The 2002 Finance Bill was published on 25 April, together with brief 'lobby notes'. More detailed explanatory notes, published with the authority of ministers, are available from HM Treasury, Parliament Square, London SW1P 3AG, or from

These notes are intended to provide Parliament with a better understanding of the purpose and effect of the government's proposals.

The chancellor of the exchequer has confirmed that the new regime designed to provide relief for the cost of intangible assets (including intellectual property and goodwill) takes effect from 1 April.

The new regime will provide for companies to obtain tax relief for the cost of intangible assets (including goodwill and intellectual property), in most cases based on the amortisation reflected in their accounts. There is also provision for tax allowances at a fixed rate of 4% a year to provide for relief in the case of indefinite or longer life assets.

The new rules will apply to expenditure on the creation, acquisition and enhancement of intangible assets (including abortive expenditure), as well as expenditure on their preservation and maintenance. Relief under the new regime will therefore be available for the cost of internal development, as well as acquisition, of intangible assets.

Payments for the use of intangibles will also be within the regime's scope. The charge on income rules will no longer apply to royalty payments, and relief will be given in line with the accounting treatment. The taxation of royalty receipts will also follow the accounts.

Disposals of intangible assets will be taxed on an income basis under the new regime. A rollover relief will apply where disposal proceeds are reinvested in new intangible assets within the regime.

Intangible assets that companies hold at commencement will generally be taxed under current law, subject to the following changes. Capital gains on the disposal of intangible assets held at commencement will qualify, where appropriate, for rollover relief under the new arrangements for intangible assets. Companies' disposals of goodwill and agricultural and fishing quotas held at commencement will not qualify for capital gains rollover relief except where reinvestment under the capital gains rules has taken place before 1 April 2002 and within the 12-month period before the disposal. Purchases of goodwill and quotas after commencement will no longer be qualifying acquisitions for the purpose of capital gains rollover relief.

The chancellor has confirmed that the new tax credit to encourage research and development by large UK companies will apply to all qualifying expenditure from 1 April 2002. Large companies will be entitled to an additional deduction from their taxable income of 25% of their current spending on qualifying R&D, in addition to the normal 100% deduction.

The definition of 'research and development' used for the new credit is the same definition as that used for the R&D tax credit for SMEs introduced in 2000 (s 837A, TA 1988). An activity will qualify as R&D for tax purposes if it would be treated as R&D under normal accounting practice for companies in the UK (SSAP 13), as qualified by the Guidelines on the Meaning of Research and Development for Tax Purposes that the secretary of state for trade and industry issued.

Companies will not, in general, receive credit for work they subcontract to others. However, they will be able to claim the credit for R&D work that they subcontract to universities and other higher-education institutions; charities; scientific research organisations; NHS bodies; and individuals or partnerships of individuals. Companies will also be able to claim credit for contributions made to these organisations to cover work that is not actually subcontracted and from which the company will not, therefore, necessarily gain direct benefit.

There is no requirement that the claimant company retains intellectual property rights from the R&D, and companies will be able to claim the credit for work subcontracted to them by others. However, where an SME subcontracts work to a large company, the SME will continue to receive credit under the existing scheme, at the higher 50% rate, and the large company will not therefore be able to claim relief. Conversely, where a large company subcontracts work to an SME, the SME will be able to claim credit under the new rules at 25% instead of 50%.

Where the principal and the subcontractor are members of the same group, the subcontractor's expenditure will qualify as R&D if the payment the principal made is itself R&D.

The chancellor has confirmed that an exemption regime for substantial shareholdings will apply for disposals from 1 April.

The main exemption applies where a trading company or a company that is a member of a trading group disposes of all or part of a substantial shareholding in another company that is itself a trading company or the holding company of a trading group. A 'substantial shareholding' would be 10% or more of the ordinary shares of the company invested in, owned for at least 12 months in the two years before the share sale. A higher threshold of 30% applies for life insurance companies disposing of assets in their long-term insurance funds.

There are special rules for aggregating holdings by members of groups of companies. A group consists of the principal company and its 51% subsidiaries on a worldwide basis. The activities of joint ventures in which the company or group holds 10% or more of the shares may be taken into account when determining whether the companies or groups satisfy the trading requirement.

Where the exemption applies, any gain on the disposal of the shares is not chargeable to tax, and any loss is not available to set against gains.

