Introduction

In his eighth Budget, the Chancellor Gordon Brown delivered some surprises but, as usual, confirmed most of the changes already announced over the past few months. Many rates, including income tax and national insurance contributions, stay the same and allowances increase by statutory indexation. The single universal regime for pension arrangements has been delayed until April 2006. The changes include increases in first year capital allowances for small businesses, although the 100% allowance for expenditure on computers has not been extended, a 19% minimum corporation tax rate on distributed profits of small companies, and the tax rate for trusts increasing from 34% to 40%. There are also measures to clarify and amend stamp duty and tax proposals, modernise the taxation of trusts and there are several anti-avoidance provisions. The Chancellor also announced that the Inland Revenue and Customs & Excise will merge.

Personal taxation

*Where either claimant was born before 6th April 1935

Employment Taxes

Company vans
From 6 April 2005, employees will not be liable to tax if they have to take their van home but are not allowed other private use of the vehicle. Where the private use is unrestricted, the existing £500 or £350 scale charge will continue to apply until 5 April 2007. After that date, the discount for older vans will be removed and the scale charge for unrestricted private use will increase to £3,000. In addition, there will be a £500 fuel charge if the employer provides fuel for private use. Self-employed van drivers are not affected by these new rules.

Company cars and car fuel
For 2004/05, the set figure for the company car fuel benefit charge will remain at £14,400. The CO2 emissions level that qualifies for the minimum petrol and Euro IV diesel percentage charge (ie 15%) will be frozen at 140 grams per kilometre for 2006/07.

Childcare
From 6 April 2005, employees will be able to receive up to £50 a week of childcare free of tax and national insurance contributions where their employers contract with an approved childcarer or provide childcare vouchers for the purpose of paying an approved childcarer. The childcare must be registered or approved home-childcare and it must be made available to all employees.

Payroll giving
Small and medium-sized enterprises with fewer than 500 employees that set up new payroll giving schemes from April 2004 will be able to apply for a one-off grant to help with the cost of establishing the scheme. The grant will be available for two years.

Enterprise management incentives (EMI)
For EMI options granted after 16 March 2004, it is no longer necessary for the qualifying company to own directly, or via its subsidiaries, at least 75% of any subsidiary companies.

Business taxes

Small company dividends and loans
Companies or groups with annual profits below £300,000 will have to pay at least 19% corporation tax on dividends that are paid to shareholders who are individuals or trusts. The minimum rate will apply to distributions made after 31 March 2004. The 0% starting rate will only apply to profits that are retained or distributed to other companies. The measure, which aims to reduce the advantage of incorporating a business, falls short of the imposition of national insurance on dividends that many people expected. The government is also considering measures to strengthen anti-avoidance legislation on loans made to shareholder directors of close companies.

Notification of trading
Companies will have to notify the Inland Revenue within three months of commencing trading. Currently they only have to notify chargeability to corporation tax. The change takes effect from the date of Royal Assent and will be enforced by penalties.

Capital allowances
First year allowances on plant and machinery for small businesses will rise from 40% to 50% for one year. The new rate will apply to expenditure from 1 April 2004 for corporation tax and 6 April 2004 for income tax. The increase does not apply to medium-sized enterprises.The Chancellor did not extend the 100% allowance for computer equipment for small businesses, which therefore ends on 31 March 2004.

Research and development (R&D) tax credits
A wider range of research and development costs will qualify for R&D tax credits. Qualifying expenditure will now include costs of software, power, fuel, water and consumable or transformable materials. The change will take effect from 1 April 2004 for large companies and as soon as the government receives EU state aid approval for small and medium-sized companies.

SME thresholds
The thresholds for small and medium-sized enterprises were increased with effect from accounting periods ending after 29 January 2004. This was announced in the Pre-Budget Report in December 2003.

Investment companies
Tax relief for the costs of managing investments will be available to companies with investment business whether or not they qualify as investment companies. The requirement that such companies be UK resident will also be removed, which will extend relief to UK permanent establishments of non-resident companies. The rules will specifically disallow the deduction of capital expenditure and take effect from 1 April 2004.

Tax and accounting
New rules will ensure broadly equivalent tax treatment between companies that choose to adopt International Accounting Standards (IAS) and those that continue to use UK Generally Accepted Accounting Practice (UK GAAP). The measure will also make changes to the legislation on loan relationships, derivative contracts, intangibles and R&D to accommodate accounting changes both under IAS and UK GAAP. This takes effect for periods of account beginning after 31 December 2004.

Transfer pricing
Small and medium-sized enterprises will be exempt from the transfer pricing and thin capitalisation rules in most circumstances from 1 April 2004. For other companies, the transfer pricing rules will be extended to transactions within the UK. Where a company is taxed under the transfer pricing rules, the connected company will be able to make a corresponding adjustment in calculating its own taxable income.

Property derivatives and Property Investment Funds
A new tax regime will broadly extend the 2002 derivative contracts legislation to property derivatives. The rules will be introduced by regulations that will be made after Royal Assent. The government is consulting on the most appropriate structure for a new Property Investment Fund.

Construction industry
A revised Construction Industry Scheme from April 2006 will replace the present CIS cards, certificates and vouchers with an Inland Revenue verification service and monthly returns. It will also aim to ensure construction industry workers are correctly classified as employed or self-employed.

Renovation allowance
A business premises renovation allowance scheme will provide 100% capital allowances for the costs of renovating business properties in Enterprise Areas that have been vacant for at least a year. The scheme will start in 2005, subject to the government obtaining EU state aid approval.

