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The Chancellor delivered a characteristically upbeat pre-budget report.  He acknowledged that the world’s economy was going though a tough period with an economic slowdown sharper than at any time in the last 20 years.

However he contended that the decisive action that has been taken on monetary and fiscal policy had provided a platform for optimism.  The British economy he insisted entered these trying times with low inflation, public finances under control and a reasonable prospect of avoiding widespread recession.

The Chancellor forecast that the UK economy would grow by 2.25% this year outstripping the growth rates of the other G7 nations.  He forecasted broadly similar levels of growth for next year, though some economic forecasters believe this is over optimistic.  As the world economy recovers and grows in 2003, the British economy should achieve growth rates of 2.75 – 3.25%.

Confident that economic stability has been achieved and is maintainable the chancellor announced an increase in spending on public services of £50 billion over 2000-01 levels.  75% of this increase will be spent on the core services of health education and transport.

In real terms between 2000-01 and 2003-04 spending will grow by:

·                    5.6% each year in education

·                    5.7% each year in health

·                    14% each year in transport

Income Tax Allowances and National Insurance Contributions

Income tax allowances are, unless legislation is enacted otherwise, increased annually by the rate of inflation based upon changes in the Retail Prices Index.  The Chancellor’s announcements confirm that for 2002-2003 statutory indexation will apply.  The rates for 2002-2003 will be:

National Insurance Contributions

The alignment of the income tax personal allowance and the employees and employers NIC thresholds will mean that neither the employee or the employer will have a liability where earning are less than £89 per week in 2002 – 2003.

The rate of employers NIC has also been reduced by .1% from 11.9% to 11.8%.

Class 2 Contributions for the self-employed will remain at £2 per week and the earning limit below which the self-employed can apply for exemption is to be raised to £4,025.

Class 4 contributions will be payable on profits between £4,615 and £30,420.

Stamp Duty Exemption

The exemption is to be introduced in two stages.  During the first stage with effect from Friday 30^th November property transfers in qualifying areas, whether they be residential or business property, will be exempt from stamp duty if the consideration does not exceed £150,000.

The second stage which the government is expected to introduce during 2002 would see the exemption granted extended to the transfer of all non residential property in qualifying areas.  Premiums under new leases will also be eligible for exemption.

The exemption is part of a range of policies targeted at regenerating urban areas, including VAT reforms to encourage the renovation of residential property and the availability of enhanced capital allowances for the renovation of residential property above commercial premises.

A list of qualifying areas is available; please contact us if you require more information.

Community Development Venture Capital Fund

The fund will be a commercially driven venture capital fund dedicated to investment in the most deprived areas of England.  The fund is set to invest £40 million, half of which will be funded by the government and will come into force early in the New Year.

Community Investment Tax Credit (“CITC”)

Further changes have been announced to the CITC, which was set up to try and encourage private investment in deprived areas.  The major change announced is the withdrawal of the overall cap on the total investment attracting the CITC in any one year.

Construction Industry Scheme

The government intends to relax rules on the deductibility of tax payments withheld from payments made to companies operating within the construction industry without a gross payment certificate.

A company is only currently entitled to set such deductions against its corporation tax liability.  The government proposes to allow companies to set tax deducted against PAYE and NIC liabilities from 6 April 2002.

Cross Border Royalties

The government proposes to introduce an optional scheme to allow companies to pay overseas royalties at the treaty rate without requiring clearance from the Inland Revenue.

A return of payments made will be required and should it subsequently transpire that the overseas recipient was not entitled to the lower rate of tax deducted, the company will be liable for the tax not deducted, interest and in some cases penalties.

Exemption for Capital Gains and Losses on Substantial Shareholdings

The government is publishing draft legislation providing details of a relief from capital gains tax on disposals after 31 March 2002 of substantial shareholdings.

Gains on such disposals will be exempt and losses not allowable 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 has been held throughout a 12-month period ending not more that 12 months before the disposal.

Capital Gains Tax Business Assets Taper Relief

The Chancellors proposals announced in the summer to improve the relief’s available on the disposal of business assets are to be enacted in the finance bill 2002.

The effective rate of tax for a higher rate tax payer will fall to only 10% after a holding period of two years and 20% if the asset has been held for between one or two years.

The new proposed rates are set out in tabular form below

The government is also considering:

·                    Whether there is any case for changes to the capital gains tax regime for none Business assets in order to improve incentives for investment and

·                    Various proposals it has received in response to the consultation launched in June 2001 on value-for-money options to simplify capital gains within the existing policy framework.

Corporate Debt, Financial Instruments and Foreign Exchange Gains and Losses

The government intends to introduce new legislation in this area to apply for companies with accounting period beginning after 30 September 2002.

The proposal is to merge the separate legislation enacted in these areas to produce a simpler code, which should prove less administratively burdensome to both companies and the Inland Revenue.

The government also intends to change the rules governing connected party bad debt to ensure that the problems that have arisen both in interpretation and implementation of the legislation are eradicated and that the rules are seen to operate fairly.  Specific legislation will be introduced to stop a number of anti avoidance schemes, which have been designed to exploit loopholes in the legislation.

