Article on the Budget by Paula Higgleton and John Whiting, of PricewaterhouseCoopers, published in April 2001 issue of "Tax Adviser". On a personal level
This Budget was apparently a Budget to ‘Build long term prosperity for all’. With the number of press releases and Budget Notices, a few cynics have been spotted who feel that the prosperity is as usual heading towards the advisers. But is that in turn too cynical a view?
A Budget for savers?
Let’s start with the savings area. As announced in the prebudget statement, the £7,000 ISA limit has been extended until 2006. Although good news, one wonders why this change has not been made permanent. Simplification of the mini/maxi ISA rules is needed but it seems that these rules are set to stay in place for the present.
Additionally, 16 and 17 year olds will be allowed to invest in cash ISAs from 6 April 2001. However, where capital has originated from parents, it seems Taxes Act 1988, s. 660B will still operate to tax the unmarried under 18’s income in excess of £100 on the parents. This complicates the supposedly tax free account. The tax adviser will have to ascertain details of the source of capital contributions, the dates of birth of children and details of interest payments. Surely the settlement provisions could have been waived for this ISA extension? Or isn’t it time for that £100 limit to be raised sensibly?
The Chancellor made much of the increase in the IHT nil rate band by £8,000 to £242,000, claiming that 95 per cent of all UK estates will be outside the IHT net. In fact the increase is only inflationary, means that the same number of estates will suffer IHT in 2001–02 as suffered IHT in 2000–01, and does nothing to address the concerns of those in many parts of the country whose ownership of a modest house gets them into the IHT net. One can’t help feeling that a revamp of IHT is pencilled in for the first Budget of a new Labour government.
The relaxation of the rules that restrict or withdraw EIS reliefs when a company returns value to investors or when an EIS company floats on a recognised Stock Exchange is welcome. But why couldn’t the Chancellor introduce a greater measure of consistency into the tax system by increasing the VCT limit from £100,000 to £150,000 to align it with EIS relief?
What about the workers?
Again as foreshadowed in November, employees owning shares in their non-trading employing company will now qualify for business asset taper relief on their shares. However, as with other business assets, the new definition of a business asset for taper relief purposes only applies from 6 April 2000. We are left with the anomaly that employees who owned their shares from before 6 April 2000 could pay more CGT than their colleagues who acquired their shares after that date because of the apportionment calculation. It is disappointing that the Chancellor did not streamline the rules and back date the business asset definition to 6 April 1998.
The CO2-based revamp to the company car taxation regime from April 2002 is well known. Less well appreciated is that the statutory mileage rates are to be recast and consolidated into a single rate at the same time. The amounts are confirmed in the Budget Notices at 40p a mile for the first 10,000 miles, with 25p a mile thereafter. Drivers of significant business miles will need to think about the impact of the new rates – clearly those who drive larger engined cars will be losing out compared with current rates.
Employers will need to decide whether to adjust their expenses policy to these new figures – which will have an impact on employees’ expectations of the money they receive for all those weary miles they drive in their own vehicles on company business. Keeping current rates may well generate taxable/NICable amounts; dispensations may need revisiting.
The 5p passenger rate received some publicity. This will need a little care – it will be tax and NIC free if paid by the employer, but, unlike the basic mileage rate, will not generate a claim for a tax deduction by the employee if it is not paid.
Meanwhile, the green transport revolution gathers pace, at least in the tax regime, with the reduction in the works bus size requirement, introduced as TA, s. 197AA by last year’s Finance Act, from 12 to 9 seats, presumably from April. And those energetic souls who pedal for the company will be able to get a 20p a mile bike rate from April 2002. Coupled with that passenger rate, it makes our company rickshaw scheme even more attractive.
Does anyone still get free petrol/diesel from their employer? Revenue statistics show that some 930,000 did in 1998–99 – a figure that surely should be reducing as the benefits charge goes ever upwards. This year the rates go up by a modest 14 per cent – the planned 20 per cent hike has been scaled back because of the drop in petrol prices since last March. No employer should simply give out free private fuel to employees without evaluating whether it really is beneficial to them – the NIC, tax and VAT costs easily make this a negative perk.
A Budget for families?
The key theme seems to have been that it was a Budget for families. Increases in the amounts of Working Families Tax Credit payments (particularly childcare amounts) will increase the numbers eligible. That will translate to more notices and more payments to administer for employers. The Children’s Tax Credit will no doubt generate lots of PAYE coding changes, queries to the payroll department, and confusion(hopefully not among Chartered Tax Advisers).
Statutory maternity pay (SMP) increases significantly from the current £60.20 to £75 from April 2002 and to £100 from April 2003. The period of SMP will rise to 26 weeks in 2003, at the same time as paid paternity leave – for a modest two weeks at the same £100 figure – is introduced. With the inclusion of adoption leave in these new rules it does seem that once again employers are shouldering the administration of another extension of social policy, however laudable that extension is.
Continuing with the personal theme, one of those items in the fine print is a revision to the existing income spreading rules for authors. There will be a new form of averaging similar to that which exists for farmers - so authors and creative artists will be able to average their income over two consecutive years. This is a welcome change as the existing rules are rarely used, being perceived to be too onerous and complicated from a computational perspective. Individuals receiving income from such activities will have the opportunity to make full use of personal allowances in a year of low profits whilst reducing the possibility of tax at the higher rate in a year of high profits. It has to be said, though, that a longer period than the proposed two years would have been better.
Let’s end by sounding a fanfare for the CIOT. A number of administrative changes were announced designed to clarify the self-assessment legislation and to improve its working. The concession whereby interest is paid where relief is carried back from one year to another is put on a statutory footing. The law is also being clarified to adjust the time-limit for the Revenue to open an enquiry into a tax return from 30 to 31 January. Why does this merit praise for the CIOT? Because many of these changes stem from the joint CIOT/IR research study carried out last year, to which many members contributed. Now if only all our recommendations were acted on …
020 7235 9381
April 2001 by