MALCOLM GUNN FTII, TEP reviews the 2001 Pre-Budget Report.
If you enjoy mysteries, puzzles, enigmas and whodunnits, this was not the Pre-Budget Report for you. In fact one has to dig very deep into all the paperwork to find anything which has not been announced, or indeed reannounced, already. Newspaper headlines focused on the 'debate' – i.e., 'prepare for this to happen'– about raising taxes to fund the National Health Service but in truth it comes as no surprise that within months of an election some unpalatable truths are finally divulged by the victorious party.
MALCOLM GUNN FTII, TEP reviews the 2001 Pre-Budget Report.
If you enjoy mysteries, puzzles, enigmas and whodunnits, this was not the Pre-Budget Report for you. In fact one has to dig very deep into all the paperwork to find anything which has not been announced, or indeed reannounced, already. Newspaper headlines focused on the 'debate' – i.e., 'prepare for this to happen'– about raising taxes to fund the National Health Service but in truth it comes as no surprise that within months of an election some unpalatable truths are finally divulged by the victorious party.
It rather reminds me of Basil Fawlty's spoof session for the erstwhile Mastermind programme:
'Next contestant, Sybil Fawlty from Torquay. Specialist subject: The blindingly obvious.' (Astute readers will note some minor editing here to cater for our house style!)
Taper relief
For tax people, the biggest news is the reduction in the business assets rate of taper relief for capital gains tax. The reduction is to take effect from 6 April 2002 and after that date business assets held for less than one year will have an effective maximum rate of capital gains tax of 40 per cent; assets held for less than two years but more than one will have an effective maximum rate of 20 per cent and after two years the effective maximum is only 10 per cent. All those who have taken planning steps to restart the taper clock, because of the existence of a pre-April 2000 non-business asset period, should find that this has paid off handsomely.
It is a bizarre relief, but the Government seems firmly wedded to it. A cottage let for holidays should be an excellent two year investment. If the staff of quoted companies can now make rapid profits by dealings in the shares of their employer, those profits will pay minimal tax. For others, investments on the Alternative Investment Market will have very attractive tax results if they perform spectacularly. Given that the relief under section 574, Taxes Act 1988 for the same type of investment has been greatly curtailed (this relief being applicable where losses arise), policy-making here seems to be in conflict with itself.
This does not of course mark the demise of the tax-avoidance industry. Although much offshore planning in the early nineties was devoted to those building up trading businesses, property ownership has historically brought about more widespread wealth creation and in general this enjoys the dull, old, non-business rate of taper relief.
All the foregoing was part of the expected for this Pre-Budget Report. However, one little sentence in all the published material was definitely not expected:
'The Government is also considering whether there is any case for changes to the capital gains tax régime for non-business assets in order to improve incentives for investment.'
This marks a glimmer of hope for all those locked into Stock Exchange investments where most of the value is capital gain. However, such clients should not hold their breath. I understand that there is little hope of a cash hungry Government giving much away to passive investors.
Inheritance tax
Yet more of the expected came in the context of inheritance tax. Before readers start thumbing through all the pre-Budget papers to see what they missed here, the answer is nothing. Inheritance tax was not mentioned, despite much press rumour, yet again, to the effect that this year major reforms are on their way.
The fact is that inheritance tax is very low on the Government's agenda; that was confirmed by a Treasury official at a Chartered Institute of Taxation seminar in September. Political observers will point out that this Government's interests lie in promoting trading companies, welfare reform and child poverty, and technology issues. Old Labour left-wing politics of property reverting to the state on death are not on the agenda. It is perhaps surprising that the Government has so far viewed stamp duty and National Insurance contributions as its major tax raising targets, leaving inheritance tax untouched, but that is one of the oddities of the current political scene.
Stamp duty
There were in fact no stamp duty increases included amongst the Pre-Budget Report proposals (although that is not to say that they will not surface next April), but on the other hand there was a new relief. With effect from 30 November 2001, the purchase of any property in one of 2,000 designated areas mentioned in The Variation Of Stamp Duties Regulations 2001 will be free of stamp duty where the consideration does not exceed £150,000. For business property, this limit is VAT-inclusive, notwithstanding that the VAT may be recoverable.
If the property is leasehold and a premium is paid under the limit, but a rent is also payable, then the premium will be exempt from duty but there will be liability in respect of the rent.
