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Introduction

The Chancellor delivered a typically bullish pre budget report despite facing a 37.4 Billion gap between tax revenues and public spending requirements, some 10 Billion greater than anticipated at the April Budget.

A raft of anti avoidance provisions, some further comments on the new proposed pension regime and some welcome additional relief’s to encourage investment were probably the highlights of the speech.

Commentary on the main areas is set out below.

Corporation Tax Rates

These have been retained at current levels.

Community Amateur Sports Clubs (CASCs)

The Government introduced the scheme in Budget 2002 to provide support for amateur clubs through tax breaks for clubs and individuals supporting them.

The Government intends to double the corporation tax exemption thresholds for CASCs. These will be exempt from corporation tax on trading profits, if their trading income is under £30,000 and on profits derived from property, if their property income is under £20,000. Qualifying CASCs will not have to complete a corporate tax return.

Costs of managing investments

The Government has agreed to extend tax relief for expenses of managing investments to trading companies. Presently certain companies are required to incur costs ensuring that structures are maintained for no reason other than to guarantee a tax deduction on commercially incurred expenditure.

Transfer pricing and thin capitalisation

The Government is proposing to extend the scope of these rules to transactions within the UK. The new draft legislation will bring the thin capitalisation rules into its transfer pricing legislation and will be effective from 1 April 2004.

Small businesses will be exempt from the transfer pricing rules (including thin-capitalisation) and medium sized businesses will be exempt inmost circumstances. Generally penalties for keeping insufficient records will not arise during the transitional period to April 2006.

The new regime will allow for a compensating reduction in the profits of a UK company where a transfer pricing adjustment has been made to increase the profits of another UK company. A tax-free 'balancing payment' will then be permitted between the companies.

Any groups not falling within the definition of 'small and medium sized', will need to give attention to the impact of the proposed legislation. An analysis of all intra-UK-group transactions and financing balances should be carried out as soon as possible.

Corporation tax: taxation of derivatives based on property and share values

The Government has issued draft legislation, on a possible new model for the taxation of certain financial derivatives.

The objective of the proposed new legislation in this area is to provide a simple and more certain tax treatment for derivatives whose value is derived essentially from an underlying asset that is within the capital gains regime. The illustrative draft legislation is based on property derivatives but discussion is also invited on how the legislation may also cover equity derivatives.

Close companies raising finance from venture capital funds

The Government is proposing to relax the circumstances where interest paid late by a close company is deferred for tax purposes and will apply where a company is close only, broadly, because it has a Collective Investment Scheme (CIS) Limited Partnership as an investor. In these circumstances interest accrued to all participators, rather than just the CIS Limited Partnership, will now not be subject to the late interest rules. Similar changes will be made in relation to debits under relevant discounted securities issued by close companies.

It will also be made clear that certain overseas limited partnerships will qualify as a CIS Limited Partnership.

These changes will have effect for accounting periods ending on, or after, 10 December 2003.


Companies in administration or liquidation and release of debts

The proposals ensure that releases of connected party debt will not be taxable after a creditor company has gone into insolvent liquidation, administration or administrative receivership provided the parties to the loan relationship were connected immediately prior to the liquidation. The new rules will apply to releases made on, or after, 10 December 2003.
Changes are proposed to help ensure that releases of debts are not taxable.

Under existing rules a release of a debt between companies may be taxable for the debtor company even though they were connected before the creditor went into liquidation.

The circumstances where relief is given for the debtor company are also extended to include companies in insolvent administrative receivership for accounting periods ending on, or after, 10 December 2003.

Pensions changes for businesses

 The main areas are:

Small Self Administered Schemes have been permitted to invest in the shares of the sponsoring employer (subject to certain limits) and loan money back to the sponsoring employer. The new proposals limit such investments to 5% of the value of the fund. Any such investment, however, already in place will remain unaffected

unapproved schemes will be allowed to exist outside of the new regime. Employers will no longer be subject to National Insurance Contributions on payments into such schemes. They will also not be granted tax relief on any payments into such schemes until the benefits are drawn by the member.

It will no longer be necessary to apply for Inland Revenue approval of occupational pension schemes.

