UK: KPMG Reaction To Budget 2000

Loughlin Hickey, Tax Partner at KPMG, said: " We fail to understand the further alienation of the Smaller Quoted Companies (SQC) sector. While we welcome the reduction in Capital Gains Tax for business assets (both the acceleration of relief and the reduction in the qualifying holding), the fact is that favouring unquoted companies by removing any qualifying holding will further discourages investment in the SQC sector.

"There is no help to increase liquidity through attracting private investment in quoted companies either through access to accelerated taper relief or to encourage the serial entrepreneur to defer Capital Gains through re-investment into the sector.

"The Government remains mesmerised by the excitement of start-ups and is not promoting measures to keep these companies in the UK through encouraging a vibrant market for SQCs. The danger is continued reduction in the SQC market through acquisitions by larger (often overseas) companies or private equity houses (also often overseas) and a flight to overseas exchanges to raise new capital to go beyond the start up phase.

"What signal is the Government sending to our SQC sector?"

Inez Anderson, Employee Issues Partner at KPMG said: "The relaxation on obtaining work permits for employees with specialist skills is excellent news, although it highlights the need for the UK to invest in this area to ensure 'home grown' talent. It raises the question as to why this talent is leaving the UK? This issue has not been addressed today.

"Small businesses will welcome the support announced to help on payroll issues. A lot has been introduced on the last few years such as Working Families Tax Credit, student loans etc. which have resulted in substantial additional administration for employers.

"It is only right that the Government helps the small employer deal with these and alleviates any concerns about getting it wrong. The Government seems to be putting emphasis on employers 'getting it right', which is refreshing and may result in employers being less concerned about calls form the tax man."

David Tuch, Head of Share Schemes, KPMG said, " We are disappointed that it is still not clear what the Government are going to do to address this issue.

Ideally we would like to see employers' NIC on unapproved options to be abolished. In reality this would only be taking us back to the position we were in until last April. If this is seen as being too expensive then at a minimum the Government should consider:

• capping the gains on exercise of unapproved options in any year which are subject to employers' NIC to gains of £50,000
• allowing employers to recharge the employers' NIC on unapproved option gains to the individual and reducing the rate of employers' NIC on unapproved option gains to 5%

What is critical is that any changes introduced apply to all companies and not just to internet start-ups and similar high tech companies.

David Tuch said, "We are disappointed that he has not used some of his war chest to reduce the period from 5 years to 3 years before shares can be taken out tax free. We also feel it is a shame that he has done nothing to deal with the potential NIC exposure where employees take out their shares within 3 years although it is possible this will be dealt with as part of the review of NIC on unapproved options.

Mr Tuch added, "Although the Chancellor has again taken the opportunity to increase the number of employees who may participate from 10 to 15 (having already increased it from 6) we would like him to have taken the opportunity to widen the class of companies which qualify.

Slightly surprised that Chancellor doesn't seem to have abolished use of QUESTs in conjunction with SAYE schemes even though he has amended them to enable shares/cash currently in QUESTs to be transferred to the new AESOP.

In addition to changes to approved share schemes he has taken the opportunity of increasing the scope of taper relief to cover all employee shareholders irrespective of the size of the holding. This change is to be welcomed and may well assist in encouraging employees to retain shares.

We are delighted that the Chancellor has listened to the representations on SAYE schemes and has decided that these schemes are to continue.

Inez Anderson, Employee Issues Partner at KPMG, said:

"Today's announcement has turned on its head the current system of company car taxation.

"It no longer encourages the use of cars for business purposes and will now penalise the salesmen who have to drive for a living.

"But we may see the rebirth of the perk car as low business mileage drivers will benefit across the board. This is good news for employers with no essential car users but bad news for organisations with heavy sales forces as employers Class 1A NIC is based on the tax charge.

"This is said to support the 'green philosophy' as it is expected to reduce the number of business miles travelled. This would only be the case on the assumption that non-essential business miles are travelled in company cars. Another factor which does not seem to have been considered is the possible increase in the number of perk cars which may end up on the road.

Ian Barlow, UK Head of Tax, KPMG said "The Chancellor has shown a lead in Europe by announcing the abolition of the with-holding tax on International Bond Interest and its replacement by a comprehensive exchange of information powers - exactly what he is encouraging other European countries to adopt."

"In the technology sector and e-commerce, it is disappointing that he has again concentrated on start-ups. The bulk of expenditure on e-enablement will actually occur in larger established companies which need every incentive to join the e-commerce revolution."

"I welcome reliefs for capital gains in groups, particularly extension of roll over relief on share disposals. An interesting example of European Court tax decisions driving UK legislation is the relaxation in the definition of a capital gains group to include overseas companies in certain circumstances."

