Pre Budget Report - 10 December 2003
The following is our summary of the main points of the Pre-Budget Report. Do please contact us for specific advice about how these announcements might affect you or your business.
Extracting income from companies - proposed changes
In a move that is almost certain to have an impact on the cost of extracting profits from a limited company, the Government has expressed concern that 'the longstanding differences in tax treatment between earned income and dividend income should not distort business strategies, or enable reductions by tax planning of individuals' tax liability, and that support should continue to be focused on growth.'
Specific proposals for action will be brought forward to Budget 2004, to ensure that 'the right amount of tax is paid by owner-managers of small incorporated businesses on the profits extracted from their company, and so protect the benefits of low tax rates for the majority of small businesses.'
For some limited company owners this could be the one proposal that will have a cost impact.
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Raising capital for SMEs
The Chancellor announced a series of proposals designed to improve access to finance for SMEs:
VCTs and EIS
Changes were announced which were designed to make Venture Capital Trusts (VCTs) and the Enterprise Investment Scheme (EIS) more attractive for investors.
It is proposed that for a two year period the rate of income tax relief will be increased from 20% to 40% for investment in VCTs, with the additional 20% being paid directly to the VCT, not the investor. However, the Government has indicated that it will consider withdrawing, from 6 April 2004, the ability to defer liability for capital gains tax (CGT) by investing in VCT shares.
It is proposed that the upper investment limit for income tax relief should be increased from £100,000 (VCTs) or £150,000 (EIS) to £200,000 in any tax year with effect for the tax year 2004/05.
Small Firms Loan Guarantee
There is to be an independent review of the operation of the Small Firms Loan Guarantee (SFLG). This funding is currently operated in partnership with 23 lending institutions and following changes to SFLG in April 2003 there has been an increase of 40 per cent in the take-up of the scheme. The review is intended to consider ways in which the take-up of SFLG can be further extended. This includes further promoting SFLG as well as considering what changes need to be made to its terms and conditions.
Enterprise Capital Funds
Respondents to the 'Bridging the finance gap' consultation suggested that consideration should be given to introducing an enterprise-funding model similar to the Small Business Investment Company programme which has been active in the USA for over 40 years.
It is planned to explore this funding scheme further, and in order to do so the Government will invite applications on a bid basis for a round of 'pathfinder' funds that will be known as Enterprise Capital Funds (ECF). It is then proposed that the lessons learned should determine whether, and how, longer-term ECF should be developed.
There is currently a wide range of sources of finance for funding a business. These proposals may assist in raising capital for new ventures and for business development in the future. Do please contact us if you wish to discuss the sources of capital currently available for your business.
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Innovation, investment and skills
Research and development (R&D)
The Chancellor announced a period of consultation aimed at:
- a simplification of the definition of R&D, so that companies will be better able to decide at the outset whether or not activities will qualify for the R&D credit, and
- a clarification and widening of the definition of qualifying R&D expenditure, to include materials consumed, software, fuel and water.
Further changes are expected to ensure the R&D tax credit is available where large companies subcontract work to non-corporation tax chargeable entities and that the costs of benefits in kind provided to staff do not qualify for the credit.
Capital allowances
Accelerated tax relief, in the form of first year capital allowances, is available for certain capital expenditure by small and medium sized businesses - in the form of a 40% first year allowance on qualifying expenditure in plant and machinery.
The definitions of small and medium businesses are to be revised, probably effective from January 2004, as follows:
- a small business is one which fits at least two of the following criteria:
- turnover not exceeding £5.6 million
- balance sheet total not exceeding £2.8 million
- not more than 50 employees
and a medium sized business will be one which fits at least two from:
- turnover not exceeding £22.8 million
- balance sheet total not exceeding £11.4 million
- not more than 250 employees
Training and skills
Tax relief is available on the subscriptions many people pay to trade and professional organisations. The Government is interested in how this relief might better focus on the contribution such organisations make to skills and training. A discussion document has been published.
The Government has also announced that Employer Training Pilots (ETPs) are to be extended for a third year, and that ETPs are to be launched in a further six local Learning Skills Council areas - bringing the total to 18.
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VAT Flat Rate Scheme
The Flat Rate Scheme is available to businesses with a VAT exclusive taxable turnover of less than £150,000 and enables such businesses to calculate the net tax due on their VAT returns by applying a flat rate percentage to their tax-inclusive turnover. The flat rate percentage applied is dependent upon the trade and is designed to represent an average for all businesses in a sector, so some will pay more and others less than they would under normal VAT accounting.
