Analysis - The share scheme ifs, buts and maybes.

The pre-Budget report promised some very useful tax changes. But the big picture is rather disturbing. However, at least this innovative statement is getting into its stride and is proving to be a useful element in the policy formulation process.

Some of the best news was about employee share schemes. The restrictions on enterprise management incentives are to be relaxed. These are the new share options for smaller companies, and they were to be limited to 15 key employees. Now the plan is to allow any number of employees to participate, and to set an overall limit of #2.5m on the value of shares.

This will remove the danger of having to leave a crucial 16th employee outside the scheme. And the #2.5m limit is higher than the old #1.5m.

Sadly, there was no sign the #15m limit on the company’s assets might be relaxed.

There was also good news for employees holding shares. Back in March, the government changed the rules so employees’ shares in trading companies would always get the capital gains tax business assets taper. After four years, only 25% of the nominal gain is taxable. The catch was that employees had to know whether their employers were trading.

Astonishingly, this is not always clear, especially not for large groups which get involved in joint ventures and make venture capital-type investments.

The government has recognised the problem. So for employees only, the business assets taper will be available even if the company is not trading.

There is one reservation: the government may not go the whole way because it is nervous about avoidance. It does not want people putting personal assets into companies that employ them, just so as to get the business assets taper.

I hope that when we see the legislation it will have an anti-avoidance section aimed at this abuse. I do not want to see pages of ifs and buts which make the law unusable. It is also a sad comment on the existing law that it may not be clear whether or not a group is trading.

The question is fundamental to computing gains on shares: remember non-employees’ shares will still only get the business assets taper if the company or group is trading. But the way the law is written precludes straightforward answers.

This is the first worrying element. There were no significant moves towards simplifying the tangle of our tax system. Some of the basic concepts are out of kilter with the modern world. But instead of revising them, successive chancellors have bolted on extra bits to help old concepts keep up with progress.

There were some welcome attempts to lift specific regulatory burdens, particularly the burden of VAT. The turnover limits for cash accounting and annual accounting both shot up to #600,000. The government will also look at a new scheme for small businesses, allowing them to pay a percentage of turnover instead of working out the VAT on sales minus the VAT on purchases.

Farmers have had a similar scheme for a while. Now it’s everybody else’s turn. I just wish Brown showed as much enthusiasm for cutting the regulatory burden on employers.

I also like the way in which the government is using the pre-Budget report to put forward ideas and get responses. Of course consultation documents can be published at any time. But consultation documents for some of the ideas, like extending the business assets taper to employees’ shares in non-trading companies, would fit on a postcard. They need a more dramatic launch than a press release, and the pre-Budget report fits the bill.

Finally, the other worrying part of the big picture: the amount the government is spending. In the short term, the public finances look good. In the longer term, the picture is not so rosy. The government is happy to see the total tax burden going up. Pensions are the most serious fiscal time-bomb: a sharply rising minimum income guarantee will deter saving, so an equally expensive pensions credit is to be introduced to encourage saving. The government actuary is already saying national insurance will have to rise. Remember, it’s your money the government is spending.