UK: “I Want To Cut Tax Bills And Red Tape”: The Chancellor’s Pre-Budget Report 2001

On 27^th November 2001, Gordon Brown, the Chancellor of the Exchequer delivered his Pre-Budget Report. The following constitutes a general overview of a number of company related provisions, many of which can be found in Chapter Three of that Report: Meeting the Productivity Challenge.

The Chancellor announced that from 1^st April 2002 company gains would be exempt and losses not allowable on the disposal of substantial shareholdings. This is in contrast to the current scenario, where a company incurs capital gains tax at a rate of 30% on profits realised on the sale of an investment in another company. The relief will be available where:

• A trading company, or a member of a trading group disposes of shares in a trading company or the holding company of a trading group, and
• A substantial shareholding (at least 20%) has been held throughout a 12 month period ending not more than 12 months before the disposal.

The Government’s rationale behind this new relief is to ensure that important business decisions on corporate restructuring and reinvestment are made for commercial, rather than tax reasons. It is an important component of the Government’s drive to encourage enterprise across the economy, the genesis of which lies in the perceived failure of the UK to nurture the levels of entrepreneurship seen in the US economy. This desire to foster entrepreneurship has also resulted in a cut in capital gains tax to 20% for business assets held for more than one year and 10% for business assets held for two effective from next April.

Particularly well received was Mr Brown’s announcement that a new research and development incentive for large companies would be introduced in the 2002 Finance Bill. This follows on from the introduction of a tax credit for small companies in the 2000 Budget, and is intended by the Government to help UK firms "harness innovation to raise productivity and build commercial success".

The Government appears to have garnered some degree of approval in the manner in which it has carried forward its proposed R&D incentive for large companies. When the proposals were first announced in March this year, the resultant consultation paper Increasing Innovation set out a choice between a volume credit or an incremental credit. Respondents were strongly in favour of a volume-based approach that rewards all qualifying R&D expenditure as opposed to the incremental credit that rewards only increases in expenditure. The Government’s subsequent willingness to adopt the former approach in the Pre-Budget Report has found favour with many including representatives of the big five accountancy firms, trade unions, industrial groups and management organisations such as the CBI.

The Finance Act 2000 introduced Enterprise Management Incentives (EMIs) which were designed to help smaller, higher risk companies by giving their managers tax breaks on share options. The Finance Act 2001 took matters further by removing the limit on the number of employees who could qualify for EMIs. The Chancellor now wants to build on the success of the scheme (Government figures indicate that over 1,600 companies have granted more than 13,000 awards to recruit and retain high calibre employees), and a Statutory Instrument doubling the gross asset qualifying limit for EMIs from £15m to £30m is to be laid immediately before Parliament and is intended to take effect from 1^st January 2002.

As part of his continued campaign to assist small business develop and flourish, ("I want to cut tax bills and red tape"), the Chancellor announced that the 10% starting band of corporation tax would be increased from its current level of £10,000 as of 1^st April 2001. The precise nature of the increase is not known at this time, but it has been confirmed that the provisions will not be extended to include close investment holding companies.

The Chancellor announced significant reforms to the VAT system aimed at encouraging and nurturing small businesses. An optional flat-rate scheme will be introduced in April 2002 under which more than 300,000 small business will be able to avoid having to account for VAT on each individual purchase and sale. It is estimated that this will cut compliance costs by approximately £1,000 per annum.

Mr Brown also confirmed that the Government was pressing ahead with reforms to the VAT penalties system to ensure that small businesses are first offered advice and support as opposed to an automatic penalty when they are late with payments.

The Pre-Budget Report also proposed that draft legislation for a new regime for providing tax relief to companies for the costs of intellectual property, goodwill and other intangible assets would take effect from 1^st April 2002. This is a key component in the Government’s drive to modernise the business tax system and is designed to encourage business "to take advantage of new opportunities in the emerging knowledge-based economy."

The new regime applies to corporation tax only, in regard to gains and losses arising from disposals of and expenditure on the creation, acquisition, enhancement, preservation and maintenance of intangible assets. Companies will benefit from the regime where they acquire, after 1^st April 2002, any intangible assets from unrelated parties and intangible assets already within the regime from related parties.