting rate for the first £1,500 of taxable income will apply to savings income such as bank and building society interest; and from 6 April 2000 it will apply also to capital gains. (Currently it applies only to income which would otherwise be taxable at the basic rate; ie, mainly earnings.)

Capital gains tax on business assets

The period over which gains on business assets are tapered is to be reduced from ten to five years, subject to detailed consultation. The full 40% rate will apply to assets held for less than one year, and will reduce in 6% steps to 10% for assets held for more than five years.

Currently a 25% shareholding in a trading company or the holding company of a trading group qualifies as a business asset (5% if the shareholder works full-time in the company’s business). The Government is to assess the case for reducing these thresholds.

No proposed implementation date is given, but the outcome of the consultation will be announced in the 2000 Budget.

CGT: business assets gifts relief

Transfers of shares or securities to companies on or after 9 November 1999 will no longer qualify for the existing holdover relief on gifts of business assets.

Employee taxation

All employee share ownership scheme

A new all-employee share ownership scheme is to be introduced, following proposals in the March Budget, but incorporating some changes. Broadly:

  • employers can give up to £3,000 of shares a year to employees;
  • employees can buy ‘partnership shares’ out of pre-tax salary up to £1,500 per year; and
  • employers can match partnership shares by giving employees up to two free shares for each partnership share they buy.

No income tax or NIC liability arises if shares remain within the plan for five years. Any increase in the value of the shares is exempt after three years.

CGT will be due only on any increase in the value of the shares after they come out of the plan.

Dividends will be tax free, within limits, if used to acquire additional shares. Employers will obtain a tax deduction for the market value of shares used in the plan.

Enterprise Management Incentives

As previously announced, a new Enterprise Management Incentives (EMI) scheme will be included in the 2000 Finance Bill. Qualifying companies will be able to offer options over shares worth up to £100,000 (at the date of grant) to up to ten key employees.

Broadly, companies which are qualifying companies under the Enterprise Investment Scheme/Venture Capital Trust legislation will be able to grant options under the EMI, although quoted companies may also qualify.

The tax advantages available under EMI are as follows:

  • no income tax or NIC (either employers’ or employees’) on grant;
  • no income tax or NIC on exercise of options provided that they are market value options (ie, the exercise price set at the date of grant was equal to the market value at that date);
  • capital gains realised on sale of shares acquired under EMI will be subject to CGT (rather than income tax) and will attract business assets taper relief (from the date the options are granted).

Business taxation

Corporate venturing

The 2000 Finance Bill will include provisions under which companies that make corporate venturing investments in small higher-risk trading companies will receive an ‘up-front’ corporation tax relief at 20%. Corporate venturers who reinvest gains in new ventures will be able to defer payment of tax on these gains, and there will be provision to set off losses against income as well as chargeable gains.

Research and development tax credit

A new R&D tax credit will increase the existing 100% relief for research and development expenditure to 150% for small and medium-sized businesses spending above £25,000 per year on R&D, from April 2000. Companies not yet making taxable profits may take the credit ‘up-front’ (within limits), reducing the immediate cash cost of R&D by 24%.

Enhanced capital allowances for energy-saving investments

In conjunction with the climate change levy, an enhanced capital allowances scheme is to be introduced for certain energy-saving investments, presumably from the same date (April 2001), although this has not been stated specifically.

Intellectual property

Subject to further consultation on a number of technical issues, the Government intends to introduce legislative changes in the 2001 Finance Bill to base the tax treatment of intellectual property rights more closely on accounting practice. There may also be scope to simplify the rules for deducting tax at source from royalty payments.

Value added tax

The de minimis level below which businesses do not have to account for VAT on deregistering is to be raised to £1,000.

The climate change levy

The climate change levy is due to be introduced from April 2001 by legislation in the 2000 Finance Bill. Further exemptions have been announced.

An 80% discount will apply to energy intensive sectors that sign energy efficiency agreements which meet criteria to be set by the Government.

The overall size of the levy is to be reduced from £1.75 bn to £1 bn, with a commensurate reduction in the levy rates, which are now expected to be 0.15 pence per kilowatt hour for gas and coal and 0.43 pence per kilowatt hour for electricity. The levy will be revenue-neutral for the private sector as all the revenue raised will be recycled to business via a 0.3 percentage point cut in employers’ national insurance contributions (as opposed to the 0.5 percentage points previously announced) and additional support for energy efficiency schemes.

Charities

The Chancellor has unveiled a large number of deregulatory changes to assist charities and encourage charitable giving.

Gift Aid and covenants

Currently, Gift Aid payments must be for a minimum of £250 each. This minimum is to be abolished from April 2000. Tax relief will therefore potentially be available for any donation, whether it is large or small, and whether it is regular or spontaneous. To be entitled to Gift Aid relief, charities will still have to be able to demonstrate an audit trail back to the donor.

The revised Gift Aid scheme will encompass charitable covenants. Donors making donations under a deed of covenant which is already in place in April 2000 will not need to complete a Gift Aid certificate to cover those donations.

Currently, donors using Gift Aid or covenants have to account for tax at the basic rate - which means that low-income donors, who pay income tax only at the starting or lower rate, face an extra tax bill. In future, donors will be able to satisfy their basic rate tax liability on Gift Aid donations out of tax paid on their income or capital gains, whether at the basic or at some lower rate.

The rules governing the limited benefits which donors can receive in return for charitable donations will be recast to take account of these changes.

From April 2000, corporate Gift Aid donations are to be made without deduction of tax.

At present, subsidiaries of charities are able to carry back covenanted payments up to nine months from the date of payment, claiming relief in an earlier period. This relief will be extended to Gift Aid donations, making it easier for such companies to deal with the mechanics of giving the full amount of their taxable profits to the charity.

Under existing rules, higher-rate taxpayers can claim relief for Gift Aid donations against the higher rate of income tax; from April 2000, they will be able to claim higher rate relief against both income tax and capital gains tax.

Payroll giving

Currently, there is a £1,200 maximum limit for payroll giving. This maximum is to be abolished.

For three years from April 2000, charities will be able to claim from the Government a 10% supplement on the payroll giving donations they receive. The Inland Revenue will be consulting with the payroll giving agencies on the mechanics of distributing this.

Gifts of quoted shares and securities to charity

Gifts of quoted shares and securities to a charity will qualify for income tax relief on their full value - in addition to any existing capital gains relief.

Charity trading

At present, charities often find it hard to tell in practice whether fundraising activities such as trading are covered by the existing reliefs. The rules are now to be simplified.

Fund-raising events

Currently, charities which engage in fund-raising events have to consider the VAT and income tax exemptions separately. These exemptions are to be extended and aligned.

Value added tax

Some small extensions are to be made to the VAT zero-rating of goods and services sold to or by charities, in particular for advertising by charities.

Stamp duty

Measures will be included in the 2000 Finance Bill to prevent the use of arrangements designed to reduce the rate at which stamp duty is payable. The Government is also considering how to modernise stamp duty legislation so that new avoidance devices can be countered as they arise.

For further information about any of the items mentioned, please get in touch with your usual KPMG Tax Advisers contact.

This Briefing 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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