The chancellor's fifth Budget statement has taken a small step towards improving the climate for business in the UK. Proposed new reliefs for intellectual property and deferred relief, or even exemption, for sales by companies of substantial shareholdings all suggest that the way companies' tax bills are calculated could undergo radical change.
The government announced further consultations on the proposed relief for gains on substantial shareholdings. This was outlined in the March 2000 Budget, and was followed by technical notes in June and November 2000. A further consultation paper is promised in June 2001, with legislation in the Finance Act 2002.
The form of the relief is still to be decided. The initial proposal was for a deferral relief, which would operate the same way as rollover relief on the replacement of business assets. After consultation, the government suggested complete tax exemption for gains on substantial shareholdings. Such a move is likely to be integrated into a review of the whole corporation tax system. This relief is important if the UK is to remain a competitive location for international companies.
The fourth round of consultations on tax rules for intangible assets was announced in an Inland Revenue technical note on 7 March 2001. The revised proposals are broadly welcome. The Revenue has addressed key concerns by proposing a new rollover relief for disposals of goodwill and intellectual property, and by eliminating clawbacks of capital allowances under transitional arrangements. The proposed new tax rules will apply only to intangibles acquired after the start of the new tax regime. Current tax rules will apply to grandfathered assets for many years. No tax relief will be available for the purchase cost of grandfathered assets that do not currently qualify for capital allowances.
For assets acquired under the new regime:
* Taxable profits and losses will generally be based on the profit or loss computed for accounts purposes, following FRS 10 rules. But some tax relief may also be allowed for assets that cannot be depreciated under FRS 10 because they have an indefinite economic life.
* Purchased intangibles will be amortisable for tax purposes.
* Income and expenditure relating to intangibles will be treated as revenue items.
* Profits or losses on the disposal of goodwill and intangibles will be taxed as income (subject to rollover relief).
Further provisions are outlined in the discussion paper.
The Budget also included changes to taxing foreign exchange gains and losses (forex rules), financial instruments and corporate debt. A further consultation document will be issued in the summer. So far, the government is considering introducing "targeted anti-avoidance" measures in the finance bill 2001. In a future bill, it intends to abolish the forex rules and merge them with financial instrument and corporate debt rules, extend the financial instrument rules, and amend the corporate debt rules to deal with the connected-party debt problem.
The government has confirmed that it intends to abolish from 1 April 2001 the requirement to deduct income tax at source from most interest and royalties payments between companies, where the recipient is within the charge to UK corporation tax on that income. This has now been extended to annuities and other annual payments. Interest payments to individuals will continue to be made subject to deduction of income tax.
This change is not all good news for taxpayers. In order to pay gross under the new proposals, the onus will be on the paying company to satisfy itself that the recipient company qualifies. The payer need not withhold tax where there are reasonable grounds to assume that this is so. If an error is made, the payer will have to account to the tax collector, plus pay interest and, potentially, a penalty. This seems harsh.
The government also announced a consultation for a tax credit to encourage research and development (R&D) and innovation by larger companies. This would complement the small and medium-sized companies' R&D tax credit introduced in the Finance Act 2000. The plan is for an incremental R&D incentive that rewards businesses according to the extra R&D spending over and above a predetermined level.
Some radical changes are proposed for small business taxation. The main proposal is that small companies can base their profits, for tax purposes, on the accounts that they prepare under the Companies Act. The government wants to simplify this, while allowing small companies to retain specific reliefs and allowances, such as 100 per cent first-year allowances for IT expenditure, 40 per cent first-year allowances for plant and machinery, and R&D tax credits. It has also proposed that businesses will be able to claim 100 per cent first-year allowances on investments in designated energy-saving plant and machinery.
Other changes are proposed to the EMI scheme, which allows companies with gross assets of 15 million [pounds sterling] or less to grant 15 employees tax-advantaged share options worth up to 100,000 [pounds sterling] each. The chancellor has proposed to extend the scheme to allow any number of employees to participate up to an overall limit of 3 million [pounds sterling] per firm.
The chancellor also promised to modernise the tax system. This is welcome, but progress is painfully slow and companies must steel themselves for more consultation before they see any tangible benefits. Remember, all Budget proposals are subject to legislation in the finance bill, which maybe altered as it goes through Parliament.
Trevor James and Robert Brown are tax partner and senior tax partner at PricewaterhouseCoopers
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|Title Annotation:||2001 British budget|
|Author:||Constable, Trevor James; Brown, Robert|
|Publication:||Financial Management (UK)|
|Article Type:||Brief Article|
|Date:||Apr 1, 2001|
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