Annex C The Budget Measures
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C.02 The effect of the measures on Government revenues is set out in Table C.1. Appendix C to this annex explains the costings and Appendix B details a number of tax changes which were announced before the Budget, including measures announced in the July Budget but not yet implemented. Encouraging workC.03 Chapter 3 describes the Budget's measures to make work pay including, new measures for young people, lone parents, the long-term unemployed and disabled people to be funded from the Windfall Tax. These measures do not appear in TableC.1. The allocation of the Windfall Tax is shown in Table3.1. The new Working Families Tax Credit is described in paragraphs 3.35 to 3.46 (1).C.04 A New Deal for Communities is described in paragraphs 3.21 to 3.23 (2). C.05 The changes to the linking rules for lone parents on Income Support and disabled people on Incapacity Benefit are described in paragraphs 3.11 and 3.20 respectively (3). C.06 The entry rates for National Insurance Contributions (NICs) will be abolished (see paragraphs 3.29 to 3.33) (4). C.07 A disabled person's tax credit is described in paragraph3.47 (5). Encouraging enterpriseCorporation taxC.08 This Budget's measures to encourage enterprise are described in Chapter 4. The changes to corporation tax are to:
Capital gains tax: structural reformC.09 Paragraphs 4.28 to 4.31 describe this Budget's structural reform of capital gains tax (10).Other measures encouraging enterpriseC.10 Changes to reinvestment relief for investing in venture capital are described in paragraph 4.35 (11).C.11 Other venture capital changes are described in paragraphs4.37 and 4.38 (12). C.12 Capital allowances for small and medium sized businesses will be, for one year, provided at a rate of 40 per cent (13). C.13 University challenge is described in paragraph4.43 (14). C.14 The registration and deregistration thresholds for VAT will be increased to £50,000 and £48,000 respectively from 1 April 1998. There will be a consultation exercise to inform future decisions on the threshold (15). Creating a fairer societyC.15 Chapter 5 describes the Budget's measures to help create a fairer society.C.16 This Budget includes £2million of extra support, so that free national museums and galleries can avoid introducing admission charges, in the form of a challenge fund(--). C.17 Income tax changes in the Budget are:
C.19 An extra £ 1/2 billion will be invested in the hospital waiting lists initiative (seeparagraph5.21)(20). C.20 An extra £ 1/4 billion will be invested in education (see paragraphs5.23 and 5.24)(21). C.21 A package of measures to increase support for children is described in paragraphs 5.04 to 5.07 (22). C.22 Paragraphs 5.63 to 5.66 describe the new individual savings account (24). C.23 Paragraphs 5.70 and 5.71 describe certain changes to inheritance tax (*). C.24 The threshold for inheritance tax will also be increased in line with inflation (25). C.25 Paragraph 5.73, fourth tiret describes certain structural changes to capital gains tax and an anti-avoidance measure (56). C.26 Stamp duty rates will be increased for transfers of property above £250,000 by 1/2 per cent and for transfers of property above £500,000 by 1 per cent (26). C.27 The higher rate insurance premium tax of 17.5 per cent will be extended to all travel insurance, from 1 August 1998, in recognition of likely changes in the market for travel insurance (27). C.28 Paragraph 5.75 describe the increases in tobacco duties (28). C.29 Paragraphs 5.76 to 5.78 describe the increases in alcohol duties:
VAT on company car fuel scales C.30 The scales used to charge VAT on fuel used for private motoring in business cars are to be increased from 6 April 1998 to reflect changes in fuel prices. The scales ensure that those using business cars for private motoring do not do so VAT-free (42).
Other company car measures C.31 Paragraph C.42 describes other company car measures (41).
Oils C.32 The legislation which fixes the time oil becomes chargeable with excise duty is to be changed as an essential first step in simplifying and rationalising the complex charging provisions that exist in the Hydrocarbon Oil Duties Act 1979, from a date to be announced (-).
Millennium Gift Aid C.33 The "Millennium Gift Aid" scheme is described in paragraph5.20 (33).
