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Devil is in the detail

1 May 01

Second of two articles on the salient aspects of the 2001 Budget (business taxation and VAT)

by Alan Barr

Business Taxation

Corporation tax rates and (effectively) its bands do not change at all. Thus profits up to £10,000 will be charged at 10%, with marginal rates up to 20% for profits up to £50,000. the small companies rate of 20% is then avaialbel for profits up to £300,000, with further marginal rates up to 30% for profits up to £1,500,000. the full corporation tax rate of 30% applies to profits from that figure.

There is a useful deregulatory measure in the increase in the permitted level of expenditure on business gifts from the negligible sum of £10 to a more realistic £50. This is also to apply in relation to value added tax.

There are minor relaxations in the rules affecting works buses; and the treatment of mileage rates paid to employees is to be simplified.

More radical deregulation is previewed in a Technical Note issued by the Inland Revenue, entitled “A Review of Small Business Taxation”. This presages a move towards a “pure” accounts basis for the taxation of small business profits. This would involve (for instance) allowing commercial depreciation to replace capital allowances for tax purposes. While this is clearly aimed at the corporate sector, and perhaps further increases the importance of having “true and fair” accounts for tax purposes, the Revenue indicate that it could also apply to unincorporated businesses. This of course would include the vast majority of solicitors’ practices. The Tax Law Committee of the Law Society of Scotland will be responding to this consultation and if members have views which they wish included, they should be passed to Drumsheugh Gardens.

A much more detailed Technical Note has also been published on “The Taxation of Intellectual Property, Goodwill and Other Intangible Assets”. This builds on earlier work and again stresses the use of accounting treatment for the purposes of giving tax relief on these types of asset. It is accompanied by ten pages of draft legislation.

This particular theme continues with a further Consultation Paper, entitled “Increasing Innovation”. This is aimed at increasing research and development by large companies. It is a detailed paper addressing how expenditure on these activities can be increased, referring specifically to the system of tax reliefs and credits whereby 150% of relevant expenditure can be relived.

This model is further extended by giving 150% relief for research into certain specified “killer diseases” - a so-called “vaccine tax credit”.

Enterprise Management Incentives were introduced by Finance Act 2000. They involve share options in companies with assets of no more than £15 million, with reliefs available from income tax and National Insurance. The rules are somewhat relaxed, so that up to £3 million worth of options can be granted without a limit to the number of employees who can benefit. There are also administrative improvements and a relaxation of certain requirements for advance approval of alterations to share capital.

Proposals are advanced somewhat further to provide a relief for company gains on substantial shareholdings. This follows earlier consultation and is to encourage corporate investment in trading companies. The relief seems likely to take the form of deferral relief for capital gains, providing that proceeds are reinvested in a further qualifying substantial shareholding.

There are minor changes to the rules for chargeable gains in groups of companies, which were also extensively amended in Finance Act 2000. Further minor changes were announced to corporate double tax relief.

The requirement to withhold tax on payments of interest by companies to recipients themselves within the charge to corporation tax will be abolished from April 2001. Discussions will take place as to the mechanics of this change, notably on the circumstances in which paying companies will be entitled to assume that they are entitled to pay gross.

Rules to confirm that limited liability partnerships are indeed taxed as partnerships are to be introduced. Furthermore, anti-avoidance rules to prevent tax losses from investment and property investment LLPs will be brought forward.

A rather strange-looking specific relief is introduced in connection with capital allowances for flats over shops. This is part of a package aimed at regenerating towns and cities. The conditions for qualification seem rather arbitrary, but the relief takes the form of a 100% capital allowance for spending on the renovation or conversion of vacant or underused space above shops and other commercial premises, in order to provide flats for rent. The property in question must have been built before 1980 and have not more than 5 floors in total. It must have been originally constructed so that the floors above the ground floor were primarily for residential use, although the ground floor could have been originally residential or commercial. But at the time of conversion it must be commercial (established by its rating classification).

Also at that time, the upper floors must only have been used for storage, or have been unoccupied for at least one year before the conversion. There must not, generally, be any extension; and there are restrictions on the size and the value of the flats to be created. There are also clawback provisions, in the shape of balancing events for capital allowance purposes, if the flats are disposed of or cease to be used or available for letting.

Despite the aims of the scheme, it may very well be that some conversions within areas that are far from deprived could qualify for these very valuable allowances. The conditions are tight, but would certainly bear investigation in cases which might qualify.

The use of capital allowances to promote perceived social improvement is also seen in 100% reliefs being made available for energy saving investments. A detailed list to define the qualifying criteria and the products to benefit will be issued.

