Supporting Commercial Innovation

The Government claimed that the Budget contained a package of reforms to the business tax system which would “enhance the competitive UK business environment, promote investment and innovation and improve access to finance for small and medium sized enterprises (SMEs) in disadvantaged communities”.

To encourage innovation, investment and training by small businesses, the Budget:

Extended 100% first-year capital allowances for Information and Communication Technology (ICT) until 31 March 2004.
Introduced improvements to Research and Development (R&D) tax credits for all companies, including a review of the R&D definition, the reduction of the minimum expenditures threshold to £10,000 and extension of the coverage of the large company scheme, making it easier for SMEs in particular to gain access to the credit.

The Government made further promises to simplify the tax system and reduce regulation and compliance costs. Moves proposed include:

Aligning the company law definitions of SMEs with the maxima allowed under EU law, as soon as the new EU maxima come into force. Raising the company law thresholds will increase the number of businesses eligible for the 40% first-year capital allowances for plant and machinery expenditure by SMEs and, until they expire on 31 March 2004, the 100% first- year allowances for ICT expenditure by small businesses.
Simplifying and modernising employee share schemes. This includes changing the Company Share Option Plan (CSOP) to remove the rule which denies tax relief on options exercised within three years of a previous exercise and measures to simplify the approvals process. At the same time the Share Incentive Plan (SIP) will be altered to allow employees to purchase partnership shares out of annual bonuses, give employers flexibility in how they determine salary for the purchase of partnership shares, ensure employees moving between employers within a group do not lose out and align the holding period for dividend shares with the holding period for base shares. The time limit has been lifted from 30 to 90 days for employees to reimburse the PAYE paid on their behalf by the employer. The new 90 day period will also apply for National Insurance (NI) purposes on charges that arise if the PAYE paid is not reimbursed.
Relaxing the Capital Gains Tax (CGT) rules which determine whether the CGT pages of a tax return need to be completed for 2003-04 onwards and a more generous treatment for losses arising after 9 April 2003 where people dispose of certain rights to future payments which they acquired when selling assets. In addition, a simplification is proposed of the rules applying where people obtain certain earn-out rights in exchange for shares or debentures and want the rights to be treated as securities so that a CGT rollover treatment can apply. Rights conferred after Budget Day will automatically be treated as securities unless taxpayers elect otherwise.

Financing SMEs

In a bid to deal with the perennial problem of improving access to finance for SMEs, the Government has launched a new consultation “Bridging the Finance Gap: a consultation on improving access to growth capital for small businesses”.

This will look at applying the US Small Business Investment Company model to the UK, enhancing the effectiveness of the Enterprise Investment Scheme, Venture Capital Trusts and the Small Business Firms Loans Guarantee, as well as improving the tax treatment of the incidental costs of equity finance.

VAT - Customs Revamps Penalties

Customs & Excise has announced a series of measures to crack down on businesses abusing the VAT system. These measures include:

An extension of Customs’ security powers to tackle serious cases of VAT evasion where several businesses act together to attack the tax system. The new proposals will allow for a ‘proportionate security requirement’ from each business that together protects the total tax at risk in a VAT supply chain.
A new ‘joint and several’ liability provision to catch businesses which receive a taxable supply of goods or services in a supply chain in circumstances where they knew, or had reasonable grounds to suspect, that VAT on those goods or services would go unpaid. The new measure came into effect on 10 April 2003.
A crackdown on purchases of land and buildings where the property is to be used partly for private purposes or for non-business use. From Budget Day private and non-business use of land and buildings will in all cases be addressed by apportionment of the VAT incurred at the time of purchase, so that only the business element counts as input tax and is recoverable.
Changes to the rules on the tax point for certain ongoing supplies. The aim is to deal with connected businesses which delay charging VAT on certain ongoing supplies made between them. The measure concerns supplies such as electricity, piped gas and water, leasing of property and equipment, management and telephone services. Current tax rules for these supplies mean that VAT becomes due only when a VAT invoice is issued or a payment is received, whichever is earlier. Some businesses have exploited these rules for the benefit of connected businesses that cannot recover all their input tax by delaying, sometimes indefinitely, both payment and invoicing. From 1 August 2003 where these supplies are made between connected businesses, tax points will be created periodically, in most cases based on 12 month periods, to ensure that accounting for VAT cannot be indefinitely or excessively delayed.
Businesses which import and export outside the European Union face new civil penalties from Autumn 2003. Customs say that the purpose of the measure is to ‘encourage businesses to comply with their legal requirements’. Two new types of penalties are being introduced, one for non-compliance and one for evasion.

From	10 April 2003	25 April 2002

Standard rate:	17.5%	17.5%
Reduced rate:	5%	5%
VAT standard rate fraction:	7/47	7/47
Registration turnover above:	£56,000	£55,000
Deregistration turnover below:	£54,000	£53,000
Flat rate scheme turnover up to:	£150,000	£100,000
Annual accounting turnover up to:	£600,000	£600,000
Cash accounting turnover up to:	£600,000	£600,000

Invoices

Regulations will be introduced to simplify the procedures for sending and storing VAT invoices electronically, and will modernise the information required to be shown on a VAT invoice or credit note.

Face-value vouchers

Vouchers such as gift tokens and telephone cards are often sold to retailers at a discount. VAT is accounted for when the voucher is exchanged for goods or services by the end user.

At present VAT may not be paid on the discount enjoyed by the retailer of the voucher. With effect from 9 April 2003 measures are introduced to prevent this VAT avoidance.

