Budget overview

In a typically robust Budget speech, chancellor Gordon Brown reaffirmed his belief in prudence and concentrated his new measures on help for families and children. 'Instead of the old short-termism of only looking a year or a month ahead, we lock in stability for the long term,' he said.

Brown forecast a current surplus of £14bn for 2000/01 in his last Budget speech; now, thanks to higher tax receipts and the greater than expected proceeds from the auction of radio spectrum licences, the surplus is estimated at £23.1bn. For successive years, starting with 2001/02, the current surpluses are projected to be £17bn, £15bn, £8bn, £9bn and £9bn. Net borrowing, forecast to be in surplus in 2000/01 at £6.5bn, is now estimated to yield a surplus of £16.4bn. For future years from 2001/02, as the government increases spending, the projections are £6bn, -£1bn, -£10bn, -£11bn and -£12bn.

The net cash debt repayment in 2000/01 will amount to £34bn, compared with £9bn in the previous year.

Last year the economy grew by 3%. Although the US economy is slowing and Japan is barely growing, the Treasury forecasts that this year Britain's growth will be in the range of 2.25% to 2.75%. Business investment will rise by between 2.5% and 3%. According to the Treasury, consumer demand will grow by 3.25% to 3.5% and inflation will be 2.25% in March 2002 and on target at 2.5% at the end of 2002. Brown confirmed that the inflation target will remain at 2.5%.

The pre-Budget report consultation measures will cost £1,995m in 2001/02 on an indexed basis and new Budget measures will cost a further £1,570m, making total Budget measures of £3,565m. In addition, the chancellor announced increased spending on education and health; and after a carrying forward of departmental expenditure limits of £1,000m and a change to the annually managed expenditure margin of plus £1,730m, the Budget 2001 book shows total Budget policy decisions costing £3,615m in 2001/02 on an indexed basis.

The main discretionary changes are a £1.1bn a year package of further support for families and children; a £0.5bn a year package of measures on maternity and paternity pay; a cut in income tax costing around £1bn a year; and an additional £2.33bn of spending over the next three years on education, health and fighting drugs.

Perhaps as we all expected, the chancellor has emphasised prudence and stability, but at the same time announced a package of measures to appeal to many voters in front of a general election. Unfortunately, simplifying the tax system is not one of Brown's priorities. While the economy remains in reasonable condition, his plans have credibility, but as we have seen in the past, a downturn in economic activity can quickly lead to deteriorating government finances.

Personal tax Rates and allowances

From 6 April 2001, the 10% tax rate will apply to the first £1,880 (v £1,520) of taxable income. The 22% basic rate will apply from £1,881 to £29,400 (v £28,400) and the 40% higher rate will kick in thereafter. The tax rate for savings income and dividends remains the same.

The following levels of allowance will apply from 6 April: personal allowance £4,535 (v £4,385); personal allowance age 65 - 74 £5,990 (£5,790); personal allowance age 75 and over £6,260 (v £6,050); married couples' allowance for those born before 6 April 1935 £5,365 (v £5,185); married couple's allowance age 75 or more £5,435 (v £5,255); married couple's allowance minimum amount £2,070 (v £2,000); children's tax credit £5,200; blind person's allowance £1,450 (v £1,400). The income limit for age-related allowances goes up to £17,600 (v £17,000).

Inheritance tax

The inheritance tax threshold will go up by £8,000 to £242,000 on 6 April.

Capital gains tax

From 6 April, the annual exemption amount goes up to £7,500 (v £7,200) for individuals, trustees of settlements for the disabled and personal representatives of a deceased person's estate. For other trustees, it goes up to £3,750 (v £3,600). The CGT rates stay the same.

Pensions earnings cap

The maximum level of earnings from which tax approved occupational and personal pension provision may be made will go up by £3,600 to £95,400 on 6 April.

Tax credits

The chancellor announced a package of measures for families. They include: an increase in the children's tax credit to £520 a year when it is introduced in April 2001, and from April 2002 an extra £10 a week during the first year of a child's life; a £5 a week rise in, and increases to the childcare tax credit component of, the working families' tax credit and the disabled person's tax credit, from June 2001; and a £1.50 increase in the child premiums in income support and the job seeker's allowance.