The environment also comes to the fore with the introduction of an accelerated tax relief for cleaning up contaminated land. This looks on the face of it to be a very generous deduction, of 150% (sic) of expenditure on remediation and connected expenditure that is additional to normal site preparation costs. The ability to deduct for tax purposes expenditure in excess of that actually incurred looks very like a grant - especially as payment will also be made available, it seems, for companies which incur a loss in their remediation work (see also the very similar relief available for research and development, discussed above.

The special tax relief for expenditure on film production is to be extended until July 2005. This accelerates the right to deduct production costs for tax purposes.

Value Added Tax

The announcements about value added tax contained the usual mixture of apparent tiny details and broad and important changes.

The registration threshold goes up by £2,000, to £54,000, with the deregistration threshold going up to £52,000. The upper limit for annual accounting is doubled, to £600,000, while that for cash accounting goes up to the same figure.

These are useful deregulatory measures, but the real hope for major deregulation is deferred until consultation in the summer. This will be on a new optional flat rate scheme for businesses with a taxable turnover of up to £100,000. This would involve paying VAT as a simple percentage of turnover, rather than being required to account for VAT on all purchases and sales. The devil seems likely to be in the detail - it is not thought that the current flat rate scheme for farmers is particular success, for instance.

Among the more minor changes are improvements to the VAT regime for vehicles adapted for disabled persons, and for passenger transport in 10 or 11 seater vehicles, the introduction of zero-rating for pedal cycle helmets, and a reduced rate for children’s car seats. The increasing size of our offspring is recognised in a modernisation of the zero-rating relief for children’s clothing and footwear. This will increase and simplify the maximum sizes which qualify for special treatment.

There are the normal increases in the VAT fuel scale charges.

A very limited number of “national” museums and galleries are to be permitted to recover their input value added tax on supplies made to them, even without introducing admission charges. Such charges would normally be necessary so that the institution could be seen to be in a business activity and thus eligible for VAT recovery.

Another focused relief, in the form of a reduced rate will be introduced as part of urban regeneration measures. This will involve cutting the VAT rate to 5% for the cost of renovating dwellings that have been empty for 3 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 other “relevant residential” use) or into a house in multiple occupation.

The zero rate of VAT will also be adjusted to provide relief for the sale of renovated houses that have been empty for more than 10 years.

These measures, combined with the changes to come in stamp duty and capital allowances, seem to represent rather a scattergun approach to this broad kind of area. Some urban housing development is to be given various tax privileges - the trouble is that this varies considerably from tax to tax; and certainty will be increasingly hard to achieve.

Other Taxes

New taxes have been a fruitful source of revenue for this Government. This trend continues again with the long-threatened introduction of the aggregates levy, from 1 April 2002. This will be charged at £1.60 per tonne, on sand, gravel or crushed rock extracted in the UK and on imports. The levy does not apply to other quarried or mined products. It is promised that the proceeds will be recycled to business through a 0.1% cut in employers’ National insurance contributions.

That same treatment is to be applied to the climate change levy, the full details of which were introduced in Finance Act 2000. Very minor changes are introduced to the legislation this year.

The escalator in the landfill tax continues, with the rate now rising to £12 per tonne.

Major changes were introduced to the betting tax regime. The tax currently charged on stakes is to be replaced by a 15% tax on bookmakers’ gross profits. This will, it is hoped, have the effect of bringing back to the UK the large quantity of betting business now run from offshore, especially via the Internet. Indeed, apparently it is hoped that the new tax regime will increase the volume of betting carried out in the UK, because (inter alia) of our apparent “reputation as a centre of bookmaking integrity and expertise”!

This change is an interesting reaction to the enormous problems facing tax authorities from the growth in Internet trade, at least where this does not involve the physical delivery of assets.

The betting industry made a fuss about the rate of duty, which must have had some effect on this change. A much bigger fuss was made by motorists and road haulage operators; and this Budget also brought to fruition the promised changes in duty on supposedly cleaner fuels; and on vehicle excise duty. These changes are extremely complex for those involved in administering them, but the majority of those affected will simply notice changes in the charges made to them.

Finally, to end on a happy note, another special interest group is promised at least consideration for special treatment. As well as freezing the duty on spirits, beer and wine (perhaps a traditional pre-election non-change), the Government is “minded” to introduce a reduced rate of duty on the beer produced by small breweries. It will consider the scope for doing so over the coming year. It sounds like the kind of proposal requiring detailed and dedicated research. Cheers!

Alan R Barr, Legal Practice Unit, The University of Edinburgh and Consultant, Brodies WS