Gambling C.34 The top rate of gaming duty is to be increased to 40 per cent and the gross gaming yield threshold for each duty band will be reduced from 1 April 1998. Overall, casinos have a lower effective rate of duty than most other forms of betting and gaming. The changes are designed to increase the effective rate of taxation on gaming in casinos, particularly the more profitable London casinos, while taking account of the unusually high fixed costs of the industry (34). C.35 The cost of a 12 month licence for an Amusement With Prizes machine, or a Jackpot machine costing 5 pence or less per play is to increase to £645 (an increase of £110) and the cost of a 12 month licence for other Jackpot machines is to increase to £1,815 (an increase of £440). The cost of a 12 month licence for non-gaming machines will remain at £250. These increases above the cost of inflation reflect the new opportunities provided by deregulation. The lowest rate of duty has not been increased to take account of the difficulties non-gaming machines have faced in remaining profitable following the introduction of Amusement Machine Licence Duty. These changes will take effect for any licence applications received by Customs on or after 18 March 1998 (35). C.36 From 1 April 1998 Skill With Prizes (SWP) machines costing 35 pence or less per play will become exempt from the duty. Currently only SWPs costing 5 pence or less per play are exempt. This change brings SWP machines into line with the exemption already available to other non-gaming machines. Legislation will also be introduced from Royal Assent to replace an extra statutory concession which provides for the exemption from Amusement Machine Licence Duty of non-prize video machines which can be played by more than one player, but where the cost for a single player to play one game alone does not exceed 35 pence. An additional limit will be introduced to state that the effective cost per player where two or more players play a game simultaneously must not exceed 50pence. This concession was introduced to give these multi-play video games the same exemption from duty as is afforded to single player video games. The legislation will regularise the position, and also closes a potential loophole by introducing the cost per player limit of 50 pence (36).
Protecting the environment C.37 In line with the Government's commitment to increase road fuel duties by at least 6 per cent in real terms on average a year, the tax (duty plus VAT) on unleaded petrol rises on Budget day by 4.4 pence per litre, and on leaded by 4.9 pence per litre (37). C.38 To reflect concerns over local air quality, and to encourage the manufacture and use of ultra-low sulphur diesel, the tax (duty plus VAT) on diesel rises on Budget day by 5.5 pence per litre, and on ultra-low sulphur diesel by 4.4 pence per litre. The next Budget will increase the duty differential between diesel and ultra-low sulphur diesel to 3 pence per litre. Future Budgets will further increase the duty differential between diesel and unleaded petrol (38). C.39 The tax (duty plus VAT) on super-unleaded petrol rises on Budget day by 6.1pence per litre (39). C.40 Vehicle Excise Duty is frozen this year for all vehicles (40). C.41 The Vehicle Excise Duty concession of up to £500 for low emission buses and lorries will commence in January 1999 (44). C.42 The fuel scale charges for free fuel provided by employers to company car owners will increase by 20 per cent above revalorisation from 6 April 1998, and for four following years. From 6 April 1999, the cost of conversion to road fuel gases will be ignored when calculating the tax charge (41). C.43 Bus fuel duty rebate will be revalorised from Budget day in line with the increases in diesel duty (45). C.44 There will be a £500 million boost for public transport. £50 million will fund rural transport services of which £45 million will fund a Bus Partnership Fund and £5 million will go to a Rural Community Transport Initiative (46). C.45 From April 1999, the standard rate of landfill tax will be increased to £10 a tonne. Following consultation, from October 1999, there will be an exemption for inert materials used in site restoration (47). C.46 Increases or cuts in the rate of landfill tax can be brought in immediately after a Budget, without having to wait for Royal Assent to the Finance Act. This will bring the tax in line with other taxes, like VAT or duties on alcohol, cigarettes or petrol, from Royal Assent (-). C.47 VAT will be reduced to 5 per cent on the installation of energy saving materials under certain Government grant schemes off from 1 July 1998, as announced in the Pre-Budget Report (43). Employment termination payments C.48 The Budget announces simpler and more appropriate treatment of payments and benefits provided over a period of time following termination of an employment, to tax more fairly the packages provided and to ease compliance burdens for employers and employees. With effect from 6 April 1998 (48).
Schedule A for companies C.49 Modernisation and simplification of Schedule A rules applying to corporation tax, to bring closer into line with those for income tax. Computation of rents will, from 1 April 1998, follow the rules for computation of trading profits, recognising income as it accrues and expenditure as it is incurred. Interest will continue to be dealt with under the corporate interest rules and Schedule A losses will be relieved in the same way as management expenses (49).