Where a company meets the conditions for the main exemption and also owns an asset related to shares in the company invested in (broadly, options over, or securities convertible into or exchangeable for, such shares), any gain on the asset's disposal is not chargeable, and any loss is not available to set against gains. This exemption applies only where the company making the disposal, or another in its group, also owns shares in the company invested in immediately before the relevant disposal.

Where, at a time when the substantial shareholding requirement is met, a disposal of shares or a related asset in the company invested in does not qualify for either of these exemptions, but a disposal at any time in the previous two years would have qualified, any gain on the disposal is not chargeable and any loss is not available to set against gains if certain conditions are met.

The draft legislation published on 27 November 2001 has been amended. The main changes include a revision of the following thresholds for: shareholdings to be substantial (from 20% to 10%); qualifying shareholdings in a joint venture company (from 30% to 10%); and the special threshold for life insurance companies (from 40% to 30%). The definitions of ' trading company', 'trading group' and 'trading activities' have also been significantly amended for both the investing company and the company invested in.

The changes include the removal of restrictions to the range of activities permissible for the company invested in and clarification of the position for intended activities and intra-group activities. A rule has been introduced to prevent abuse of the exemptions in certain circumstances, in place of the earlier proposed restrictions on the range of permitted trading activities of the company invested in.

To facilitate further commercial restructuring and reinvestment, the government has also amended the way the 'degrouping charge' operates. Where a company leaves a group owning an asset it acquired from a fellow group member within the previous six years, it will be able to claim rollover relief in respect of the gain that is deemed to arise. These 'degrouping' gains or losses may be surrendered to other members of the group that may have losses or gains of their own to set them against. It will also be possible for the degrouping gain that is surrendered to another member of the group to be rolled over under new rollover provisions.

The Finance Bill introduces proposed legislation to counter tax avoidance by individuals who exploit the way the rules in FA 1996 deal with certain transactions between connected parties involving a relevant discounted security (RDS) 2.

The current rules require a comparison to be made between the acquisition price of an RDS and its market value when the holder transfers it to a connected party. Where the market value is higher than the acquisition price, the difference is taxed as the holder's income. Where it is lower than the acquisition price, the holder is allowed an income loss. The avoidance involves a company issuing to a connected person an RDS whose terms are such that its market value is far below the price at which it is acquired. The RDS is then sold, and what is claimed to be an income tax loss crystallised.

The proposed legislation will prevent an RDS issued at more than its market value to a connected party from giving rise to an income tax loss on any later disposal to a connected party. For this purpose, the connection rules in s 839, TA 1988 will apply with a further rule that a person with a minority shareholding in the bondissuing company will be treated as connected if he/she, together with other people who also take out bonds, collectively control the bondissuing company (or a company connected with it) and the issuing company is a close company.

Measures have also been introduced to prevent an unintended double charge to tax where an individual sells a business for a payment of cash and an 'earn-out' right, ie, a right to receive loan notes in the future, subject to conditions associated with the subsequent profitability of the business being met.

The loan notes are equivalent to further sale proceeds for capital gains tax purposes. The measure will prevent the income tax charge from arising, and the change will be deemed always to have had effect.

In a new Statement of Practice, SP1/02, Corporation Tax Self-Assessment and Chargeable Gains Valuations, the Inland Revenue has clarified the circumstances in which it will not, as a matter of practice, raise further enquiries into matters unrelated to a valuation or a chargeable gains computation where an enquiry remains open solely because the valuation is not agreed. The practice applies where an enquiry has been made into a return under Sch 18, para 3, FA 1998, the Revenue has given notice under Sch 18, para 24 of its intention to enquire into that return, and the enquiry remains open after the expiry of the period within which that notice had to be issued purely because of an unagreed valuation for chargeable gains purposes. The practice will not apply if, had the enquiry already been completed, an officer could have made a discovery within the meaning of Sch 18, para 41.

The practice applies only to valuations made for the purpose of computing chargeable gains of companies and other bodies within the charge to corporation tax. It does not alter or fetter the Revenue's right to ask further questions - or make additional enquiries about matters in connection with, or consequential to, obtaining the valuation - which were not raised when the valuation was first referred to the Shares Valuation Division or the Valuation Office agency.

Draft regulations have been published implementing the stamp duty exemption for transactions involving land in disadvantaged areas by reference to whether the property is residential property or not, and by reference to the amount or value of the consideration for a transfer or new lease. Clause 108, Finance Bill 2002 sets out the relevant definition of residential property, amended as a result of consultation, and provides the powers to make regulations to specify the exemption's parameters. Subject to approval as state aid from the European Commission, the chancellor's intention is to abolish ad valorem stamp duty on non-residential transactions in respect of land in disadvantaged areas, while retaining the existing exemption for residential property where the consideration is £150,000 or less and, for new leases, where the average annual rent does not exceed £15,000 (see the draft Stamp Duty (Disadvantaged Areas) (Application of Exemptions) Regulations 2002.