For those employers offering Defined Benefit schemes. The Government proposes to use a single conversion rate of 20:1. However, it intends to refer this and the following two points below to the National Audit Office:

o  Firstly, whether it is reasonable for the Government to estimate that around 5,000 people will have pension funds in excess of £1.4 million at 5 April 2005

o  Secondly, whether it is reasonable for the Government to estimate that around 1,000 people a year may be affected by the Lifetime Limit allowance for contributions who would not have been affected by the current earnings cap rules.

The National Audit Office is to report in advance of the 2004 Budget to allow an announcement to be made in the Budget itself. If they agree on all three points it seems that the changes will be introduced in April 2005. Otherwise the current eight different regimes will remain in place

Research & Development Guidelines

The new guidelines neither widen nor narrow the scope of the current definition. However, their aim is to:

Make the definition clearer and easier to understand

Allow companies to more easily assess whether their work qualifies for R&D relief.

R&D is now defined as 'an advance of science or technology', rather than the previous definition of 'novelty' and 'innovation'.

The Inland Revenue is also to issue guidance on how companies might prove their work is seeking to achieve an advance in science or technology. Such guidelines should help the process of claiming the relief, although there have not indicated when these will be published. Be published.

The qualifying costs eligible for R&D relief will be extended by replacing the term 'consumable stores' with:

The cost of materials consumed or transformed

Water and fuel (including electricity and gas) costs used in the R&D process.

In addition the cost of most bought-in software will be allowable provided it is directly used in the R&D process. The software no longer has to be 'advanced' in order to qualify.


International Accounting Standards

The Government’s has confirmed that companies adopting International Accounting Standards (IAS) can use these figures for preparing their UK corporation tax return.

Rise in the statutory audit threshold

The Government has announced that it proposes to raise the audit exemption threshold to companies with a turnover of less than £5.6 million per annum.

Capital Gains and Inheritance Tax Allowances

The changes to Capital Gains and Inheritance Tax Allowances are set out in the Tax Facts table.

Chargeable gains: restriction of gift relief’s

Settlor interested trusts

New provisions have been introduced which are designed to counter tax deferral or avoidance strategies which utilise holdover relief’s on gifts.

For disposals on or after 10 December 2003 holdover relief is denied if the gift is to a trust where the individual making the gift (the settlor) or his spouse can derive a benefit in any circumstances whatsoever. The relief is also denied where all or part of the gain arising on the gift has previously been heldover on a gift by an individual, and that individual can derive a benefit immediately or in the future from the trust.

If the gift is to a trust where no immediate benefit is retained by the settlor or his spouse, but a benefit to the settlor or his spouse arises at a later date within six years of the end of the year of assessment in which the gift was made, there is a provision for a claw back of any holdover relief obtained at the time of the disposal into the trust.

The new provisions apply both in relation to gifts of business assets and gifts on which inheritance tax is chargeable.

These provisions will not apply to a disposal of assets to trustees of certain trusts for disabled persons or for the maintenance of historic buildings.

Private residence relief

New provisions have been introduced to deny private residence relief on houses either, occupied by beneficiaries of a trust under the terms of that trust or owned personally by the occupier where the property was acquired by way of a gift into or out of a settlement and was subject to holdover relief.

The provisions apply to a disposal after 9 December 2003. The bar on private residence relief applies only to the time apportioned part of the gain referable to the period of ownership from 10 December 2003 to the date of disposal.

No period of occupation from 10 December 2003 qualifies for private residence relief as part of the final three-year rule.

Review of domicile and residence rules

The Government has confirmed that it is not intending to make any immediate changes to the residence and domicile rules. The government has stated it recognises that this is a complex and far-reaching issue and is determined to proceed on the basis of evidence and in keeping with its key principles'.

The three key principles that the Government sees underpinning any changes as announced in the background paper are:

· be fair
· be supportive of the competitiveness of the UK economy
· be clear and easy to operate.

 Film partnerships and exit routes

 Film partnerships are given tax incentives to produce UK films by being permitted to write off the cost of producing the film for tax purposes over either three years or more commonly one year.

These accelerated tax relief’s normally result in the creation of a tax loss in the first year, which can be set off against the tax liability on the film making partner's other income or carried back for up to three years. However, these are only temporary relief’s since if the film is profitable the later stream of revenue will be fully taxed without the benefit of the accelerated relief’s.