Maternity/paternity pay

The chancellor has announced that statutory maternity pay will increase from £60.20 a week to £75 a week from April 2002. From April 2003, SMP will rise to £100 a week and the period will extend from 18 weeks to 26 weeks. From that year, working fathers will also be entitled to two weeks of paternity leave at the same rate as SMP.

Parents who adopt children will also be eligible for paid leave set at the same rate and period as SMP. This will apply from the time that the child is first placed with the family.

The 'sure start' maternity grant will rise from £300 to £500 in April 2002. At the same time, the small employer relief rate will be doubled to £40,000 to assist businesses paying employees SMP to claim costs and compensation.

Business tax Share ownership

Enterprise management incentive (EMI) schemes. The limit on the total value of shares that may be granted at any one time under an EMI scheme has been doubled to £3m. The scheme is available to trading companies with gross assets of no more than £15m. The chancellor has also removed the limit on the number of employees that can take advantage of the scheme.

From 5 April, the Small Company Enterprise Centre will provide advance assurance for companies before they start to grant EMI options. The time limit for notification that the EMI options have been granted goes up from 30 days to 92, so that companies can make the necessary arrangements to transfer National Insurance contributions liability. The requirement for companies to seek approval from the Inland Revenue before altering share capital has been removed.

Aesops

Stamp duty is to be removed for employees who buy shares from an all-employee share owner-ship plan (Aesop) trust, so that no-one will pay tax twice when their company grants them shares. The qualifying employment period for take-up of an Aesop scheme will also be changed so that an employee who has worked in any company that was part of the same group for the qualifying time will be eligible to take part in the scheme.

CGT taper relief

Employees, including part-time employees, of non-trading companies will be eligible for business asset taper relief for capital gains tax on shares bought in their company, provided they have less than a 10% interest in the company. The change applies from 6 April 2000.

NICs on share options

The chancellor confirmed that legislation in the Social Security Contributions (Share Options) Bill will limit the amount of National Insurance contributions payable on options granted between 6 April 1999 and 19 May 2000. Liability will be limited to the gain attributable to the growth in company share price up to 7 November 2000, and will take effect when the Bill is given Royal Assent.

SDRT and pensions

The chancellor released draft legislation that will enact the stamp duty reserve tax (SDRT) exemption for individual pension accounts (IPAs). The SDRT exemption proposals allow pension savers holding units in unit trusts or shares in open-ended investment companies (OEICs) within an IPA to adjust their investments without paying an SDRT charge.

Regulations offering entire unit trusts and OEICs restricted to IPA holdings will be laid before Parliament shortly.

Profits-averaging system for creative artists

The chancellor has published draft legislation to replace the income spreading rules for creative artists with a profits-averaging system.

Currently, authors and creative artists can spread certain types of copyright and similar income over a number of years back and forth for income tax purposes. But under the proposals, they would be able to average their profits over two or more consecutive years if they were derived from employment whose profits proceeded from creative activities, and if they were taxable under Sch D, Case I or II.

Averaging, however, would only apply if profits of the lower year were less than 75% of profits of the higher one.

Business gifts

Finance Bill 2001 will see the de minimis limit for business gift expenses rise from £10 to £50. For corporation tax purposes this will take effect for periods of account beginning on or after 1 April 2001 and, for income tax purposes, for the tax year 2001/02.

Self-assessment

Following recommendations by a joint report from the Chartered Institute of Taxation and the Inland Revenue, Finance Bill 2001 will include measures to improve and make clearer legislation governing assessments, amendments, appeals and collection of taxes under the Revenue's self-assessment regime.

Both sides will be able to resolve disputes on points of law by litigation as and when they arise and will not have to wait until the whole enquiry is complete. The procedure for amending an income tax assessment at the end of an inquiry will also be simplified. The rules concerning self-assessment, amendments and enquiries will be rewritten to make it clear that a taxpayer has a legal right to amend sums on the form and to reject any corrections of 'obvious' Revenue errors. The Revenue's time limit for opening an enquiry is adjusted from 30 January to 31 January.