Cracking down on tax fraud

Gordon Brown has launched a campaign to ‘tackle tax fraud and avoidance’. The Government has promised to invest £66 million in the campaign over the next three years and expects to produce at least an additional £1.6 billion of tax in the same period.

The Government said that the package of reforms would ensure that the tax burden does not fall unfairly on taxpayers who play by the rules.

At the head of the Budget reform is the launch of a new compliance and enforcement package for direct tax and national insurance contributions (NICs). The package is the first step in a new strategic approach for Inland Revenue compliance work and is part of the bid by the Government to create a modern and fair tax system.

Target areas

The additional resources will be deployed in three areas:

Protecting the Exchequer from non-payment of tax and NICs debts and from failure to file tax returns
Tackling fraud involving concealment of undeclared income or profits offshore
Countering avoidance of Corporation Tax and NICs and tax on employment income.

The Government has publicly identified several areas, including:

Preventing tax and NICs avoidance through the payment of share-based remuneration
Measures to close loopholes in the chargeable gains regime for second-hand life policies and prevent avoidance of Capital Gains Tax through complex transactions using offshore trusts
Steps to tackle avoidance through sale and repurchase agreements
Measures to close loopholes in the loan relationships and derivative contracts regimes; and
Previously announced measures to prevent exploitation of the 100% allowances for small business in Information and Communications Technology (ICT).

The Government also took the opportunity to reverse the decision in the recent case Mansworth v Jelley. The Budget restores the tax treatment of capital gains and losses on the exercise of options to that which was generally understood before the case. The change will apply to options exercised on or after 10 April 2003.

It seems that after tackling the abuses of self- employed contractors operating through limited companies in the notorious IR35 clause, the Government has moved on to preventing tax and NICs avoidance by those engaging domestic workers through a service company.

A similar package of anti VAT avoidance measures by Customs has been announced as above.

Stamp Duty

The Budget confirms the details and changes to Stamp Duty initially announced in the 2002 Budget. The main provisions are:

The modernised Stamp Duty regime will apply from 1 December 2003. The Government’s stated objective is to prevent abuse on high value commercial transactions whilst reducing the burden on small businesses. The vast majority of individuals buying or renting residential property will see no immediate changes, although over time electronic payment will be possible.
Significant changes will be made to commercial property transactions. The method of valuing a lease will be amended to reflect the true value of the lease over time, thus increasing the Stamp Duty payable. However, the Stamp Duty zero rate band for non-residential property does increase significantly from £60,000 to £150,000.
From 10 April 2003, Stamp Duty will no longer be payable on all commercial property transactions in 2,000 enterprise areas.

Company Cars

No significant company car changes were announced, probably to the relief of both employers and drivers who are still adapting to last year’s major changes. The Government continued to tinker with the taxation of transport in order to protect the environment. Measures announced in the Budget include:

Deferred revalorisation of the main road fuel duties until 1 October 2003 owing to oil price fluctuation
A new duty differential for sulphur-free fuels from 1 September 2004, of 0.5 pence per litre relative to the rates for ultra-low sulphur fuels
A one penny increase from Budget day in the duties for rebated gas oil (red diesel) and fuel oil
The introduction of a new duty incentive for bioethanol used as a road fuel from 1 January 2005.

Cash equivalent

The company car driver is taxed on a cash equivalent value of the car he drives. This cash equivalent figure is a percentage of the manufacture’s list price for the car when it was first registered, as derived from the following table. The cash equivalent for most company cars will increase in 2003/04 and 2004/05 as the percentage of list price increases for each band of CO2 emissions.

CO2 emissions gr/km Percentage of vehicle's list price

Tax Year 2003/04	Tax Year 2004/05	Petrol Engine	Diesel not Euro IV Standard	LPG or Dual LPG & Petrol

155 or less	145 or less	15	18	14

160	150	16	19	15

165	155	17	20	16

170	160	18	21	17

175	165	19	22	18

180	170	20	23	19

185	175	21	24	20

190	180	22	25	21

195	185	23	26	22

200	190	24	27	23

205	195	25	28	24

210	200	26	29	25

215	205	27	30	26

220	210	28	31	27

225	215	29	32	28

230	220	30	33	29

235	225	31	34	30

240	230	32	35	31

245	235	33	35	32

250	240	34	35	33

255	245	35	35	34

* The Chancellor may well continue to increase the tax charge beyond 2004/05 to encourage company car drivers to use smaller, cleaner cars.

The emissions

The CO2 emissions figure is given on the vehicle’s V5 registration document for cars registered after 1 March 2001, or can be obtained from the manufacturer or dealer. The actual CO2 emissions figure should be rounded down to the nearest 5 gr/km to read the above table.

Hybrid electric and petrol cars are taxed as petrol engines less two percentage points on the list price with a further 1% reduction for every 20gr/ km the CO2 emissions figure is below the minimum threshold in the table. Pure electric cars have no CO2 emissions and are taxed on 9% of their list price. Cars which were manufactured to run on both LPG and petrol also qualify for a 1% discount on the list price for every 20gr/ km the CO2 emissions figure is below the minimum threshold, but this discount does not apply to cars that are converted after registration to run on LPG.

Fuel

From 6 April 2003 the fuel scale charges, which applied when free fuel was provided for private used in a company car, are swept away. The new tax charge for private use of fuel takes the percentage derived from the tables above, applied to a set value of £14,400 rather than the vehicle’s list price.

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