Steven McGrady, Head of Stamp Duty KPMG said "Yet another hike in stamp duty rates to 4 % affects all commercial property other than shares and is becoming a very significant transactional cost. The exemption which has been announced for transfers of Intellectual Property is welcome. Initially this will not apply to transfers of good will but there is a hint that he might be looking at extending the exemption to good will."

Tony Lynne, Head of Indirect tax said "On VAT it was a case of the dog that didn't bark. Anticipated changes to the property VAT regime failed to materialise this is probably due to the complexities of ring fencing a reduced rate on either conversion or new building were too onerous for Customs."

He added, "The Chancellor appears to have back tracked on Vehicle Excise Duty on lorries this appears to been a response to so called 'flagging out' where lorries were being registered in Belgium and Holland to be free of VED. The fact that he has reduced duty seems to be an admission of earlier error."

Loughlin Hickey Head of Entrepreneurial Solutions, KPMG

"The Budget has given a boost to e.commerce but it lacks essential connectivity between the start up business and the next phase larger business." said Loughlin Hickey, head of Entrepreneurial Solutions at KPMG.

"There is a good package to encourage small businesses to embrace e-commerce including:

• Write off of the full cost of buying computers and computer equipment;
• Consultancy services to be provided through the Small Business Service;
• Internet training for employees;
• Tax cut for e-filing tax and VAT returns;

"The danger is that this will fuel only the much hyped 'business to consumer' end of e.commerce. Business to business activity will be the major productivity benefit, but it requires investment by all sizes of company; the larger the company the greater the smaller supplier base it is likely to support.

"Where is the help for the existing larger businesses to encourage the 'business to business' links that smaller companies can benefit from?

"The changes to Taper Relief will boost investment in smaller companies, many of which will be part of the New Economy - it encourages gains by allowing investors to retain a greater share of capital profits which encourages sensible risk taking. It is an anomaly however, that the focus remains on start ups and unquoted companies. What about the next phase of development when new capital needs to be raised. By ignoring the smaller quoted company (SQC) sector by not extending accelerated relief to such investments and not allowing these companies specifically to benefit from serial re-investment there is a danger that there is no vibrant UK market to fund next phase growth; again a good start but no connectivity between a start up and the FTSE 350."

The Chancellor called this a Budget for Enterprise and Investment. Indeed it has given a boost to e.commerce within the entrepreneurial business sector but it lacks essential connectivity between the start up business and the next phase larger business.

There is a good package to encourage small businesses to embrace e-commerce including:

• Write off of the full cost of buying computers and computer equipment;
• Consultancy services to be provided through the Small Business Service:

• Internet training for employees;
• Tax cut for e-filing tax and VAT returns;

The danger is that this will fuel only the much hyped 'business to consumer' end of e.commerce. Business to business activity will be the major productivity benefit, but it requires investment by all sizes of company - the larger the company the greater the smaller supplier base it is likely to support.

Where is the help for the existing larger businesses to encourage the 'business to business' links that smaller companies can benefit from?

The changes to Taper Relief will boost investment in smaller companies, many of which will be part of the New Economy - it encourages gains by allowing investors to retain a greater share of capital profits which encourages sensible risk taking. It is an anomaly however, that the focus remains on start ups and unquoted companies. What about the next phase of development when new capital needs to be raised?

We fail to understand this further alienation of the Smaller Quoted Companies (SQC) sector. While we welcome the reduction in Capital Gains Tax for business assets (both the acceleration of relief and the reduction in the qualifying holding), the fact is that favouring unquoted companies by removing any qualifying holding will further discourage investment in the SQC sector.

There is no help to increase liquidity through attracting private investment in quoted companies either through access to accelerated taper relief or to encourage the serial entrepreneur to defer Capital Gains through re-investment into the sector.

The Government remains mesmerised by the excitement of start-ups and is not promoting measures to keep these companies in the UK through encouraging a vibrant market for SQCs. The danger is continued reduction in the SQC market through acquisitions by larger (often overseas) companies or private equity houses (also often overseas) and a flight to overseas exchanges to raise new capital to go beyond the start up phase.

A good start but no connectivity between a start up and the FTSE 350.

John Battersby, Tax partner KPMG said " For many personal taxpayers, the known charges on mortgages, marriage and national insurance more then outweigh the basic rate cut and the indexation of allowances.

In broad terms

• taxpayers over 65 will be better off it they have no mortgage
• someone on one and a half times average earnings with a mortgage and married will be £175 worse off after 5 April 2000
• the increase of £2,000 in the ISA limit is an astute move to head off criticism of the complexity of the scheme

Mr Battersby added "Overall the Chancellor has redistributed from these in reasonably paid work in favour of working families and those moving in to work."

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

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