Clearer guidelines governing tax collection will also be set out so that confirmation of that interest on penalties and on surcharge can be included in Revenue claims in court proceedings, and so that a specific due date will be set for tax payment or repayment of tax following a partnership return amendment. Guidelines will also confirm that proceedings for recovery of payments on account may be taken to a county court - or sheriff court in Scotland.

The concession allowing interest to be added to repayments arising when relief from one year is carried back against income from an earlier year will be put on a statutory footing.

Life policy share transfers

Life assurance companies will be required to give their policyholders details of any gains for any policies beginning on or after 6 April 2001. However, insurers will have until 6 April 2002 to put such systems in place. This should make it easier for policyholders to submit the details of such gains on their end of year self-assessment forms.

Legislation simplifying and clarifying the rules for the tax treatment of transfers of shares in life insurance products will also appear in Finance Bill 2001. The tax charge on the rights transferred will be the same in England and Wales as it is in Scotland, and the person who gives up the interest will be liable for any tax due on the transfer.

Transfers for no consideration of part of the rights under a life policy contract will no longer be liable to income tax.

Vaccines and drugs

The government will consult with interested parties before introducing an additional 50% tax relief on qualifying R&D expenditure. In order to qualify, expenditure must be treated as R&D within s 837A, ICTA 1988, and be incurred in developing vaccines and drugs to combat malaria, TB and certain strains of HIV/AIDS.

LLPs

The Limited Liability Partnership Act 2000, which takes effect from 6 April 2001, broadly taxes LLPs as if they are partnerships rather than corporate bodies. Further measures will be introduced to prevent LLPs being used as an alternative business structure, particularly by property and investment companies. The legislation will define 'investment LLP' and 'property investment LLP', and restrict tax relief on borrowings to finance investment in an 'investment LLP'. Income and gains from investment in property investment LLPs will cease to be exempt for pension funds, friendly societies and the pension business of life assurance companies. The rules will also clarify the tax treatment of LLPs as partnerships wherever necessary.

Close companies

UK-resident participators will, with effect from Budget day, no longer be taxed on attributable gains arising from an investment in a close non-resident company where: the participator has an interest of 10% (v 5%) or less in the gain; or the gain arises on any asset, including intangible trading assets, used outside the UK, in a trade carried on to any extent outside the UK; or the gain would be attributed to an exempt approved pension scheme. The rules for giving credit for tax on gains against tax on subsequent distributions of those gains will also be relaxed. In future, credit will be available if a distribution is made within the earlier of: three years of the end of the period to which the company makes up its accounts; or four years from the date the gain arose.

Withholding tax

The Finance Bill will introduce measures to abolish the deduction of tax at source on interest and royalty payments made by one UK company to another that is within the charge to corporation tax. The rules that require withholding tax on annuities and annual payments made by UK companies to UK companies chargeable to corporation tax on that income will also be abolished. Both measures take effect from 1 April 2001.

CFCs

A new anti-avoidance measure will prevent controlled foreign companies entering into artificial tax avoidance schemes designed to take advantage of the 'acceptable distribution policy' (ADP). With effect from Budget day, dividends paid by a CFC, which can be used by the recipient to offset losses created by the allotment and sale of shares in the CFC, will not count towards the ADP exemption.

Chargeable gains

Legislation will be introduced to clarify detailed aspects of rules introduced in Finance Act 2000 to modernise the regime for the chargeable gains of groups of companies. It will remove uncertainty about the transitional rules applying to de-grouping transactions.

The proposed amendments will make it clear that there will be no de-grouping charge in situations where a subsidiary company holding assets transferred to it before 1 April 2000 from another member of the old group leaves the old group on or after 1 April 2000 but remains within the worldwide group. Nor will there be any charge where a company that was previously the principal company of the old group leaves the worldwide group, in respect of assets transferred within the old group before 1 April 2000.

Where the appropriate election is in place the group company deemed to make the disposal of an asset may be able to claim relief for the incidental costs of making the disposal incurred by the company actually making the disposal. The above changes have effect retrospectively from 1 April 2000.

