1. Income tax – 10% starting rate to be extended from the first £1,500 to £2,000 of taxable income. Public finances look strong enough to consolidate this 10% rate, which was introduced in the last Budget. This move, combined with the new tax credits and the already-announced reduction of the basic rate to 22p, would reinforce the chancellor’s political theme that work pays.
2. Abolition of QUESTs (Qualifying Employee Share Ownership Trusts) to clear the decks for the New All-Employee Share Scheme. While one does not prevent the other, the Chancellor may feel that corporate tax deductibility for companies paying into QUESTs can no longer be justified.
Of the two existing all employee share schemes, the Chancellor is likely to announce that the profit-sharing scheme is to be phased out. But we think the SAYE (Save As You Earn) scheme is safe for the time being.
3. Capital Gains Tax – a reduction from 10 years to 5 in the period over which capital gains on business assets are tapered. This move has been the subject of consultation and the outcome will be announced in the Budget.
4. Discount for filing self-assessment tax returns via the internet. Possibly around £25, this will be part of a package to encourage e-commerce.
5. Action to help reduce red tape burdens on small business. The committee set up by the government and chaired by Lord Trotman will be submitting its recommendations on amending the policy environment to assist smaller businesses in the lead-up to the Budget. At least some of these will almost certainly feature in the Budget.
6. Alignment of the NIC upper earnings limit with the higher-rate tax threshold. The gap between these has been steadily reducing in recent years and there would be some presentational attraction in having these at the same figure, in the same way that the personal allowance is now equal to the lower NIC limit for employers’ contributions. The only snag is that if the 40% starting point was raised in future, it would mean the affected taxpayer’s marginal tax rate would effectively benefit only by 8% not 18%. (difference between higher-rate and basic rate would be reduced by 10% NIC)
7. Action to ameliorate NIC exposure on unapproved options for high growth companies. The government has been keen to assist high-tech start -ups and there have been concerns that the NIC liability might be sufficient to wipe out some companies (particularly internet companies) before they become profitable.
8. Inheritance Tax – the government has previously indicated it would like to reform the IHT system. The abolition of Potentially Exempt Transfers (PETs), which would mean IHT being charged on gifts given in lifetime, has been mooted. But PETs have proved useful in cutting down administration, so we believe the Chancellor will restrict any reforms to extending from 7 years to 15 years the period which must elapse before exemption from IHT.
9. Pensions – the government may consider allowing the carry back and carry forward of tax relief for pension contributions. But any major pensions reforms is unlikely until introduction of the stakeholder pensions, which is likely to be after the spring.
10. Increase in Inland Revenue powers – the government announced last October a review of the legal powers available to Revenue officers when visiting employers to check records. Detailed proposals were expected in late 1999 but have not yet appeared, making this only an each-way bet to appear in the Budget. The situation is similar for possible changes to the Revenue’s powers to combat serious tax fraud.
11. Stamp Duty – An increase in stamp duty is a definite possibility with the South-East housing market showing no signs of slowing down despite interest rate rises. It is possible there will be a splitting of the rates for commercial property from residential rates to avoid hitting the commercial sector. We also anticipate anti-avoidance legislation to prevent arrangements whereby property-owning companies are set up and then sold to avoid stamp duty on the sale of the property.
Stamp Duty on shares will probably remain untouched. While some parties, including the Stock Exchange have argued that abolition of Stamp Duty would actually boost government coffers by increasing capital gains tax revenues, the Treasury is not convinced.
12. Excise duties – reductions in duty on tobacco, alcohol and betting. It could be argued that tobacco and alcohol smuggling would be made less attractive by reduced rates of duty, but it could equally be argued that direct action to boost Customs’ strength in tackling the problem would be more effective. On betting, the government may be more tempted to cut duty to prevent wholesale public moves to betting offshore, particularly in Ireland.
13. A ‘health service tax’. While this has been the subject of much debate as the winter flu outbreak has stretched the NHS, we do not believe the Treasury is convinced of the merits of so-called hypothecation. While seemingly attractive, the problem is that hypothecated taxes in one area will inevitably lead to calls for them in another and would threaten to undermine the basis of normal taxation.
14. Individual Savings Accounts – it is possible the government will take action to counteract criticisms about the supposed complexity of ISAs, but with only ten months gone since they were introduced, this is unlikely. Round-up of key measures already announced:
15. Company cars – there will be legislation in the 2000 Finance Bill introducing a major change in the tax system, with effect from 2002. The system of taxation will move from one based on price, business mileage and age, to one based on a combination of price and carbon dioxide emissions. This is intended to be revenue-neutral and environmentally friendly.
16. All employee share ownership plan – the AESOP will allow listed and unlisted companies to provide employees with the opportunity of acquiring shares out of gross salary (up to £1,500 p.a.), with the company having the ability to provide up to two free shares and/or the possibility of receiving free shares linked to performance (up to £3,000 p.a.)
17. Enterprise Management Incentive – the EMI scheme will allow small and medium sized (often high-tech) companies to give stock options to ten key employees over shares worth up to £100,000 per employee.
18. R&D tax credits for small/medium -sized companies. This will be expanded from 100% relief to 150% for expenditure over £25,000. Good as far as it goes but why can it not be extended to bigger companies?
19. Corporate Venturing – Larger companies that take stakes in small higher-risk trading companies will get up-front corporate tax relief at 20% provided they retain the shares for 3 years.
20. Charities – the Chancellor has announced a package of reforms aimed at increasing charitable giving. This will include a more generous system of tax relief for cash donations and the abolition of the limit on employee donations via the payroll.
Revenue to offer 5% discounts for taxpayers who file electronically