Significant
points and further information
| Business Tax | |
Income tax allowances increased in line with inflation
Increases in National Insurance to take effect from 6 April 2003.
Improvements in taper relief for CGT on business assets from 6 April 2002.
No Corporation Tax for companies with profits up to £10,000.
Major changes to Corporation Tax for large companies.
Exemption from Stamp Duty for purchases of goodwill.
No significant increases to VAT or to Inheritance Tax.
TAX RATES AND ALLOWANCES (click on link to go straight to
Personal Income Tax Table)
Personal
allowances and higher rate thresholds were increased in line with inflation. The rates of tax are unchanged. The benefit of these changes is in the region of £125 for a higher rate taxpayer. The benefit is much smaller for a person on low income, but is likely to represent a larger share of that person’s tax bill.
The overall effect is complicated by the different rates which continue to apply for dividends, interest and other income. Nothing has been done to simplify the tax calculation, which (in its most basic version) continues to require 16 pages of little boxes in the Revenue’s return forms.
The
Children’s Tax Credit for 2002/03 is increased from £5,200 to £5,290.
The relief is worth 10% of that figure, so this effectively saves an extra £9 a year for someone who qualifies. If the claimant has income which is taxed at higher rates, the credit is
tapered away, and the higher earner of a couple is required to make the claim. So this relief is targeted on those who are considered to need it most.
As announced last year, extra credit (a further £5,200) is allowed from 6 April 2002 in the year in which a child is born. Because the tapering of the credit is still at the same rate (£2 for every £3 taxed as
higher rates), this double credit will affect the tax liabilities of much higher earners. However, it will still be the higher earner who has to claim, even if the mother may not earn as much during the year of a child’s birth.
TAX
TRAP!
If one partner is a higher rate taxpayer and the other is not, the higher earner has to claim the CTC (which will then be restricted).
After only coming into effect for 2001/02, the Children’s Tax Credit will be replaced by a new system from 6 April 2003. It is very complicated, and potentially will allow some credit to couples who previously could not claim. It will be restricted according to the combined income of the couple, rather than simply the income of the higher earner, and some credit will still be available up to a combined income of £58,000.
Although the changes will only apply from 6 April 2003, it will be important for people who might be affected to start considering their claims early, so they will be in place by the beginning of the new tax year.
The major tax increases, required to pay for additional NHS funding, are in National Insurance
Contributions, but they have been deferred to 6 April 2003.
The increases are:
Freezing the starting point for tax and NIC at £4,615 for 2003/04
Raising employee and employer contribution rates by 1% to 11% and 12.8% from 6 April 2003.
Increasing the rate for self-employed contributions from 7% to 8%
Charging earnings of employees and self-employed people above the upper threshold (currently £30,420) at 1%
These represent substantial increases, particularly for higher earners.
Pensioners are promised a new Pension Credit which will come into effect from October 2003, guaranteeing a minimum level of income for all pensioners. In the meantime, the personal allowances are increased this year in line with inflation, but will be increased at above inflation for 2003/04. These increases are estimated to take 170,000 pensioners out of the charge to income tax altogether.
COMPANY CARS (click on link to go straight to Benefits in Kind Tables)
The new system
for calculating company car benefits – based on carbon dioxide emissions
rather than business mileage – finally come into force on 6 April 2002. It was announced in 1999 and passed into law in 2000, so it might have
been expected that the transition would have been relatively simple. However, the Inland Revenue realised quite late on that they did not have
full details of all company cars, and many PAYE coding notices had to be issued
on an estimated basis. It is likely
that there will be wrong codings that will require correction for the rest of
this year, and possibly into next.
The tax charges
on free fuel which is provided for use in a company car have been increased at
substantially above the rate of inflation again, as promised several years ago. The tax charge for a higher rate taxpayer with a company car of over
2000cc is now £1,680 (up from £1,448), and it is likely in many cases that the
tax on the benefit is greater than the cost of the fuel used for private
purposes. It may be cheaper for
employees to buy their own fuel. The
Revenue have recently published approved rates at which employees can pay back
their employers when using a company car for private purposes, so avoiding this
charge altogether.
TAX
TIP!
Consider
repaying to the employer the whole cost of private fuel if it is less than the
tax.
It was
announced last year that the rates of tax-free mileage allowances which
employers can pay employees would change with effect from 6 April 2002. The maximum rate is now 40p per mile for the first 10,000 business miles
in a tax year, and 25p per mile after that, regardless of the engine size of the
car. This is likely to be
relatively generous to those driving small cars, and relatively mean to those
with larger ones, where the rate has previously been higher.
From 6 April
2002, it is also permitted for employers to pay their employees a tax-free 5p
per mile if they take a business colleague in the car with them. The insurance position should perhaps be checked, because an insurer
might regard this as akin to using the car as a taxi.
Now that the
changes to car benefit have finally come into effect, the Chancellor is
proposing to change the system of fuel benefits from 6 April 2003.
This will also be based on the carbon dioxide emissions rating of the
car, so less efficient cars will become doubly expensive. It will be important to review the changes again when the figures become
available.