The relief is applied by reference to the post codes for properties and the press release helpfully gives the telephone number of a post code enquiry line where the code for any given address can be obtained: 08457 111222. They are not all run down and deprived areas: the inclusion of Shepherds Bush in West London and parts of Kensington and Chelsea and Westminster has caused a frisson of excitement in those localities.
The relief will be extended, Europe permitting, from a date in 2002 but only in respect of non-residential property.
The relief is of course all part of the expected. It was first mooted in the 2000 Pre-Budget Report but rumour has it that it ran into difficulties with hitting the right target and excluding tax avoiders.
Stamp duty relief is a blunt instrument in the property market. There was a general nil rate for properties up to £250,000 for a temporary period between December 1991 and August 1992 but I am not aware of any evidence that this had any meaningful impact on the property market.
Corporates favoured
A feature of the Pre-Budget Report is that there are a number of proposed measures, or reannouncements of proposed measures, which are exclusive to corporate bodies. These include:
1. An exemption for capital gains and losses on the sale of substantial shareholdings in trading companies.
2. A relief for the cost of acquiring intellectual property, goodwill and other intangible assets.
3. A possible scheme to enable companies to pay cross-border royalties without deducting tax at source.
4. For those in the construction industry scheme suffering deduction of tax from trading receipts, the possibility of applying the deductions towards any liabilities due, including pay-as-you-earn tax and National Insurance contributions.
5. Confirmation that the new régime covering corporate debt, financial instruments and foreign exchange gains and losses is to be introduced for accounting periods beginning on or after 1 October 2002.
6. A tax credit for research and development expenditure, where there were originally two proposals, but only one is now in the picture, this being a 'volume' credit giving extra tax relief based on the amount of research and development spending.
None of these matters is to have any application to unincorporated businesses, although the reliefs for intangible assets and construction industry deductions would seem to have just as much importance for those not trading in corporate form.
Once again, virtually all the proposals here are just another chapter in the current volume of tales of the expected. Consultations have been going on for some time and apparently are to continue in the future. We can therefore look forward to some more reannouncements of these reannouncements.
Tobacco smuggling
This magazine does not normally involve itself in Customs duties, but I could not help noticing the following statement in one of the press releases:
'In 2000-01 Customs seized more than 10,200 cars, vans and lorries used by smugglers, almost double the number seized in 1999-00.'
For 'smugglers' you might well interchange 'private individuals' in certain cases. One such case surfaced at the VAT and Duties Tribunal recently where some 'smugglers' had had a day out across the Channel in the family car to stock up with booze and cigarettes for a forthcoming family event. On return, Customs took the lot, including the car, and left them to walk home. The contention was that the volume of goods purchased was in excess of Customs' little-known internal guidelines and the family had a monumental struggle to get even their own car back. I have nothing but the utmost contempt for a state system which conducts unarmed robbery against its own innocent citizens. This remark in the Pre-Budget press release should be a matter of public shame. The arbitrary confiscation of assets by Government officials is uncivilised and unacceptable.
Employers' obligations
With all the Pre-Budget material comes a report of a committee set up to investigate 'ways to help small employers grappling with their payroll obligations'; perhaps that should be rephrased as 'ways of coping with pay-as-you-earn, P11Ds for benefits in kind, statutory maternity pay, sick pay, student loan repayments, working families tax credits', all in their spare time after a day's work. The report can be paraphrased as follows:
'It certainly is tough being a small employer these days. It would be nice if the system could be simplified, but obviously the Revenue is not going to repeal chunks of the tax legislation on employments, because it would lose some revenue, nor is it going to take on some of the work of employers, because it has already decided to offload this work onto them to cut its own costs. So the answer is that employers must be compelled to use computers. If they have not got one, they must either buy one plus the necessary software, or else they must pay somebody else to do the payroll work. Obviously anybody employing staff, including those with nannies and full-time carers, must be rich or they would not have staff in the first place.'
The committee will no doubt point to a vital omission from this paraphrase, which is that there should be an introductory payment by the Government on the introduction of the electronic requirement in four or five years' time and reducing payments in subsequent years. That is fine, but the obligations will continue forever after, and of course new employers will arrive on the scene each year and they may have no entitlement to the introductory payment.
There does seem something very unsatisfactory about a tax system which has to be administered by laymen and which is beyond the wit of man to understand. If the Government is to require them to submit returns in a certain fashion, then I suggest that it should supply itself the necessary equipment and software.