Lower rates on average of about 1% reduction will come into effect for all businesses with effect from 1 January 2004. There will also be a 1% discount for new VAT registrations for the first year of business. The changes are detailed in VAT Information Sheet 17/03 available from Customs on 0845 010 9000.
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2004/05 allowances and exemptions
The Chancellor announced increases in the basic and age related tax allowances from 6 April 2004, as follows:
| |
2003/04 |
2004/05 |
| Personal allowance (reduces taxable income) |
| age under 65 |
£4,615 |
£4,745 |
| age 65-74 |
£6,610 |
£6,830 |
| age 75 and over |
£6,720 |
£6,950 |
| Married couple's allowance (reduces tax) |
| at least one spouse born before 6 April 1935 and elder spouse aged to 74 |
£556.50 |
£572.50 |
| elder spouse aged 75 and over |
£563.50 |
£579.50 |
| Minimum amount |
£215.00 |
£221.00 |
| Income limit for age-related allowances |
£18,300 |
£18,900 |
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National insurance and tax credits
Although the rates of most classes of Contributions remain unchanged, small changes were announced to the flat Class 2 and Class 3 voluntary rates. Also announced were changes in the thresholds. All changes are effective from 6 April 2004.
| Class 1 (not contracted out) |
Employer |
Employee |
| Payable on weekly earnings of |
|
|
| £91.01 - £610 |
12.8% |
11% |
| Over £610 |
12.8% |
1% |
| Men aged 65 and women over 60 |
as above |
Nil |
| |
| Class 2 - flat rate, self employed |
£2.05 per week |
| Excepted if earnings less than |
£4,215 per annum |
| |
| Class 3 - voluntary |
£7.15 per week |
| |
| Class 4 - self employed, on profits |
|
| £4,745 - £31,720 |
8% |
| Excess over £31,720 |
1% |
| (exempt if state retirement age is reached by 6 April 2004) |
Child Tax Credit
An increase of £180 a year in the child element of Child Tax Credit to £1,625 per child per year for 2004/05 was amongst the tax credit increases announced.
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Pensions: Last-stop consultation before final changes announced
Some would argue that a unified approach to the taxation of pensions has long been overdue. With the effects of lower annuity rates, higher life expectancy and poor stock market performance in recent years, it was perhaps inevitable that a review of pensions would ensue.
The changes suggested in the Pre Budget Report are intended to unify and simplify the rules for pension investment. These changes include increasing the minimum age for taking benefits from 50 to 55 by 2010, new rules to allow up to 25 per cent of the fund's capital value to be taken as a tax-free lump sum, and the residual pension not being guaranteed for a minimum period greater than 10 years.
Consultative document
In the second consultative paper, entitled 'Simplifying the taxation of pensions: the Government's proposals', a range of modifications has been proposed following the first consultative paper.
It is expected that the final proposals will be announced in the 2004 Budget. Currently, the Government is moving toward a package of measures that includes the following:
- A lifetime allowance for tax-privileged pension savings of £1.4 million indexed in line with RPI
- A single valuation factor for valuing Defined Benefit schemes against the lifetime allowance at £20 for every £1 of pension
- A recovery charge at a lower rate of 25 per cent on funds in excess of the lifetime allowance
- Allowing funds in excess of the lifetime allowance to be taken as a lump sum, subject to a higher recovery charge of 55 per cent
- A 'light-touch' annual allowance for contributions and benefit accretions of £200,000 indexed by RPI
- Increased transitional protection for those who decide to stop accruing further contributions and pensionable service
- Exempting funds held in schemes outside the simplified regime from the recovery charge.
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Increasing employment opportunities
Employer supported childcare
The Government consulted earlier this year on proposals to encourage more employers to help their staff with the cost of childcare. Following the responses to this consultation, the Government is announcing new measures, to be implemented in April 2005. These include:
- extending the current workplace nurseries tax exemption to cover any formal registered childcare or approved home-childcare contracted by the employer, such as a parent's local nursery, out-of-school club or childminder;
- removing the requirement for the employer to have management responsibility for the childcare provision;
- a new matching tax exemption for childcare vouchers; and
- a rule that where schemes operate, they should be generally accessible to all employees.
The tax and NICs exemption for employer-contracted childcare and childcare vouchers will be restricted to approved childcare, and will be set at £50 per week per employee.