New rules have
been introduced to deal with the complications of employees exercising share
options and immediately selling the shares. Such a transaction may be subject to Income Tax, National Insurance
Contributions and Capital Gains Tax, and the changes affect the interaction
between all the taxes.
TAX
TRAP!
If you have share options, make sure you know the tax consequences before you exercise
them.
PENSION CONTRIBUTIONS
The “earnings
cap” for personal pension contributions and occupational scheme benefits is
set at £97,200 for 2002/03 (2001/02: £95,400). The maximum contributions for different ages are set out in the table.
The maximum
amount which can be contributed to a tax-free ISA remains £7,000 in a tax year,
with no changes to the rules.
Measures will be introduced to reform the tax reliefs given to investment in British Films, with immediate effect. This will affect some popular tax saving schemes.
The annual
exemption for individuals has been increased to £7,700 for 2002/03 (2001/02: £7,500). Trustees receive half this figure (£3,850 for 2002/03; £3,750 for
2001/02), although this may be shared between trusts which have been set up by
the same person.
CGT continues
to be calculated by adding the net chargeable gains for the year to income and
using the income tax rates for interest, which will be 10%, 20% or 40%,
depending on the level of income.
Taper relief was introduced in 1998 as a replacement for indexation allowance, which reduced gains to take into account the effects of inflation. Taper relief reduces the chargeable gain by a percentage based on the time between acquisition and disposal, so the longer it takes to make a gain, the less the gain is chargeable. Although Gordon Brown promised that this would be a simplification of the rules, taper relief has created a whole new set of complications.
The rates of
taper relief are much more favourable for “business assets” than for
“non-business assets”. Most investments in shares and property are non-business
assets, but an employee who owns shares in his employer enjoys the higher
business asset rate from 6 April 2000 onwards.
The business
assets taper rates were increased for disposals after 5 April 2000, and they
have been increased again for disposals after 5 April 2002.
From 6 April 2002, gains on business assets will be tapered by 50% if the
asset has been owned for one year, and by 75% if the asset has been owned for
two years. This means that a higher
rate taxpayer will suffer an effective rate of only 10% on the gain – 25% of
the gain will be charged at 40%.
There seems to
be no change to the rules which treat most employee shareholdings as
non-business assets up to 5 April 2000. This
can deny the full benefit of the 75% relief for years to come.
TAX
TIP!
If you are planning to sell capital assets, make sure you know the whole CGT picture,
including taper relief.
RATES
(click on link to go straight to Stamp
Duty Tables)
Contrary to
some predictions, there were no increases in the rates of Stamp Duty.
Instead, some loopholes which are exploited in commercial property
transactions have been closed down.
GOODWILL
In 2000,
Stamp Duty was abolished on purchases of patents and other classes of
intellectual property. From 23
April 2002, purchases of goodwill will also be exempt, reducing the costs of
incorporation or the purchase of a business with its assets.
DISADVANTAGED AREAS
At the time of the pre-Budget report in November, the Chancellor announced a new exemption from Stamp Duty for purchases of residential properties costing up to £150,000 in “disadvantaged areas”. A comprehensive list of electoral wards affected was published in December, and is available on the Inland Revenue website.
It is
intended to apply a complete exemption to commercial property within the same
areas, but this requires approval from the European Commission. It is now proposed that the purchase of six or more residential
properties together (to encourage landlords) will qualify for the full
exemption. The exemption will also apply to the grant of a lease as well
as to a purchase, where the annual rent does not exceed 10% of the threshold
(i.e. £15,000 for a residential property).
INHERITANCE TAX (click on link to go straight to IHT table)
The Inheritance Tax threshold is increased from 6 April 2002 to £250,000 (2001/02: £242,000). It is estimated that only about 4% of deceased’s estates have to pay the tax.
The rates of tax remain unchanged at 40% for transfer on death and within three years of death, and a tapered rate for transfers over three and less than seven years before death. The rate for transfers which are chargeable during lifetime remains 20%.
There have
been no other major changes to the
tax, although one tax planning scheme involving trusts has been shut down.
CORPORATION TAX (click on link to go straight to Corporation Tax Table)
RATES
Companies
with profits of up to £10,000 will pay no Corporation Tax for the year
commencing 1 April 2002. The small companies rate, which applies to profits of between
£50,000 and £300,000, is cut from 20% to 19% from the same date.
SUBSTANTIAL
SHAREHOLDINGS
The Revenue
have been consulting for a considerable time about the tax treatment of
disposals of subsidiaries by groups of companies. It has been argued that the tax charges imposed in the UK have made this
country unattractive for international groups, and the rules are to be changed
to increase flexibility and competitiveness.
The new rules, which apply from 1 April 2002 onwards, are detailed and complex, but in summary:
they only apply to disposals by a trading company, or the holding company of a trading group
they only apply to the disposal of shares in the same types of company
the vendor must have owned at least 10% of the other company for at least a year to qualify
If these
conditions are met, the vendor is exempt from Corporation Tax on any gain made
on the disposal.
Clearly, this
is a significant relief where a company wishes to dispose of a subsidiary.