Changes to ESC D33, Capital Gains Tax on Compensation and Damages, will enable the deemed vendor to claim relief for indemnity payments that become enforceable.

Further small changes are proposed to align the time limit for making an election under s 171A, TCGA with other corporation tax limits, and to extend the rules governing intra-group transfers and value shifting for IHT purposes to include s 171A.

Cost of decommissioning

Two petroleum revenue tax loopholes relating to expenditure on decommissioning oil installations have been closed with effect from Budget day. They can arise from a transfer of an interest in an oil field from one company to another or from transfers of interests in infrastructure that has been shared between two or more fields.

Also, PRT relief is being extended in respect of decommissioning expenditure incurred in certain circumstances in fields that produce, or have produced, gas that is exempt from PRT.

The proposal to extend capital allowances for the costs of preparing oil installations for re-use has been extended to include all expenditure incurred in connection with an abandonment programme approved on or after 7 August 2000.

Substantial shareholdings

The Inland Revenue will publish in June a further consultation paper on the current proposals for a relief on gains realised by companies arising when they dispose of substantial shareholdings (20% or more of ordinary share capital) in trading companies.

Customs & Excise VAT thresholds registration

From 1 April 2001, the VAT registration threshold is increased to £54,000 and the deregistration threshold will rise to £52,000. The registration and deregistration limits for acquisitions from other EU countries will also be increased from £52,000 to £54,000.

Cash accounting

From 1 April, the cash accounting threshold is increased to £600,000. Once in the scheme, businesses remain eligible to continue to use it until their annual taxable turnover exceeds £750,000.

VAT reduced rates changes

The VAT reduced rates legislation is to be simplified and made consistent with legislation on other VAT reliefs.

VAT representatives

From 1 January 2002, a measure will be introduced to abolish the commissioners' powers to direct certain non-established taxable persons (NETPs) to appoint a tax representative in the UK. The change will affect NETPs based in countries that organise mutual assistance under arrangements laid down in the EU. Commissioners' powers in relation to NETPs based outside such countries will be unaffected.

Compensatory interest

Businesses that have, as a result of Customs' action, overpaid or underclaimed excise duty, or experienced undue delay in receiving a repayment of excise duty, may in future receive a payment of compensatory interest.

Climate change levy

Autogenerators that are charged climate change levy on their input fuel will be able to take into account any exempt or excluded use, which they will need to certify to their supplier. Climate change levy will only be charged on the proportion of the supply that is not ultimately used for an excluded or exempt purpose.

Exempt unlicensed electricity suppliers that are also taxed on their input fuel will benefit from the same treatment as autogenerators.

Businesses that purchase taxable commodities for use in a combined heat and power station by a third party may benefit from climate change levy exemption. Previously, only entities that purchased taxable commodities and used them themselves were entitled to the relief. The eligibility for this exemption is dependent on meeting the criteria outlined in the quality assurance programme run by the Department of the Environment, Transport and the Regions.

These changes will come into effect on 1 April 2001.

Urban regeneration

The VAT rate on renovating dwellings that have been empty for three years or more, converting a residential property into a different number of dwellings, converting a non-residential property into a dwelling or a number of dwellings and converting a dwelling into a care home or into a house in multiple occupation, will be cut to 5%. The changes will come into effect on the day after Royal Assent to the Finance Bill 2001.

The zero rate of VAT will be adjusted to provide relief for the sale of renovated houses that have been empty for 10 years or more. This will take effect on 1 August 2001.

The government is introducing a UK-wide grant scheme that will reduce the VAT cost to 5% of the work undertaken for the repair and maintenance of listed buildings used as places of worship. Expenditure on work undertaken after 1 April will be eligible. Property transactions in the most disadvantaged areas of the UK are to be exempt from stamp duty. A list of qualifying areas will be published in due course. The exemption will take effect shortly after the date of Royal Assent.

Non-taxable business gifts

The limit below which businesses can give away gifts VAT-free rises from £15 to £50 with effect from 8 March 2001.

Fuels in pilot projects

Reduced duty rates are to be introduced for alternative fuels used within specific, authorised pilot projects designed to test benefits and technical feasibility of more environmentallyfriendly fuels, particularly those from renewable resources. The change will take effect from Royal Assent.