Tax schemes seeking to convert the tax deferral into a permanent tax saving involve the film making partner exiting from the business by assigning or giving up the right to receive future income and also being removed from the liability for the balance of the loan. Sometimes the transaction is the disposal of the whole of the business, which can, depending on the circumstances, be taxed quite lightly, perhaps due to the availability of losses.

With effect from 10 December 2003 there will be rules to prevent income tax avoidance via contrived exits from film partnerships which. Will provide for an income tax charge on the partner that will be the sum of:

Any consideration received for surrendering any rights to future income

The tax loss relief obtained minus the capital contributed to the business that was ultimately borne by the individual.

 Gift Aid relief

Some charities have introduced schemes that grant free day admission in return for a donation that attracts Gift Aid. As Gift Aid is not meant to be available where the donor receives a significant benefit from this payment, the Government will consult with the charities regarding the legislation to close this loophole. This will be included in the 2004 Finance Bill.

Pensions reform

The Government has issued the second consultation document on pension simplification for approved pension schemes. The main changes are:

Unapproved schemes will exist outside of this new regime but will lose some tax reliefs.

Individuals with benefits significantly in excess of what will be allowed by the Lifetime Limit under the new regulations will be granted greater protection on what has been accrued.

The investment powers of pension schemes have been will include residential property.

The recovery charge on any funds in excess of the Lifetime Limit has been reduced to 25%.

In a change from the original proposals any pension credit will no longer count against the donor's Lifetime Limit but instead that of the recipient.

Trusts

From 6 April 2004 the tax rate paid on income and gains of trusts will be brought into line with higher rate taxpayers.

The trustees will therefore be liable to tax on dividend income at 32.5% and other income and gains at 40%.

Proposals following consultation are to be published on:

Reducing the compliance burden of small trusts

A modernised income and capital gains tax regime for trusts

Reduction on the tax burdens of smaller trusts

Ensuring that trusts established to protect the vulnerable are not disadvantaged by the tax system

Actions against avoidance of the Inheritance Tax rules for gifts with reservation.

Construction Industry Scheme

The start date for the Inland Revenue’s new proposals for the construction industry has now been deferred until April 2006. In November 2002, the Inland Revenue issued a consultation document entitled 'The Inland Revenue and the Construction Industry: Working Together for a New Scheme'. The key proposals are:

A verification service to replace registration card and gross payment certificates

A new employment status declaration

Electronic filing to replace vouchers.

Employer supported childcare

The tax and National Insurance (NI) treatment of employer supported childcare will change from April 2005.

The new rules will allow any form of employer directly contracted childcare, or vouchers, to be provided on a tax and NIC exempt basis up to a limit of £50 a week. The exemption has two conditions, firstly it only applies where the carer is either registered or an approved home carer, and secondly, the childcare scheme must be available to all staff.


Payments to third parties connected to the employer

The Chancellor has announced that the law will be clarified in relation to payments employees receive from a third party that is 'connected' to their employer. Currently an employer can be responsible for any tax and national insurance due in such circumstances or for reporting non-cash benefits given by connected parties on the employee's return of expenses and benefits (form P11D).

The definition of connected is often not clear cut.

Foreign Earnings Deductions for seafarers

The government is to tighten up on the exploitation of the 100% foreign earnings deduction by employees working on offshore installations.

Professional fees and subscriptions

The Chancellor has set out proposals to reform tax relief for members' subscriptions to such organisations with the aim of strengthening and supporting workforce education and skills.

The Chancellor aims to broaden the reach of the tax relief, reduce unfairness and increase flexibility. His main proposals are:

Establishing measurable criteria to replace the 'only or mainly' test

Introducing a monitoring system to ensure continuing entitlement to approval

Considering a system for approving sub groups within an organisation

Inviting comment on easier methods of providing the tax relief and extending the relief.

Income Tax Allowances and NIC Rates

The changes to Income Tax allowances and NIC rates are set out in the Tax Fact tables.

Childs tax credit

The level of Child tax credit is to be increased to 1,625 per annum an increase of 3.50 per week.

Enterprise capital funds

 The Government intends to invite bids for a round of 'pathfinder' funds based on the SBIC model, to be known as Enterprise Capital Funds ('ECFs').

The Government would allocate loans or loan guarantees to pathfinder ECFs through a competitive bidding process, guidance on which should be published in Spring 2004. It is anticipated that the proceeds of successful investments would be allocated between private investors and the Government. Initial financing rounds will involve up to £2 million of fundraising.