However, it is likely to be limited in its application to transactions
between large corporate groups – the conditions make it unlikely to be
relevant to smaller companies.
TAX
TIP!
If you are
involved with a company which is selling a subsidiary, these new rules are
likely to be very significant.
INTANGIBLE
ASSETS
From 1 April
2002, a new regime has been introduced for the taxation of intangible assets
such as goodwill, patents, and know-how. The
changes only affect companies.
In the past,
intangible assets have been subject to a variety of different treatments.
depending on the precise nature of the rights involved. There have been capital allowances for the purchase of some types, and no
relief at all for the purchase of others.
The new rules
allow companies to obtain tax relief on the costs associated with intangible
assets in accordance with the accounting policy of the company. Alternatively, a straight-line depreciation at 4% can be claimed instead. This is a very significant change, because it will allow some tax relief
on the purchase of goodwill where previously there was none.
However, the
relief only applies to the purchase of the intangibles directly, not to the
situation where they are “wrapped up” within a company. As the vendor of a company will presumably want the “substantial
shareholdings” exemption for the sale of shares, and the purchaser will want
the “intangible assets” relief for the purchase of the assets themselves,
the combination of these changes is likely to increase the arguments involved in
buying and selling companies.
RESEARCH
AND DEVELOPMENT
Small and
medium companies have been entitled to extra Corporation Tax relief for
expenditure on research and development since 1 April 2000. As usual, there are many conditions, but the form of relief is to
multiply any qualifying costs by 150% for tax purposes – so saving more tax
than other types of expenditure.
A similar
relief is now extended to larger companies from 1 April 2002.
Many of the conditions are similar, but the multiplier is 125% where a
large company carries out the work.
There are
complex arrangements where one company subcontracts this kind of work to another.
The essential aim of the rules is to give the extra relief to the company
which carries out the work, even if someone else has asked for it to be done and
is paying for it.
CONSTRUCTION
INDUSTRY DEDUCTION SCHEME
From 6 April
2002, companies in the construction industry who are paid after deduction of 18%
income tax will be able to offset this against their monthly PAYE liabilities,
rather than waiting until the payments of their Corporation Tax after the year
end. This will be a major boost to
cash flow and deals with a long-standing complaint.
TAX
TIP!
If you are a company suffering deductions, this is good news for you.
REGISTRATION THRESHOLDS
From 25 April 2002, the level of taxable turnover at which a business is required to register for VAT increases by £1,000 to £55,000. The level of predicted future turnover at which a business can deregister also rises by £1,000 to £53,000.
SCHEMES
FOR SMALL BUSINESSES
A new “flat-rate scheme” has been introduced with effect from 25 April 2002. Businesses with taxable turnover of up to £100,000 a year can opt for the scheme, which removes the requirement to identify individual transactions when accounting for VAT to Customs. Instead of applying different VAT treatments to different types of receipt, and claiming VAT back on individual purchases, businesses within the flat-rate scheme will apply a single percentage to all their receipts in order to work out the VAT payable to Customs for the period.
Although this
is potentially a simplification of the record-keeping and accounting
requirements, it will also make a difference to the amount of tax payable.
The simplifications are supposed to save businesses up to £1,000 a year,
but it will be important to judge whether it seems advantageous in each
individual case. As tax invoices
still have to be issued to VAT registered customers, the scheme is most likely
to be attractive to businesses which sell mainly to the public.
TAX
TIP!
If your turnover is below £100,000, it is worth considering the pros and cons of this
scheme.
OTHER
CHANGES
There are many detailed changes to VAT rules, including:
removing the requirement to notify debtors when claiming bad debt relief
extension of the types of building work that qualify for the lower 5% rate.
changes to the required contents of a tax invoice, but not before March 2003.
CHARITABLE
GIVING
From April
2002, it will be possible to obtain a deduction against income for the value of
land given to charity. A similar
relief was introduced in 2000 for gifts of quoted investments. This means that an income tax rebate of up to 40% can be obtained for the
gift, as well as exempting any capital gain that has arisen on the property to
date.
It is also
proposed that tax relief for Gift Aid donations will be eligible for “carry
back” to the previous year. This
means that a higher rate taxpayer who makes a charitable donation before 31
January can claim higher rate relief against the payment due for the previous
year on that 31 January, rather than having to wait a year until the current
year’s tax is due.
COMMUNITY
AMATEUR SPORTS CLUB
Following a
consultation, the Budget has confirmed the intention to extend most of the
benefits of charitable status to certain amateur sports clubs.
This means that there will be tax exemptions for most categories of
income and gains, and tax rebates on donations by members.
Clubs will have to apply to
the Charity Commissioners for approval of their status.
TAX
TIP!
If you are
involved with a sports club, this is worth looking into.
FOREIGN
RESIDENTS
AND DOMICILIARIES
The Chancellor announced in his speech his intention to review the tax treatment of foreign residents and foreign domiciled individuals, for example expatriates working in the UK. No further details were given at this time.
AUTHORISED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS IN ENGLAND AND WALES TO CARRY ON INVESTMENT BUSINESS