Landfill tax

From 1 April, the standard rate of landfill tax goes up to £12 (v £11) a tonne.

Transport

The new effective rates on hydrocarbon fuels are: for unleaded petrol (until 14 June 2001) £0.4682 a litre, for ultra low sulphur petrol £0.4582 a litre, for ultra low sulphur diesel £0.4582 a litre, the separate rate for higher octane unleaded petrol is abolished and gas for use as road fuel £0.09 a kilogram.

The rate changes took effect at 6pm on Budget day. The temporary cut of 2p a litre in the rate of duty on unleaded petrol will be withdrawn on 14 June 2001.

A freeze on all car, motorcycle and bus vehicle excise duty (VED) rates until Budget 2002 was introduced, and the small car threshold for VED for cars registered before 1 March 2001 has been extended from 1,200cc to 1,549cc from 1 July 2001, backdated to November 2000.

In addition, there will be a two-stage reform of mileage rates from April 2001. The zero rate on passenger transport is amended with effect from 1 April to include smaller vehicles with nine or more passengers. From April 2002 works buses with nine, rather than 12, passenger seats will qualify for tax exemption. The tax-free mileage rate for cycles used for business trips will increase to 20p a mile from April 2002. From the same date a tax-free passenger rate of 5p a mile per passenger will apply to encourage carsharing for business trips.

A major reform of lorry VED will be introduced from 1 December 2001, and VED on tractors will be abolished.

Disabled persons' transport

From 1 April, the size of passenger transport for vehicles, ships and aircraft is reduced for zero-rating purposes from 12 or more seats to 10 or more (including the driver). Vehicles that are constructed or adapted to carry more than 10 passengers, but that carry fewer than 10 passengers solely because they are equipped with facilities for people in wheelchairs, are also included.

From the same date, the existing VAT relief on purchase of vehicles adapted for disabled people will be updated to include larger adapted vehicles carrying up to 12 people. The requirement that the disabled person must be capable of travelling while seated in a wheelchair or lying on a stretcher will go, so that they can choose adaptations that best suit their individual needs.

Fuel scale charges

VAT scales for taxing private use of road fuel are revised downwards to reflect changes in fuel prices. This reflects the reduction in current fuel prices compared to this time last year. Businesses funding any private motoring by subsidising fuel must use the new scales from the start of their first accounting period beginning on or after 6 April 2000.

VAT refund for museums and galleries

A new scheme will allow certain non-charging museums and galleries to recover VAT they incur on their purchases by adding it to input tax claimed on their VAT returns. The Treasury will decide which national museums and galleries are to be eligible for the scheme. The measure will come into effect no later than 1 September 2001, but eligible bodies will be able to make a claim for the VAT they have incurred from 1 April 2001.

Aggregates levy

The levy will be used in part to fund the Sustainability Fund, which aims to deliver local environment benefits.

A new aggregates levy of £1.60 a tonne will come into effect on 1 April 2002. The levy will apply to any sand, gravel or crushed rock extracted in the UK or its territorial waters, or imported into the UK. The aggregate will become liable when it is commercially exploited, ie, the earliest of its physical removal from the site, its sale to another person, its use in construction, or on being mixed with anything other than chargeable aggregate or water.

The levy will not apply to other quarried or mixed products, such as: coal; clay, shale and slate; metals or mineral ores; gemstones or semi-precious stones; and industrial. Nor will the levy apply to blocks of stone used for paving or facing buildings, etc, or to limestone used for the production of lime and cement.

Exports of aggregates will be relieved of levy and imports taxed on their first sale in the UK. There will be relief for bad debts and VAT will be charged on the levy inclusive of sales value.

Tobacco products

The rates of duty on tobacco products imported into or manufactured in the UK went up by 1.8% at 6pm on Budget day. The new rates are: cigarettes 22% of the retail price plus £92.25 a 1,000 cigarettes; cigars £134.69 a kilo; hand-rolling tobacco £96.81 a kilo; and other smoking tobacco and chewing tobacco £59.21 a kilo.