The legislation excludes fixed stamp duties from the exemption to ensure that documents subject to a fixed duty are administered in the simplest way possible.

Regulations amend and vary the terms of the undertaking an overseas insurer is required to give so that it need not have a tax representative (see The Overseas Insurers (Tax Representatives) (Amendment) Regulations 2002, SI 2002/443).

The rules relating to insurers' duties and recordkeeping have also been amended to reflect the changes to s 552, TA 1988 and the introduction of s 552ZA by FA 2001 (see The Life Assurance and Other Policies (Keeping of Information and Duties of Insurers) (Amendment) Regulations 2002, SI 2002/444.

Revisions to IR 76 (2000) - Update 130 . The Inland Revenue has revised some parts of the guidance, IR76, on the subject of the allowable maximum (earnings cap) and the basis year. The Inland Revenue's view has been that where an individual nominates a basis year to support higher-level contributions for a later tax year, the net relevant earnings of the basis year are subject to the 'cap' applying in the basis year. However, from 23 April 2002, an individual may nominate a basis year to support higher-level contributions for a later tax year and apply the 'cap' applicable to the current year. This means that an individual does not need to re-nominate the basis year every year simply to take account of the increased cap each year. IR76 has been amended to reflect this change.

Part-time employees - Update 131 . The update confirms the tax position on pension contributions relating to part-time employees who are given backdated rights to membership of occupational pension schemes following the European Court of Justice ruling in the Preston case.

Contributions from an employer to fund back-service will be allowable for tax purposes in the normal way under s 592(4), TA 1988.

Employee contributions made either as a single contribution or as ongoing contributions, will be eligible for tax relief under ss 592(7) or 594(1), TA 1988, subject to the 15% limit of remuneration paid in that year in relation to that employment. The Board of Inland Revenue has no powers to allow a higher limit in these circumstances. Subject to the scheme rules or appropriate amendments being made to the rules, there is no objection to an employee paying contributions in excess of the 15% limit in specified circumstances; but tax relief will not be available on the excess over the 15% limit. An employee cannot opt to carry back or have payments otherwise related back to earlier years, but the payment of contributions may, if agreed with the scheme trustees, be made by instalments over future years. This could help to keep the amount paid in any one tax year within the 15% limit. If an employee has left the employment concerned but is to contribute to the former employer's occupational pension scheme, such contributions may be made, but no tax relief will be available.

Where retrospective membership is to apply to a contracted-out scheme, arrears of contractedout contributions would need to be paid. To the extent that tax relief is available on such contributions, say, on flat-rate payments of the employee's share of minimum payments, tax relief may be given under the above rule.

If employers and their employees agree on compensatory lump-sum settlements outside the pension scheme rather than additional membership rights under the scheme, these lump sums will not be taxable as the employee's income under Sch E. The employee may be liable to capital gains tax, but the usual normal annual exemption limits will apply. Where redress within a pension scheme is made for an employee who has already taken benefits, it will not be acceptable for an additional retirement lump sum to be provided. However, if a transfer payment has been made and a further enhancement of benefits now arises, it will be permissible to pay a second transfer payment as described in Update 40.

As it is the Inland Revenue's understanding that the court rulings relate only to occupational pension schemes, they do not apply to a personal pension scheme, including a group personal pension scheme, to which the employer may have contributed.

Following the Privy Council's decision in the Brumark case, (reported as Agnew and another v IRC and another [2001] All ER (D) 21), the Crown departments (the Inland Revenue, Customs and the Redundancy Payments Service) reserve the right to challenge the distribution, or proposed distribution, by an insolvency practitioner of book debt proceeds subject to a purported fixed charge where they, as creditors, believe the charge is in fact a floating charge. The decision to make such a challenge will be made in the light of the facts of each case. In general terms, the Crown departments believe that where a charge has been operated so that the chargor has been allowed an unfettered right to draw on the book debts' proceeds without the chargeholder's specific consent, there is insufficient control to qualify as a 'fixed' charge over such book debts.

In addition, pre-insolvency VAT credits will be paid to companies subject to insolvency procedures in preference to other Crown creditors only in cases where a debenture is provided and Customs is satisfied that the charge over book debts in the debenture is actually a fixed charge.