GAAR C.50 Paragraphs 5.86 and 5.87 describe new anti-avoidance measures (-).
Foreign earnings deduction C.51 The "foreign earnings deduction" will be eliminated for all but seafarers, to end a readily exploited vehicle for abuse under which certain UK residents have been able to receive large amounts of income from "working abroad" completely free from tax. With effect from 6 April 1998 (50).
Cash accounting for professionals C.52 From 6 April 1999, practices which permit some professional businesses to pay tax on a more favourable ("cash") basis will be withdrawn, in order to level playing field for all businesses. Catching-up charge to be phased in order to spread impact for those affected (51).
Capital gain buying by companies C.53 Legislation will be introduced to prevent avoidance by groups of companies using a device known as "gain buying" to bring together gains and losses which have arisen on assets in different economic ownership. The provisions will apply where a company joins a group on or after Budget day. Legislation will also address two smaller avoidance risks for groups of companies with capital gains. The first of these concerns transfers of assets to investment trusts or venture capital trusts. The second corrects a technical defect in the charge that can arise when a company leaves a group (52).
Remuneration in shares subject to forfeiture or conversion C.54 Shares subject to the risk of forfeiture or conversion, awarded to employees or directors will be taxed at the point at which the risk of forfeiture is lifted or conversion occurs. This will apply to shares awarded on or after Budget day (*).
Life insurance: tax treatment of policy holders' gains C.55 The rules for taxing gains from certain life insurances will be changed. The changes will affect policies held in trust in those circumstances where currently there is no charge and overseas life assurance business policies to deny an inappropriate tax credit. We will impose an additional annual charge on personal portfolio bonds, and will require certain non-UK life insurers to appoint a tax representative in the UK. The purpose is to make the present rules more effective in protecting UK tax revenue (53).
Pensions C.56 A number of detailed changes will be made to improve the present controls over tax approved occupational and personal pension schemes in order to limit the scope for abuse of the pensions tax reliefs. These will include:
Charge on temporary non-residents C.57 Gains arising during a period of temporary non-residence will be charged on return to the UK (see paragraph 5.73, fourth tiret) (55).
Transfer pricing and controlled foreign company rules C.58 The transfer pricing (TP) and controlled foreign company (CFC) rules will be brought within the self assessment regime for companies. This will reverse the present position where the onus is on the Inland Revenue to apply the legislation, and will make the new regimes fairer and more effective. At the same time the transfer pricing regime will be modernised by being brought into line with OECD principles and best international practice. In both cases the new legislation has been the subject of consultation and has been refined to take into account suggestions from interested parties. The new systems will apply to UK company accounting periods ending on or after 1 July 1999 (56),(57). C.59 In addition, the definition of activities potentially covered by the CFC rules will be strengthened in two respects. These changes will apply to CFC accounting periods beginning on or after Budget day (57).
PAYE avoidance C.60 The rules which apply PAYE to remuneration in non-cash forms, and payments made by intermediaries and offshore employers, will be strengthened and extended with effect from 6 April 1998 (59).
Offshore trusts C.61 The tax treatment of offshore trusts will be amended in a number of respects. Those who set up offshore trusts before March 1991 from which they, their immediate family, or companies which they control, can benefit, will be charged to tax on gains as they arise to the trust. This measure will apply to disposals made by the trust after 6 April 1999 (allowing a transitional period for those affected to reorganise their affairs). Rules will be included to prevent exploitation of the transitional period. It is also proposed to extend the charge on the settler to include an offshore trust from which only grandchildren can benefit. It is also proposed to extend the beneficiary charge to trusts created by non-domiciled settlors (54).
Profit-related pay C.62 The Budget includes a measure to prevent exploitation of the provisions to phase out the income tax relief for profit-related pay (PRP). This measure will prevent certain employees, who are in a registered PRP scheme, from obtaining a higher tax relief limit for a longer period by becoming a member of another registered scheme on or after 17 March 1998. It will apply where the scheme employer of the two schemes is the same person, or if the scheme employers are connected (55).
Taxation consequences of EMU C.63 Some technical tax changes will be made to help British businesses affected by European Monetary Union, concerning foreign currency elections, foreign currency bonds, currency contracts and some other matters (*).
