Budget Special – Seeing the bigger picture.

It was a decidedly mixed Budget for individuals. Most workers under 65 will pay less income tax – unless they are married. Air passengers will gain benefit from lower duty – as long as they don’t fly business class. And company car drivers will be better off – as long as they steer well clear of gas guzzlers. For private investors, the Budget is something of an early Christmas present, with significant cuts in capital gains tax likely to save around #600m a year in taxes. From April CGT will fall from 40% to 35% after one year on a steady taper to 30% after two years, 20% after three years and 10% after four years. Chancellor Gordon Brown has also extended the definition of unquoted companies to allow those listed on the Alternative Investment Market to share in the new taper relief for disposing of business assets. The move is also designed to encourage more flexible and wider investment, and will cover those who own shares in their own company plus investors with a five per cent holding in a new business. According to Brown, Britain can now claim to be ‘the place’ for business start-ups with the lowest-ever rates of capital gains tax. And for some, it’s certainly welcome news, particularly investors in unquoted shares and high earning portfolios. But for the ordinary and the poorer portfolio investors, the benefits won’t be quite so obvious. ‘The changes really throw into sharp relief the poor portfolio investor who now has to deal with an even more complex CGT regime,’ says Maurice Parry-Wingfield, personal tax specialist at Deloitte & Touche. ‘The five per cent portfolio threshold also excludes most ordinary investors, with very few able to actually afford five per cent in shares in the larger companies.’ Parry-Wingfield says the chancellor should have simplified the capital gains tax regime rather than lower it in favour of the higher range of investors. Mukesh Gunamal, chairman of ACCA’s taxation committee, agrees that the CGT regime needed a radical overhaul. But he says the chancellor’s changes failed to recognise the ‘disproportionate compliance burden placed on the taxpayer’. Still in his investment and enterprise-boosting mode, Brown also announced the continuation of the Save As You Earn (SAYE) share scheme, which currently has 1.7 million members. The industry had feared that it would be abolished with the introduction of the All Employee Share Scheme, but the two will run together. The AESS will offer greater levels of investment, and allows employees to buy up to #1,500 of shares a year which the employer can match with up to #3,000 of equity. Employers can also give an additional #3,000 of free shares linked to performance. Specific companies, such as hi-tech start-ups, will be allowed to offer shares of #100,000 for up to 15 employees, and will also benefit from the 10% CGT taper for asset disposals. Sandy Pepper, partner at PricewaterhouseCoopers, says: ‘We welcome the decision to keep both SAYE and the Company Share Option Plan as the new All Employee Share Ownership Plan – which we anticipate being very successful – is as yet untried in practice, and will require a period to become established.’ But Brown failed to deliver any changes to national insurance liabilities for employee share schemes. Internet companies, in particular, have been left with multimillion pound bills after offering share option incentives for employees. The Inland Revenue says it will only ‘consider’ legislation to give employers more certainty about their future NI liabilities. Low-use and environmentally friendly company car drivers will also benefit from Brown’s budget, with potential tax savings of 35%. From April 2002, the company car tax will be based on a percentage of the car’s value plus the level of its carbon dioxide emissions, rather than mileage. The maximum charge will be 35% of the car’s price, which will hit the high mileage executive driver hardest. ‘A high mileage driver would be worse off by 35%, a mid-range driver would be in the same position but would be worse off by 2004/05,’ says Alison Haynes, partner at Deloitte & Touche. ‘But for the person driving a car with a list price of approximately #19,000 and a C^O2 emission rate of 202, a perk car driver will be better off by around 35% in 2002/2003.’ Haynes urges company car drivers to take C^O2 emission into consideration, plus cost, when they choose a new vehicle. Brown’s Budget has also targeted corporate travellers. Air passenger duty rises from #10 to #40 for those visiting destinations outside of Europe. For business and first class travellers within Europe, the tax will be #20, although it has been slashed to #5 for economy flights. But if the latest survey figures from American Express are anything to go, by this will have a limited impact with an increasing number of corporate travellers opting for low cost ‘no frills’ flights. PROJECTED TAX CHANGES OVER CURRENT PARLIAMENT

Related reading