At a glance
Business-friendly measures announced by the Chancellor in the Pre-Budget Report include:
- Helping small businesses by simplifying the VAT system, so cutting down on form filling and improving cash flow.
- Removing restrictions on the number of employees who can be offered share options, which will be particularly important for high tech smaller firms in helping them recruit and retain skilled staff.
- Proposals for improving the prospect of growth firms receiving venture capital, which will help firms develop new goods and services and launch into new markets.
- Examining the case for further measures aimed at encouraging Research and Development, and in particular looking at the proposals from the CBI and EEF for extending the R&D tax credit beyond smaller firms.
- The announcement of a consultation on setting up a Community Investment Tax Credit, aimed at increasing private investment in under-invested communities; and that the Government will work with the venture capital industry on setting up the first Community Development Venture Fund.
- Action to solve problems where National Insurance Contributions are levied on share options. This has been a particular concern for many high tech firms.
The impact of VAT on SMEs
The Government is proposing to introduce a package of measures from April 2001 to allow small firms to manage their entry into the VAT system, reduce their VAT administration burden and improve their cash flow. The package will include:
- Extending the benefit of the cash accounting scheme to 40,000 traders by expanding the turnover limit from £350,000 to a new consolidated SME turnover level for VAT of £600,000. This aims to help more SMEs manage their VAT, whilst easing their cash flow burdens.
- Allowing at least 100,000 more businesses to benefit from lower compliance costs through the ability to file VAT returns on an annual rather than quarterly basis. The upper turnover limit for qualification will be raised from £300,000 again to the new consolidated SME turnover level of £600,000.
- Providing better advice for SMEs, through launching a lifelong business support programme and a national contact centre for general enquiries, extending the national importers and exporters programme and developing e-business measures.
- Increasing the VAT threshold in line with inflation, keeping the UK threshold at the highest level in Europe. This will ensure that another 8,000 businesses will be entitled to operate without the need to charge VAT.
- Consultation on rationalising the frequency of VAT payments due from traders under the annual accounting regime and introducing a lower SME turnover limit of £100,000, under which these SMEs will be able to:
- use a "flat rate scheme". Within this scheme, SMEs will be able to calculate their VAT liabilities as a percentage of their turnover and avoid having to internally account for VAT on all of their purchases and sales. The scheme would be designed to generate broadly the same amount of VAT payable, but would be simpler to use.
- enter the annual accounting regime immediately rather than having to wait until they have completed a year of VAT chargeable trading.
Tax incentive for employee share ownership
New measures to encourage more employees to take a stake in their company were announced by the Chancellor. The measures, which are intended to boost productivity by increasing employee commitment to growth in the enterprises where they work, aim to:
- Help more employees benefit from the generous business assets rate of taper relief from capital gains tax when they sell their shares. Business assets taper relief is, subject to consultation, to be made available from April 2000 to employees of a range of non-trading companies, alongside employees of trading companies who are already eligible;
- Expand the Enterprise Management Incentives so that smaller businesses can make more flexible use of the benefits in a way best suited to their needs, to help recruit and retain a wider range of staff they need to help grow the company; and
- Address the uncertainty regarding unpredictable National Insurance liabilities on the growth in value of some employee share options that were granted to employees between 6th April 1999 and 19th May 2000. Legislation will be brought forward to allow companies to settle these liabilities rather than having them continue to accrue.
About the capital gains tax taper relief
- The measure will simplify the tax system and reduce compliance costs. Employee shareholders will no longer always have to consider whether the company where they work is trading. As a result, many companies, in particular listed companies, will no longer have to address this question on behalf of their employees.
- Employees, including part-time employees, of the company in which they hold shares (or of any company in the group) will qualify. Officers of a company are at present treated in the same way as employees and this will continue.
- The new definition of business assets will apply to disposals on or after 6 April 2000, and to periods of ownership from 6 April 2000, thus coinciding with the changes announced in Budget 2000. Where shares qualify as business assets only from that date, an apportionment of the eventual gain will be necessary so that part qualifies for business asset taper and the balance for non-business asset taper. The apportionment will be carried out under existing rules.
- The introduction of the new measure will be subject to suitable revenue protection. Rules will be needed to prevent people obtaining an unfair tax advantage by securitising their personal assets in companies of which they are directors or employees. One option would be to continue to require close companies to be trading if shares in them are to qualify as business assets. The Inland Revenue will consult on the rules to set in place to achieve this protection.
