020 8876 1097 office@blythetax.com
Budget Comment March 2000
Introduction

As with all Budgets the extent to which it can be summed up depends very much on individual circumstances. Looking merely at the tax provisions as opposed to the spending and political announcements, we call it good because of the lack of bad news and because of the encouragement given to enterprise.

As always, there are plenty of issues and much detail, but only 6 that we feel are worthy of special mention.

Comfortably the main highlight of the Budget is the change to Capital Gains Tax relating to business assets.

Also of interest is the introduction of the Enterprise Management Incentives for independent trading companies and Employment Share Ownership schemes.

And still with business, there is encouragement to invest in IT.

On a smaller scale we like the changes to charitable giving.

For the future, if you have a company car there are big changes but these don’t take effect until 6 April 2002. We will need to review how this may affect you at the time.

Finally, we have published the updated Rates and Allowances, the main one of which (the reduction of the Basic Rate to 22%) was announced in the previous budget.

These are our own general views. If you would like advice on how any of the points we have mentioned (or any that we haven’t) affect you, please do not hesitate to contact us.

The chart of new Rates and Allowances is, as always, set out below.

Capital Gains Tax

For disposals on or after 6 April 2000, the new 4 year taper for business assets will apply for holding periods from 6 April 1998. The gains charged to tax will be reduced as set out in the table below.

Period asset held (years)
Percentage of gain chargeable (%)
Equivalent rate for higher rate CGT payer (%)
0 - 1
100
40
1 - 2
87.5
35
2 - 3
75
30
3 - 4
50
20
> 4
25
10

For business assets, the additional year for assets held at 17 March 1998 will be consolidated into the new 4 year taper so that it will not be added for disposals on or after 6 April 2000. For non-business assets, the existing 10 year taper, together with the additional year for assets held at 17 March 1998, will continue to apply. The present thresholds for shareholdings in unquoted and quoted trading companies of 5% for full-time employees and 25% for others will be reduced so that the following shareholdings will qualify as business assets:

  • all shareholdings held by employees and others in unquoted trading companies;
  • all shareholdings held by employees in quoted trading companies;
  • shareholdings in a quoted trading company where the holder is not an employee but can exercise at least 5% of the voting rights.

All employees, including part-time employees, of the company in which they hold shares (or any group company etc.) will qualify. Officers of a company are presently treated in the same way as employees and this will continue.The threshold reductions will apply from 6 April 2000. Where shares qualify as a business asset only from that date, an apportionment of the eventual gain will be necessary so that part qualifies for business taper and the balance for non-business taper. The apportionment will be carried out under existing rules.

Unquoted companies will be defined as those which have no shares or securities listed on a recognised stock exchange. Shares traded on the Alternative Investment Market of the London Stock Exchange will be treated as unquoted.

Enterprise Management Incentives

Independent trading companies with gross assets of not more than £15m will be able to reward up to 15 key employees with tax-advantaged share options, worth up to £100,000 each at the time of the grant.

There is no income tax on the grant of the option and normally no income tax or national insurance for the employee to pay when the options are exercised; normally there will be no national insurance charge for the employer.

The big advantage is that, when shares are sold, capital gains taper relief will normally start from the date the options are granted. Having said all of that, we do have to await the fine print on this scheme.

There is likely to be a fair amount as the HM Revenue & Customs’s own estimate of the professional fees required to set a scheme up is £3,500 and that there will be maintenance costs. We think Blythe & Co won’t be charging that much(!) and that this could be a very interesting area for the small business.

Employee Share Ownership

Improvements to the new all-employee share plan were announced following a further period of consultation. The plan is now more attractive to companies of all sizes and easier to operate. However these schemes are likely to still require specialist advice – confirmed by the HM Revenue & Customs estimate of set up costs in excess of £20,000!

  • Employees who keep their shares in the plan for at least five years will pay no income tax or national insurance with respect to those shares. There are also capital gains tax advantages.
  • Employers can give employees up to £3,000 of shares each year free of tax and National Insurance, and
  • Some or all of these shares can be awarded to employees for reaching performance targets
  • Employees will be able to buy partnership shares out of their pre-tax salary, up to a maximum of £1,500 a year, free of tax and National Insurance
  • Employers can match partnership shares by giving employees up to 2 free shares for each partnership share they buy.
  • Companies will get corporation tax relief for the costs they incur in providing shares for employees to buy to the extent such costs exceed the employees’ contributions
  • The dividend re-investment limits are simplified – up to £1,500 of dividends may be re-invested in shares tax free each year
Business Expenditure on IT

For three years starting on 1 April 2000, 100% First Year Allowances will be given for capital expenditure on IT equipment and software. In other words the tax treatment of buying (say) a computer will be as though it was a standard business expense (like accountancy fees!).

Charities

The Chancellor had already announced that the minimum Gift Aid donation of £250 and the maximum limit for Payroll Giving will be abolished. In addition, from 6 April 2000 there will no longer be a separate tax relief for payments under a Deed of Covenant.

In future all tax relief will be under the new Gift Aid scheme. Tax relief has been extended for gifts of listed shares and securities. Relief will be given by way of a deduction for the full value of the gift in computing the income or corporation tax due.

Non-resident individuals and companies will now be able to claim Gift Aid relief against UK tax. VAT exemption on fundraising events for children has been extended.

Company Cars

The Chancellor announced details of a major reform of company car tax. From April 2002, cleaner, more fuel-efficient cars will be rewarded by linking the tax charge to the car’s exhaust emissions.

From 6 April 2002, the charge on the benefit of a company car is to be graduated according to carbon dioxide (CO2 ) emissions, and the reductions for business mileage (including those for second cars), and older cars will not apply. The minimum charge will be 15% of the car’s price rising to a maximum of 35%. The new rules mean that the percentage of a car’s price on which tax will be charged will be based on CO2 emissions and engine size rather than business mileage.

Rates and Allowances
 
1999-00 (£)
2000-01 (£)
Income tax allowances    
Personal allowance
Personal allowance – age 65-74
Personal allowance – age 75 and over
4,335
5,720
5,980
4,385
5,790
6,050
Married couple’s allowance – age 65 before 6 April 2000
Married couple’s allowance – age 75 or more
Married couple’s allowance – minimum amount
5,125
5,195
1,970
5,185
5,255
2,000
Income limit for age-related allowances
16,800
17,000
Widow’s bereavement allowance
1,970
2,000
Blind person’s allowance
1,380
1,400
 
Capital gains tax annual exempt amount
Individuals etc
Other trustees
7,100
3,550
7,200
3,600
 
Inheritance tax threshold
231,000
234,000
 
Pension schemes earnings cap
90,600
91,800

Taxable bands
1999-00 (£)
Taxable bands
2000-01 (£)
Starting rate 10 per cent
0 - 1,500
Starting rate 10 per cent
0 - 1,520
Basic rate 23 per cent
1,501 - 28,000
Basic rate 23 per cent
1,521 - 28,400
Higher rate 40 per cent
Over 28,000
Higher rate 40 per cent
Over 28,400

So for the year ended 5 April 2001, you become a 40% taxpayer when your total gross income exceeds £32,785.

Corporation tax profits
1999-00 (£)
Corporation tax profits
2000-01 (£)
    Starting rate 10 per cent
0 - 10,000
    Marginal relief
10,001 - 50,000
Small companies’ rate 20 percent
0 - 300,000
Small companies’ rate 20 percent
50,001 - 300,000
Marginal relief
300,001 - 1,500,000
Marginal relief
300,001-1,500,000
Main rate 30 per cent
1,500,001 or more
Main rate 30 per cent
1,500,001 or more