Much tinkering, little change

Gordon Brown continues to innovate, but he has now delivered enough Budgets (and pre-Budgets) for his own “traditions” to be emerging. The main innovation this year was perhaps to have the Budget on a Wednesday. (It was thought that this might have been followed by the announcement of an election, but at time of writing this has yet to be called.) The continuation of new traditions included much repetition of matters that had already been trailed, whether in the pre-Budget report in November or less formally; continued emphasis on spending plans at least to the same extent as tax changes; and a fair degree of looking forward, including promises of changes to come, which in times when opinion polls are less consistent might smack of

over-confidence in the ability to deliver!

As ever, there was a wealth of

follow-up material, although to someone who has sadly ploughed through this over a number of years perhaps less than has sometimes been the case - the Press Releases often seemed to repeat information given elsewhere, as well as repeating themselves in many places.. Although this year’s Finance Bill does not promise to be such an effective doorstop as last year’s mammoth effort, there will still be a fair amount of new legislation. Indeed, some of it will involve further changes to more substantial reforms introduced only last year. However, new changes in the tax system are less substantial than in recent years, for which relief much thanks - even if the reasons include the depressing prospect of an impending election campaign. The overall impression gained is of a large amount of

tinkering, with little in the way of headline-grabbing change.

Another continuing theme is the use of the tax system as a carrot and a stick, to encourage the Government’s perceived “goods” and discourage the “bads”. Thus urban regeneration and research and development are Good Things and are to be rewarded through the tax system; while creating pollution and extracting sand and gravel are clearly Bad Things, to be punished. Children appear to be rapidly gaining ground as Good Things, as the extension of the Children’s Tax credit demonstrates.

The actual legislative process this year will depend on whether an election is called for the near future. If it is, it may be necessary to put through a truncated Finance Act, to ensure that the country can continue to have enough resources to run the government. (Income tax is still an annual tax and without Parliamentary authority the Inland Revenue could not continue to raise it at all. Some of the more basic proposed changes could also be included.). If a bit more time is available, especially given the size of the current Government majority, it may be possible to push through a relatively full version of the Act. But otherwise, 2001 is likely to be one of the years with a Finance (No 2) Act, to be enacted when the new Parliament assembles. Given that much of its content would be technical, it is likely that the bulk of any Bill published before an election would survive to make its way to the statute book eventually.

Income tax

There is quite a substantial rise in the starting rate band, especially as compared to last year - it has become a band worth having. But there was no reduction in the basic rate, nor even a promise of this to come, which many had expected. The rise in the basic rate band at the other end is quite substantial - meaning that the basic rate will cover an extremely broad range of incomes.

The small but significant discrepancy between the treatment of savings and other income will continue to cause confusion. The extension of the 10% band will mean that more savers will be able to reclaim the difference between that rate and the 20% usually deducted before the income arrives - but the number prepared to go through the necessary hoops to achieve this may not match those entitled.

This year brings the Children’s Tax Credit, worth £10 a week. However, it comes with a complicated claim form, at least if it is to be obtained in advance, through PAYE. The Children’s Tax Credit is reduced from the figure  of £5,200 at the rate of £2 for every £3 of income above the point at which higher rate tax comes in (thus disappearing completely at income of £41,735). This withdrawal will be based on the partner (who need not be a spouse) with the higher income. There has already been much criticism of the fact that the credit will be restricted where a couple’s income is concentrated in the hands of one partner, whereas the same amount split between the couple would allow full relief.

In this area, we are promised a further change to come. From April 2002, there will be an additional children’s tax credit for families in the year of a child’s birth, doubling the basic amount.

There are already inordinate difficulties involved in sorting out the children’s tax credit where couples separate, especially where children spend time with each parent. The new addition for babies will not reduce the confusion - and nor will the fact that it is only available for a single year.

It seems likely that there will be further integration between at least this aspect of the tax system and various benefits - the Working Families Tax Credit (also substantially increased by this Budget, and a constant point of reference both in the Chancellor’s speech and the follow-up papers) is a good example of this. The whole system, including child benefit, may become unified in due course. (This would, indirectly, provide a means of taxing child benefit.). The further integration of the tax and the benefit systems is illustrated by the range of announcements made by the Chancellor in this Budget, for instance on Statutory maternity Pay and paternity leave.