Clothing and safety kit

The chancellor announced a number of VAT measures affecting suppliers and purchasers of clothing and safety equipment. On 1 April, the rules relating to young children's clothing will be updated and simplified to recognise the increasing size of children and allow more of them to benefit from zero rating. From the same date, adult pedal cycle helmets that meet required safety standards (bearing the EU mark 'CE') will be zero-rated.

The VAT rate on children's car-seats including those that may be used as pushchairs or prams will reduced to 5% from the date of Royal Assent.

Betting duty

The current general betting duty of 6.75% on total stakes is to be replaced by a new duty on bookmakers' gross profits so that the punter will pay no tax. The new regime is to take effect before 1 January 2002.

For all bets, other than spread bets, the duty will be an amount equal to 15% of the sum of the value of the stakes less the value of the winnings paid out to winning customers. If this results in a negative sum, the amount of duty will be zero. Where spread bets are concerned, the duty will be the money due from customers less the winnings paid out times 3% (for financial spread bets) or 10% (all other spread bets). Again, if this results in a negative amount, the duty will be zero. Bets made between individuals as brokers and the bets made by agents will also be within the scope of the new rules.

Gaming duty

New gaming duty bands take effect on 1 April. They are: the first £484,500 of gross gaming yield 2.5%; the next £1.076m 12.5%; the next £1.076m 20%; the next £1.8835m 30%; and the remainder 40%.

Duty on alcohol

The chancellor announced a crackdown on avoidance of duty on cider and perry, in particular, by their dilution after duty is paid. The duties on spirits, wine, beer and other alcohol are frozen for the coming year.

Miscellaneous Film industry

Relief for British qualifying films is extended to 1 July 2005. Films are certified as 'British qualifying' by the Department for Culture, Media and Sport if they meet certain criteria. The relief allows the full write-off, on completion, of the production and acquisition costs where the film budget does not exceed £15m.

Double taxation relief

The changes announced in the pre-Budget report are to be supplemented by further amendments to the rules. The report proposed an extension of the on-shore pooling rules for double taxation relief to allow relief for rates of foreign tax paid up to 45%, even if this was at more than one level in a chain of companies. In addition, charges were proposed to the way the mixer cap was calculated.

From 31 March 2001, companies will also be able to claim relief for less than the full amount of foreign tax if they so wish. The deeming rate of underlying tax attributable to dividends from UK subsidiaries held by an overseas holding company is to be the UK corporation tax rate at the date the dividend was paid. FA 2000 is to be amended so that references to 'accounting periods' are changed to 'chargeable periods' to ensure the provisions work properly for nonresidents other than companies.

Energy saving

It is proposed that businesses will be able to claim a 100% first-year allowance for investment in designated energy-saving plant and machinery. The proposal is awaiting approval from the European Commission that it is not state aid. The DETR will issue an energy technology list by 1 April 2001, defining the qualifying technologies, relevant energy-saving criteria and products currently within the scheme. Claims may be made after the date of Royal Assent.

Urban regeneration

To encourage the regeneration of traditional shopping areas, property owners will be able to claim 100% capital allowance on the costs of converting residential property over shops or commercial property. The property must have been built before 1980 and been unused or used only for storage for one year prior to the commencement of the work, and a number of other conditions must be met. The allowance will be available from the date of Royal Assent.

Contaminated land

The costs companies incur in clearing up 'contaminated land' are to receive an accelerated tax credit. An enhanced deduction of 150% will be available for the costs of remediation and connected expenditure in addition to normal site preparation costs. Any losses created will be available for group relief or by surrender to the Exchequer for payment. The scheme will apply to costs incurred from the date of Royal Assent, and will be reviewed in five years.

Venture capital

The chancellor aims to make venture capital schemes more attractive. From Budget Day, the amount of money that must be spent within 12 months by companies that have raised capital through enterprise investment schemes (EIS), a venture capital trust (VCT) or the corporate venturing scheme (CVS), will be reduced to 80%. The remaining 20% must now be spent in the following 12 months.

The rules that restrict or withdraw EIS relief when a company returns value to investors or when an EIS company floats on the Stock Exchange are also relaxed from the same date.