Adjustments to amounts of foreign tax paid C.64 The Budget will clarify the relief for foreign tax - requiring taxpayers to notify the Revenue if the claim becomes excessive because the foreign tax is adjusted. This will clarify the taxpayer's responsibilities. The provision will apply to adjustments made on or after Budget day(*).
Limiting relief for foreign tax on certain interests and dividends C.65 Existing restrictions on relief for foreign tax on interest received from overseas borrowers by taxpayers in whose hands the income is a trading receipt will be amended and extended to relief relating to certain foreign dividends that are trading receipts. In certain circumstances, the extension will also cover income or related expenses of associates. The changes will apply immediately to payments in respect of arrangements entered into or after Budget day, but will only apply to payments in respect of pre-Budget day arrangements from 1 January 1999 (60).
Taxation of gilts C.66 Some small changes are made with effect from 6 April 1998 to ensure interest on existing gilts is not taxed in the hands of overseas investors, and to rationalise the operation of charges in the accrued income scheme (*).
Commercial sports clubs C.67 The definition of non-profit making status is to be tightened to counter schemes used by commercial sports clubs to avoid VAT, from 18 March 1998 (61).
Second-hand goods margin scheme C.68 The margin scheme for second-hand goods, etc., allows VAT to be calculated on the seller's profit margin rather than the full selling price of the goods. From 18 March 1998, where second-hand goods, works of art, antiques and collectors' items have been transferred between businesses, the profit margin for the scheme will be based on the price paid by the original purchaser, to counter avoidance (*).
Transfer of Going Concerns C.69 A loophole which allowed assets, acquired as part of the transfer of a business as a going concern, to be given away VAT-free will be closed from 17 March (*).
Goods on hire C.70 A loophole in VAT law which has allowed businesses outside the European Union to let goods on hire in the UK to non-business customers without charging VAT, will be closed from 18 March 1998 (*).
Group registration C.71 A consultation is to be conducted on the VAT group registration facility. The consultation will seek views on its possible restriction to fully taxable companies, to minimise tax avoidance opportunities and achieve a better balance between revenue costs to the Exchequer and compliance costs to business (-).
Bad debt relief C.72 UK legislation is being changed to allow businesses to claim relief from VAT on bad debts arising from barter transactions, from Royal Assent (-).
Scottish developers C.73 From Royal Assent, Scottish property developers will have an equivalent right to reclaim VAT to developers in the rest of the UK: 20 year leases will be regarded as long leases for VAT (*).
Right of appeal C.74 Traders' rights to a Departmental review and right of appeal to the VAT and Duties Tribunal will be increased by widening the range of circumstances where tax irregularities are notified by assessment, from a date to be announced following Royal Assent (*).
Alcohol-drawback C.75 From a date to be announced after Royal Assent, the primary law relating to the refund of duty on beer exported from the UK will be repealed, as it is largely duplicated in regulations introduced in 1995 (-).
Air Passenger Duty C.76 Registration procedures for foreign airlines with no business address in the United Kingdom are being changed to make it easier for them to comply with the law (*).
Redundant legislation C.77 The Customs Duties (Dumping and Subsidies) Act 1969 is to be repealed as European Union law has made the Act redundant, from Royal Assent (-).
Carry forward of 1997-98 underspend C.78 £1 1/2 billion allocated to departments for programmes in 1997-98 has not been spent and is therefore carried over into 1998-99. This line is not included in the totals as the expenditure is accounted for elsewhere.
Transfer to Reserve from carry forward C.79 £1 billion of the carry forward has been reallocated to the Government's high priority programmes, leaving £ 1/2 billion to add to the Reserve for 1998-99 (62).
Table C.1: The Budget Measures
Table C.1: The Budget Measures (continued)
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-500 | -500 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total cost(-)/yield(+) | -435 | +165 | +915 | +1 210 |
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| Total cost(-)/yield(+) excluding cashflow yield from line 8 | -535 | +65 | -685 | -790 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(1) The effect of the Budget measures on government revenues is set out in Table 5A.1. The number in brackets after each measure refers to the line in Table 5A.1 where its yield or cost is shown. The symbol "-" means that the proposal has no effect on revenue. "*" means it has negligible effects on revenue amounting to less than £3million a year. The overall effects of the public expenditure measures on the Control Total and General Government Expenditure are set out in Tables B.18 and B.13.