An alternative which has been discussed from time to time would be to bring all employees into a form of self assessment, but of course this would greatly increase Inland Revenue costs. So the idea is unlikely to be seriously considered.
Compliance visits
One section in the committee's report is to be applauded. It notes that employers have a perception that when the Inland Revenue compliance staff visit, their sole aim is to find something wrong. It would be better if there was less focus on narrow technical areas of the law, such as the treatment of working lunches, and more attention paid to the problems of business in operating payroll for the Government and helping them get things right for the future.
Bravo, but unfortunately the psychology behind any Inland Revenue enquiry or audit is not one of making sure that all is well, but rather one of entrapment. For this reason, any adviser in the investigations field, or indeed more widely in criminal defence work, will counsel that only the barest minimum of necessary co-operation with the authorities should be given. Pay-as-you-earn audit staff will feel they have achieved nothing if they discover no error, just as does an accountant who fails to reduce a tax bill. If the audit staff can indeed be re-programmed, this would be a remarkable achievement.
Small business taxation
Most of us were stunned by a press release in the 2000 Budget Pack which seemed to suggest that a scheme might be introduced for small businesses to pay tax on their accounting profits, unadjusted by all the detailed tax rules, for example those requiring the replacement of depreciation with capital allowances. Had we missed a sentence somewhere to the effect that some items, such as business entertaining, were no-go areas in relation to this exercise? It does now seem that the review panel did indeed start with a clean sheet of paper and everything was up for grabs. However, according to a summary of the findings of the review which is amongst the Pre-Budget Report material, those participating soon saw that taxation on accountancy profits would by no means work all in favour of the taxpayer. For example, the benefit of first year capital allowances would be lost. All in all the review has produced the following conclusion:
'Taking into account the wide range of views put forward in response to the technical note, the Government proposes to consult further on particular areas, such as tax nothings and the rationalisation of the schedular system, where closer alignment could bring simplification while maintaining incentives and fairness.'
Flat rate VAT scheme
A possible flat rate VAT scheme for businesses with a turnover of less than £100,000 has been the subject of recent consultations and is now to go ahead. It seems hard to believe that it will be of much interest. Using it will forgo the benefit of VAT input tax recoveries on major expenditure and very few businesses hover under a £100,000 threshold for very long, unless they are relatively unsuccessful. Any such businesses would surely not have much trouble listing down their inputs and outputs and avoiding the perennial VAT googly of the flat rate charge on private petrol consumption paid for by the business.
Charities
One matter which appears to have been referred to only in the Chancellor's speech is a possible scheme for charitable payments to be related back to a fiscal year by means of the annual tax return form. This will enable giving to be geared to annual income as declared for tax purposes. It seems likely to run into some difficulties as I believe that not all higher rate taxpayers are within the self-assessment system, if the tax liability is all dealt with under pay-as-you-earn.
Other points
The 10 per cent rate of corporation tax for companies with low taxable profits is to be extended, but no details were made available. The main use of this reduced rate band is to enable profits above the band to be extracted by way of remuneration and those within the band to be accumulated or paid out by way of dividend. In the field of share schemes, the enterprise management incentive scheme is to enjoy an increased limit with effect from 1 January 2002; companies operating the scheme may have gross assets of £30 million in place of the present figure of £15 million. Share scheme experts appear to be unimpressed. Gross assets are a fairly meaningless test and much more sensible would be a limit by reference to net assets.
No surprises
All in all, this was not so much a Pre-Budget Report but rather an update on existing ideas under consultation and others already trailed by past announcement. The themes which interest the Government are constantly revisited and tinkered with, whilst those which are not of interest are left untouched. It seems hard to see how the forthcoming increased business assets taper relief will be of any practical benefit other than in tax-avoidance situations; people do not normally build up businesses and sell them within two years, nor is two years a long-term investment by any stretch of the imagination.
In the corporate field, purchasers of target businesses will almost certainly insist on acquiring the assets in order to get a tax write-off of goodwill plus capital allowances on tangible assets; vendor companies would prefer to sell the shares in subsidiaries to benefit from the new tax exemption. Hence corporate planners may need to persist with existing 'complex structures', as the press release puts it, in order to satisfy the aims of both vendors and purchasers. Might that be one unexpected feature of this long tale of the expected?