Enterprise Investment Scheme (EIS)

The Government proposes to increase the upper limit for eligibility for the 20% income tax relief through EIS investments from £150,000 to £200,000 in any single tax year, with effect from 6 April 2004. Note that unlike VCTs the rate of EIS relief remains unchanged at 20%.

 
Venture Capital Trusts (VCTs)

The Government has made the following proposals to make VCT’s more attractive to potential investors:

Consideration will be given to increasing the upper limit for income tax relief from £100,000 to £200,000 in any tax year. This would apply from 6 April 2004 and would be accompanied by the withdrawal, from that date, of the ability to defer chargeable gains by investing in VCT shares.

Subject to consultation, the Government intends to provide a stimulus to VCT fundraising through a temporary improvement to income tax relief for a period of two years from 6 April 2004. The Government’s favoured option is to increase the rate of income tax relief from 20% to 40%, with the additional relief paid directly into the VCT for investment in companies seeking finance.

Small Firms Loan Guarantee Scheme

The Government proposes enhancements to The Small Firms Loan Guarantee Scheme, to raise awareness of the scheme among SMEs to simplify the administrative requirements, and increase the take-up.

First year allowances

The Chancellor surprised most people by doubling of the small and medium sized company thresholds. This means that 40% first year plant and machinery allowances become available to significantly smaller businesses. It is expected that the new thresholds will be introduced in January 2004, applying to accounting periods ending after that date.

The 2004 Budget will publish details of allowances for the renovation of business premises that have been vacant for a year or more and which are situated in Enterprise Areas. The Government intends to introduce the allowances in 2005, subject to EU state aid approval being obtained. For enterprise areas there will be a 100% investment allowance to renovate vacant commercial premises.


Tax transparent property vehicles

The Government announced that a consultation to consider the most appropriate structure for a tax transparent property vehicle would be published when the Budget is announced in Spring 2004. This review will also cover the transition rules and charges for conversion to the new vehicle, as well as the taxation of other related property investment products.

Aggregates levy

Proposals for extensions to reliefs from aggregates levy in Northern Ireland have been announced.

Bad debt relief

Changes to the scheme that allows businesses relief from VAT on bad debts have been announced relating to use of the scheme where debts are assigned to a connected party. Customs believe that businesses were avoiding VAT by assigning debts and the changes will close the opportunity for this avoidance. The changes will come into effect from 11 December 2003.

Climate change levy

Announcements have been made relating to:

the interaction of climate change levy and the EU emissions trading scheme

Proposals to widen the criteria for climate change levy discounts for businesses in energy intensive sectors that meet efficiency targets.

Cultural exemption

In their Business Brief 28/03, Customs have set out their policy for determining which bodies can qualify for exemption for cultural activities. A body that qualifies, such as a non-profit making theatres or museums, need not charge VAT on tickets or admission charges, which can give rise to major VAT savings.

Formal implementation of the new policy will be deferred to 1 June 2004 to allow potentially affected bodies to consider their position. However, a body can use the new policy immediately if it so wishes.

The Business Brief also sets out transitional reliefs for major building projects that are currently underway. A revised VAT notice has been produced that gives details of the reliefs.


Flat rate scheme

Various proposals have been announced to make the scheme more attractive, including a general reduction in the rates applied to most business sectors the average reduction being 1%. A further 1% reduction is to be given to businesses in their first year of VAT registration. The table of flat rate sectors has also been revised.

Fund management

Customs have completed their review of the VAT treatment of fund management and concluded that no changes will be implemented at present.


Partial exemption

Changes have been announced that may affect businesses that have agreed, or are in the course of agreeing, a special partial exemption VAT recovery method.

With effect from 1 January 2004, Customs will be able to issue a notice that will require changes to be made immediately (or backdated to the date of the notice once they are agreed). It will be possible for a business to appeal against the issue of the notice or against any assessment raised as a result.

VAT avoidance

Customs' paper 'Measuring and Tackling Indirect Tax Losses' sets out their approach to protecting indirect tax revenues. The paper revises previous estimates of the values of VAT and other indirect tax that is 'lost' by avoidance. Further staff will be deployed in VAT control and debt recovery.