The pension scheme earnings cap rises from  £91,800 for 2000-2001 to £95,400 for 2001-02.

As seems to be case every year, minor amendments are made to the rules on enterprise investment scheme and venture capital trust reliefs, relaxing the rules on the time limits for utilising funds raised, returning value to investors and the situation when an EIS company goes on to float on a recognised stock exchange.

A new and simpler system of  profits averaging for authors and creative artists is to be introduced. The requirements are that profits come from a trade, profession or vocation taxable under Case I or II of Schedule D, and are mainly earned from “qualifying creative works”. These will include literary, dramatic, musical or artistic works, and designs. (I wonder if this will extend to designing tax planning schemes - they can be very creative!) A claim for averaging can be made for consecutive years if the profits of the lower year are less than 75% of the higher year.

On the administration front, there are changes to be made to the rules on self-assessment  enquiries. It will become possible if both sides agree to resolve disputes about a point of law through litigation without having to wait until the whole enquiry is complete; and the procedure for amending an assessment at the end of an enquiry will be simplified. There is also the promise of the rules being rewritten in a more straightforward way; and minor changes to the rules on Revenue recovery through the courts.

Capital gains tax

The annual exempt amount rises from £7,200 to £7,500, with the exemption for most trusts rising to £3,750.

Minor improvements are made to the now vital business assets taper relief. The definition of

business assets is extended to include shares belonging to employees disposing of shares in non-trading companies where they work, as long as they do not own more than 10% of the

company.

An anomaly is corrected, whereby assets used for the purposes of a trade by a partnership of which the trustees are a member will be eligible for the business assets taper. This change is helpfully
backdated to April 2000.
Perhaps more worryingly, the Revenue are to address by an article in Tax Bulletin the meaning of some of the terms used in the legislation on business assets taper relief. It makes an enormous difference in many cases if an asset qualifies for the increased rate of relief; and while clarification is to be welcomed, it is to be hoped that this will not involve restrictions under a different guise.
In more general terms, the changes are a reminder of the huge extent to which planning is available to mitigate capital gains tax. While some action can be taken after a disposal (such as by appropriate from of re-investment), planning in advance of disposals is usually much more fruitful. This is especially the case at the moment, as CGT taper relief builds up to its full extent, while retirement relief moves into its final phases. Some fairly complex arithmetic can be required in order to ensure that maximum advantage is taken of both reliefs.
Minor relaxations are made to the regime under which UK residents pay tax in investments held through a closely controlled non-resident company.
Inheritance tax
Nothing dramatic - just a rise in the nil rate band reflecting rather higher inflation than in the
previous year. It goes up from the arithmetically unfriendly £234,000 to the equally unmemorable £242,000. Of course, even this rise will not match the general rise in asset values (particularly in relation to houses), although recent falls in the stock market may balance this effect. The total take from inheritance tax is still projected to rise over the next few years (in contrast to that from capital gains, which is projected to fall as taper relief builds up).
“Of course, the most important recent development in relation to inheritance tax has been the introduction of the new forms. As part of
ongoing dialogues between the Law Society and the Capital Taxes Office, the Capital Taxes Committee would be very pleased to hear of any problems found with the new forms or the
procedures involved in using them.”
Stamp duty
It was widely feared that the attractive cash cow of stamp duty, at least on land, would be subject to further demands on its produce. This did not happen; but nor did the much desired abolition or reduction of the duty payable on shares.
At time of writing, we are still awaiting final details of a relief announced in the last Budget. This will be to encourage brownfield development. It remains to be seen whether it will take the form of a complete exemption for all transactions within the designated areas, or whether it will be more restricted.
The relief is awaited with much interest. In many ways it forms a third leg to other changes in this Budget dealing with housing in areas of social deprivation - see further on Business Taxation (capital allowances for flats over shops) and on Value Added Tax (urban regeneration measures).
Stamp duty is not to be payable when employees purchase their shares from the new All Employee Share Ownership Plans.
Alan Barr