About the Enterprise Management Incentives
Enterprise Management Incentives (EMIs) were introduced in the Finance Act 2000. EMI share options can be granted by trading companies with gross assets of no more than £15m. This size limit is the same as used for other tax incentives aimed at encouraging equity investment in small, higher-risk unquoted trading companies.
At present under EMI, 15 key employees can each be granted options over shares worth up to £100,000. So companies are allowed to grant EMI options over a maximum of £1.5 million of their shares at any one time.
Many of the smaller higher risk companies that can use EMI have said that the limit of 15 employees is not flexible enough for their type of business, because share options are important to attract larger numbers of highly skilled workers. The government says it is keen for these smaller enterprises to be able to use EMI in the way that will best meet their business needs.
The government will, subject to consultation, abolish the limit on the number of employees and replace it with a limit on the total value of shares under EMI option which would be raised from its current £1.5 million to £2.5 million per company. This will help eligible smaller higher risk companies to recruit the staff they need to help them achieve their growth potential.
National Insurance Contributions (NICs) are charged on gains arising when share options are exercised outside an Inland Revenue approved scheme if the shares are readily convertible into cash. While employers can plan for NICs on regular pay, it is not as easy for them to plan for NICs on share options, particularly where the share price is volatile.
Legislation was introduced this summer to allow employees to agree that they will pay the employer's NIC when they make a gain on their share options. However, some companies have said that they cannot make such agreements with their employees if an option has already been awarded.
To help companies that granted options after 6 April 1999 the government has said that legislation will be introduced at the earliest opportunity to limit the amount of the NIC payable on options granted between 6 April 1999 and 19 May 2000. The liability will be limited to the gain attributable to the growth in company share price up to 7 November 2000.
About capital gains tax taper relief
Capital Gains Tax (CGT) taper relief was introduced in the Finance Act 1998. The relief reduces the amount of a capital gain that is charged to tax on the disposal of an asset; the reduction increases the longer the asset has been held after 5 April 1998. Taper relief applies to the capital gains of individuals, trusts and the personal representatives of deceased persons, but not to the capital gains of companies.
Different tapers apply to business assets and non-business assets. The taper reduces the effective CGT rates for a higher rate CGT payer from 40 per cent to 10 per cent for business assets and from 40 per cent to 24 per cent for non-business assets.
The Finance Act 2000 broadened the range of assets that qualify as business assets with effect from 6 April 2000. Business assets now include:
- shares owned by employees and officers in a trading company where they work;
- shares in unlisted trading companies; and
- shares in listed trading companies provided that the individual controls not less than 5 per cent of the voting rights.
Most businesses are treated as trading, but investment companies and property investment companies are not. Companies that are mainly trading, but that have more than an insubstantial amount of non-trading activities are also not treated as trading.
There will be no change to the requirement for shares held by non-employee shareholders to be in trading companies in order to qualify as business assets.
Taxpayers will benefit from the relief on disposals of assets when they calculate their CGT liability under self-assessment. A helpsheet (April 2001 Helpsheet IR 279 Taper Relief) will include information about the proposals, and a revised version will be issued after the next Finance Bill has received Royal Assent. It will be available on the Inland Revenue's website at www.inlandrevenue.gov.uk or by calling 0845 9000 404.
Close companies are defined in legislation. Close companies include companies that are controlled by five or fewer people.
Measures to make UK tax system more attractive
The Chancellor’s package, which is subject to consultation:
- Removes out-dated requirements for companies to withhold tax on most intra-UK interest and royalty payments, simplifying the administration for payers and avoiding cash flow issues for the recipients. This should help to enhance competition in the financial services sector;
- Builds on the work undertaken since Budget by the Inland Revenue, together with business, to launch the next stage in the reform of the taxation of intellectual property, goodwill and other intangible assets;
- Expands the scope of the consultation on the taxation of disposals of substantial shareholdings, to consider the issues surrounding a deferral relief regime in more detail and, as part of a wider discussion on competitiveness, whether alternative approaches, including the possibility of a form of exemption regime, might be appropriate; and
- Extends the on-shore pooling rules for Double Taxation Relief to allow relief for rates of foreign tax paid up to 45 per cent even if these arise at several levels in a chain of companies overseas.
In addition to these measures, the government is also looking to:
- Simplify and modernise the legislation concerning corporate debt, financial instruments and foreign exchange gains and losses;
- Clarify the tax treatment for the new Limited Liability Partnerships;
- Adjust and simplify the calculation of foreign tax for Double Taxation Relief purposes, so that it applies in all cases as originally intended; and
- Clarify the changes to the treatment of capital gains of companies introduced in this year's Finance Act.
- Appropriate legislation for these measures will be introduced in the next Finance Bill.