Reducing unemployment
Measures announced to enable the UK to maintain its current low level of unemployment focus on the role of the New Deal rather than on creating jobs.
Proposals include:
- extending rights and responsibilities of claimants of Jobseeker's Allowance to ensure that they are genuinely seeking and are available for work
- ensuring that there is a financial incentive to work, including those on sickness and disability benefits, whose gains to work may be lower
- focusing on minimising barriers to work. Jobcentre Plus provides a range of measures to overcome barriers such as access to childcare, improved skills training, English language courses and other challenges such as health and discrimination issues.
From October 2005 the New Deal for lone parents (NDLP) whose youngest child is aged 14-15 will receive increased scrutiny through extra, more intensive Work Focused Interviews providing the opportunity to 'NDLP support'. It should be noted that in 2000 over 50 per cent of lone parents were employed.
For those aged 60 and over in receipt of Pension Credit there will be the opportunity of access to employment programmes.
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Tax avoidance
Several measures have been announced, aimed at tackling tax avoidance in several areas.
Small companies
The Government is concerned that the owners of small businesses are taking advantage of the initial zero percent rate of corporation tax and the tax treatment of dividend income to minimise taxes on extracting profits.
It is proposed that legislation will be included in Finance Bill 2004 aimed at countering the tax advantages obtained in this way and encouraging reinvestment of profits within businesses.
Trusts
From 6 April 2004 the rate of tax payable on the income and gains of trusts will be increased from 34% to 40% (25% to 32.5% for dividend income). This is intended to remove a tax advantage from some higher rate taxpayers - those paying lower and basic rates will be able to recover any tax deducted in excess of their true liability.
Tax avoidance through 'gifts relief' on disposal of assets to settlor-interested trusts is ended with immediate effect. Legislation to confirm this will be included in the 2004 Finance Bill.
Further avoidance, in this case of inheritance tax through the donor retaining the use or enjoyment of 'gifted' assets, will be reduced through the introduction of a tax charge on the 'benefit' gained from the use or enjoyment of the asset. Following consultation on the exact working of this charge, legislation will be included in the 2004 Finance Bill.
Construction industry
The Inland Revenue is to increase compliance activities in the construction industry, to ensure that all those involved understand and comply with their obligations. A new Construction Industry Scheme will apply from April 2006.
Film finance scheme
The film finance scheme was intended to offer a tax deferral for those investing in UK films. However, schemes have operated allowing investors to turn the deferral into a permanent tax relief.
With immediate effect, investors exiting film partnerships will be liable to a tax charge effectively recovering any excessive tax advantage obtained.
Gift Aid
As a result of an increase in the number of heritage and conservation charities granting free admission in return for a Gift Aid donation, the Government is to act. The intention is to maintain the integrity of the Gift Aid scheme.
VAT on assigned debts
Businesses can recover from Customs & Excise the VAT they charged but have not been able to collect from customers who have not paid them. This VAT is normally recovered by Customs & Excise if the business subsequently receives payment from the customer, but not if the debt has been assigned to another business.
With effect from 11 December, businesses will not be able to retain the VAT recovered from Customs if the debt has been assigned to a connected business and the customer then pays.
Partial exemption
At present Customs cannot terminate a bespoke method of calculating VAT unless they have already prepared a fairer method or negotiated one with the business. Under legislation to take effect from 1 January 2004, Customs will be able to set a date from which they can correct the effect of unfair methods. Thus it will no longer be possible for businesses to continue to take advantage of methods unfair to the Exchequer by deliberately delaying negotiations with Customs.
Tackling VAT avoidance
A further 450 staff are to be deployed over the next two years to improve compliance and recovery from non-compliant businesses.
Alcohol
The Government has announced a new strategy to reduce avoidance of duty. This includes better regulation of the alcohol duty regime, implementing the recommendations in the Roques report - applying tax stamps to bottles of spirits - and setting targets for Customs & Excise to reduce the black market in spirits - estimated by the Government at one in six bottles.
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Road fuel gases
Following consultation, the Government has decided there are no grounds for the current large differential in duty favouring liquefied petroleum gas (LPG) and in consequence the rate of duty will be increased over time to a more appropriate level.
By comparison the benefits of natural gas (NG) over other conventional road fuels are believed to be sufficient to justify leaving the differential in duty favouring NG constant for the next three years.
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