Interest and royalties
The UK is implementing the EU Interest and Royalties Directive with effect from 1 January 2004. This largely eliminates taxation in the source state of interest and royalty payments between associated companies in different EU member states.

Enterprise capital funds
To improve access to finance for small and medium-sized firms, the government will introduce enterprise capital funds from a date to be announced. They will be commercial funds investing a combination of private and public monies in small high-growth businesses.

Capital taxes

Inheritance tax (IHT) nil rate band
The inheritance tax nil rate band will increase to £263,000 from 6 April 2004.

Inheritance tax administration
Consultation will take place on simplification of the reporting process for estates where no inheritance tax is payable. The aim will be to limit the need for an IHT account to those estates where there is tax to pay, although there will be a few exceptions. Regulations should be made later this year.

From the date of Royal Assent, the penalty rules for IHT will be amended to bring them more into line with those for income tax and capital gains.

Capital gains tax annual exemption
The annual capital gains tax exemption for individuals will increase to £8,200 from 6 April 2004. The maximum annual exemption for most trusts will rise to £4,100.

Gifts relief
From 10 December 2003, the capital gains tax rules are changed to prevent gifts relief applying to disposals of assets to trusts in which the settlor has an interest.

Private residence relief
From 10 December 2003, the capital gains tax rules are changed to prevent the interaction between private residence relief and gifts relief being used to avoid tax.

Stamp duty land tax - partnership transactions
Stamp duty land tax will apply to the transfer of an interest in land into a partnership, the acquisition of an interest in a partnership (where the partnership includes an interest in land) and the transfer of an interest in land out of a partnership. The change will be effective from the date of Royal Assent.

Stamp duty land tax - technical clarifications
A range of technical changes will remove tax avoidance opportunities and clarify the position on sub-sales. In particular, all variations that extend a lease or increase the rent will be treated as the grant of a new lease. The majority of the measures will take effect from 17 March 2004.

Tax compliance

Tax avoidance
Promoters of certain types of tax avoidance schemes will have to provide details to the Inland Revenue shortly after selling a scheme, including the types of transactions planned and their tax consequences. Taxpayers using schemes from offshore promoters will have to disclose details themselves shortly after buying or using the scheme. The starting date for this provision will be announced in the Finance Bill.

Tax compliance initiatives
The Inland Revenue will receive extra funding to focus more effectively on taxpayers who do not comply with their tax obligations. A package of measures will include better publicity to raise public awareness of tax obligations, new data systems to analyse tax compliance issues, tackling the black economy and more specialist staff for high risk areas involving large businesses and individuals with complex tax affairs.

Partnership tax avoidance
Tax will be imposed on investors in film schemes who make disposals after 9 December 2003 to avoid income tax on future income.

The partnership losses of non-active partners will be restricted to the amount actually contributed to the business. Disposals of future income streams by non-active partners will be taxed. Both measures take effect from 9 February 2004.

Corporation tax will be charged where a company shelters taxable profits in a realisation of its share of a partnership interest. The charge will be on realisations that comprise untaxed profits arising after 16 March 2004.

Simplified tax return
Individuals who receive tax returns but have simple tax affairs will be able to complete a four-page tax return with no supplementary pages. Taxpayers who receive the short form, based on information in the previous year's return, will have to check they are still eligible. The simplified return will benefit many pensioners and people with small amounts of income from property, investments or businesses.

Jointly owned assets
If shares in a close company are jointly owned by a husband and wife, the income distributions (normally dividends) will be taxed according to the actual ownership of the shares rather than automatically split 50/50. The change will take effect from 6 April 2004.

Pre-owned assets
A free-standing income tax charge will apply from 6 April 2005 to the benefit an individual receives from having the free or low cost enjoyment of assets which they formerly owned. The charge will broadly follow the benefit in kind rules and will be subject to a de minimis threshold of £2,500 of benefit.

A range of exemptions will apply, including an exemption for all gifts made before 18 March 1986 (the starting date for inheritance tax). Transitional relief will allow those caught by the new rules to elect by 31 January 2007 that the property falling within the income tax charge will instead be regarded as part of their estate for inheritance tax purposes.

Value added tax (VAT)

Turnover limits
The VAT registration turnover limit rises to £58,000 from 1 April 2004. The deregistration limit increases to £56,000.

The annual turnover limits for the cash accounting and annual accounting schemes go up from £600,000 to £660,000 from 1 April 2004. Businesses that are already in these schemes will be able to remain in them until their taxable turnover reaches £825,000.

Disclosure rules
Businesses with supplies of £600,000 or more will have to tell Customs & Excise if they are using specific avoidance schemes on a list that will be published. Failure to disclose this will incur a penalty of 15% of the tax avoided. Businesses with supplies over £10 million will have to disclose the use of any avoidance scheme, with a penalty of £5,000 for non-disclosure. The rules will take effect soon after Royal Assent.

VAT groups
The eligibility rules for VAT groups will be tightened up from 1 August 2004 to prevent VAT avoidance by using jointly owned entities and by preventing a company being in two VAT groups at the same time.

Energy saving materials
The 5% reduced VAT rate for energy saving materials is extended to ground source heat pumps from 1 June 2004.

Demonstrator cars
Customs & Excise will be able to direct that motor traders account for VAT on the open market value of demonstrator cars where the business reclaims input tax and charges employees a nominal sum for their use. The change will take effect from a date to be announced.

VAT fuel scale charges
New scales apply from the start of the first accounting period beginning after 30 April 2004

National Insurance Contributions (NICs)

Links

HM Treasury

Inland Revenue

Please note: This summary has been prepared very rapidly and may contain errors for which we cannot be responsible.