Purchase of Intangible Assets Corporate Debt, Financial Instruments and Foreign Exchange Gains and Losses

Draft legislation is to be enacted to provide a measure of tax relief for the costs of purchasing intellectual property, goodwill and other intangible assets.

The legislation will allow relief to be given on the future acquisition of such intangible assets as far as possible, in line with the accounting amortisation policy.

Research and Development Tax Credit

A follow up consultation document, to that released in the 2001 budget, about the introduction of a scheme to give tax credits for research and development is to be launched next month.

The document will set out the responses to the original consultation document and outline proposals for the implementation of a scheme.

Enterprise Management Incentive (“EMI”)

EMI share schemes were introduced to provide a vehicle to reward employees willing to risk investing time and skills in small companies with development potential.

Under an EMI scheme tax advantaged share options with a market value of up to £100,000 can be granted to employees, subject to a maximum share value of £3million.  However for companies to qualify their gross assets must not exceed £15million.

The chancellor has announced that from 1 January 2002 the gross asset limit will be doubled to £30 million.

Further Review of Small Business Taxation

The consultation process on reforming the taxation of small businesses is set to continue, in particular proposals to more closely align taxable profits with reported accounting profits found widespread approval during the consultation process.  This area is to be considered further by the Inland Revenue.

Lower Rate of Corporate Tax

The chancellor re-iterated his commitment to increase the band of profits chargeable to the lower rate of corporation tax of 10% in his 2002 budget.

The Carter Review

The government published the results of the Carter Review on new and small businesses payroll provision. 

The conclusion of the report is that the key to improving businesses ability to cope with the complexities of their payroll obligations is to encourage them to embrace new technology.

The reports recommendation include cash incentives for a period of five years, to encourage electronic filing of year end returns and a statutory requirement to file such returns electronically by the year 2004 for businesses with more than 50 employees and 2007 for smaller employers.

The government is inviting comments on the recommendations by 31 January 2002.

VAT Flat Rate Scheme

The government has decided to implement a new optional flat rate VAT scheme for businesses whose turnover does not exceed £100,000.

If traders opt into the scheme their VAT liability will be calculated by reference to their total turnover, including any exempt income.

VAT Annual Accounting Scheme 

The government plans to announce changes to the annual accounting scheme, available to businesses with a turnover of up to £600,000 a year.  Under the scheme businesses which qualify can file their VAT returns on a yearly rather than a quarterly basis, improving both their cash flow and reducing compliance costs.

The government intend to open the scheme up to more businesses by removing the 12-month qualifying period for businesses with a turnover of up to £100,000.  It also wishes to simplify the payments procedures.

Reforms to VAT Penalty System

Reforms are to be introduced to offer support to businesses, which are late in paying across VAT rather than the current regime of applying automatic penalties.

Venture Capital Fund

The government is to publish a prospectus for £50 million of seed growth funding to be available to help access to finance for small growing companies.

Green Technology Challenge (GTC)

Since April 2001 100% Capital Allowances have been available on qualifying energy saving equipment.

The GTC will seek to build upon this by offering enhanced capital allowances in three areas:

·                    Cleaner fuels and vehicles

·                    Energy saving

·                    Improving water use and quality

Road Haulage Taxation

A consultative document entitled “modernising the taxation of the haulage industry” is being launched today.  The aim is to introduce a road user charge for lorries as part of the governments commitment to ensure that haulers contribute to the costs they give rise to in the UK.  As UK haulers already contribute to these costs the government is looking at ways it can offset the effect of the charges for UK haulers by reducing other taxes on their operations.

Reforms to lorry vehicle excise duty are to be introduced in December 2001.  The government is also looking at reforming vehicle excise duty to encourage van operators to adopt new cleaner technology.

Aggregates Levy

The previously announced aggregates levy will be introduced in April 2002.

Pensioners

A number of measures were announced to help pensioners these include:

·                    A new pension credit from 2003 to avoid pensioners who have accumulated savings being discriminated against in the tax system.  The new credit will guarantee a minimum income, protect housing and council tax benefits, reward saving and abolish the weekly means test. 

·                    A guaranteed rise of £100 for a single pensioner and £160 for a pensioner couple on the annual basic state pension for 2003-04.

·                    Maintenance of the winter fuel payment, at £200 for the remaining life of this parliament.

Vocational Training

The government is to examine four linked elements to overcome barriers to training.

A number of pilot schemes will be set up to test what approach will be most effective and efficient.  These will include:

·                    Pilot schemes offering 100% compensation for wage costs to employers when employees are engaged on training

·                    Pilot schemes giving employees a statutory right to 35-70 hours of paid time off a year for training

·                    Rewards for the successful completion of training programmes

·                    Subsidies for course fees

Working Tax Credit & Child Tax Credit from 2003

This new working tax credit will be designed to supplement the income of the low paid whether or not they have children.  The rates will be set in the 2002 budget.  A new tax credit for families with children will also be introduced in 2003.