Budget Measures

Introduction

This chapter sets out the measures announced in Budget 99. The financial implications are displayed in Table 1.11 and explained in Appendix 1A. Tax changes announced before the Budget are set out in Appendix 1B. Appendix 1C provides estimates of the revenue costs of some of the main tax allowances and reliefs.

Personal taxes and benefits

Income tax 1999-2000

Bands, rates and personal allowances

A new rate of tax at 10 per cent will be introduced on the first £1,500 of income from 6 April 1999. The existing 20 per cent band on non-savings income will disappear. (8)

Income tax on savings eligible for the lower rate up to the basic rate limit will continue at 20 per cent up to that limit and 40 per cent above it, except for dividends which from 6 April 1999 will be taxed at 10 per cent up to the basic rate limit and 32.5 per cent above it.

The personal allowance will increase to £4,335 as already announced. The blind person's allowance and the basic rate limit will rise in line with statutory indexation.

The married couple's allowance and related allowances will rise in line with indexation to £1,970 at 10 per cent in 1999-2000. The age-related married couple's allowance will also rise in line with indexation. (These allowances had already been increased for 1999-2000 on account of the change in the rate of relief to 10 per cent.) (7)

Personal allowances for older people will be increased by up to £200 more than statutory indexation - to £5,720 and £5,980 respectively for people aged 65-74 years and 75 years and over. The income limit for the age-related allowances will be increased in line with statutory indexation to £16,800. (24)

Working Families Tax Credit

The basic tax credit in the Working Families Tax Credit (WFTC) will be increased by £2.50 and the tax credit for children under 11 years will be increased by £4.70 from October 1999. (20)

Other measures

The maximum earnings for which pension provision may be made with income tax relief (the "earnings cap") will be increased in line with statutory indexation to £90,600. (*)

The Government will confirm that annuities paid by free standing voluntary contributions schemes are taxable in full on receipt. (-)

Investors in court common investment funds will be treated in the same way as investors in shares, authorised unit trusts or open-ended investment companies. (*)

There will be no tax charge where an employer provides an employee with a mobile telephone which is used for private calls. (57)

To make the repayment arrangements for the new income-contingent student loans fairer to borrowers, interest on amounts they have overpaid will be tax-free. (*)

Table 1.1: Bands of taxable income 1999-2000¹

Table 1.2: Income tax allowances 1999-2000

Income tax 2000-2001

Bands, rates and personal allowances

From 6 April 2000, the basic rate of income tax will be reduced from 23p to 22p. (9)

The married couple's allowance, for a husband and wife aged under 65, and related allowances, will be removed from 6 April 2000. Couples in which at least one of the spouses was born before 6 April 1935 will remain entitled to claim the married couple's allowance. Tax relief for maintenance payments will cease for payments made and falling due on or after 6 April 2000. Tax relief for maintenance payments will be retained where one or more of the parties is aged 65 or over on 5 April 2000. (17)

Mortgage interest relief

Relief on mortgage interest repayments will be removed from 6 April 2000. Mortgage interest relief for those aged 65 and over who take out a loan to buy a life annuity (a home income plan) ends with effect from 9 March 1999, but existing loans will continue to qualify for relief for the remainder of the loan period. (27)

Working Families Tax Credit

From 6 April 2000, there will be a further increase of £1.10 above indexation in the credit for children under 11 years. (20)

Disabled Person's Tax Credit

A new "fast-track" to the Disabled Person's Tax Credit will be introduced from October 2000 to help with the retention of staff disabled while working, and whose return to work depends on a reduction in hours or rate of pay. (20)

Table 1.3: Bands of taxable income 2000-2001¹

Income tax 2001-2002

Children's Tax Credit

A tax credit of up to £8 per week (£4,160 per year at 10 per cent) will be introduced from 6 April 2001 for families with children. The credit will be tapered away from families where one or both partners is a higher rate taxpayer. (18)

Effects on the Scottish Parliament's tax varying powers - statement regarding Section 76 of the Scotland Act 1998

After the changes outlined above, a one penny change in the Scottish variable rate in 2000-2001 could then be worth approximately plus or minus £230 million, compared with plus or minus £180 million prior to these changes. In the Treasury's view, an amendment of the Scottish Parliament's tax-varying powers is not required as a result of these changes.

Inheritance tax

Threshold

The threshold will be increased by statutory indexation to £231,000. (52)

Improving compliance

A simpler procedure for obtaining information and stricter penalties for non-compliance will be introduced.(*)

Taxes on capital gains

Capital gains tax rates and annual exempt amount

The annual exempt amount will be increased by statutory indexation to £7,100.

Capital gains tax rates will be aligned with those for savings income, charging gains at 20 per cent or 40 per cent depending on the level of income and gains. (53)

Simplifying capital gains in Lloyd's insurance market

Rules for individuals in the Lloyd's insurance market will be changed in order to make the calculation of gains simpler and fairer. From 6 April 1999, an individual in a members' agent pooling arrangement (MAPA), will treat his or her share of the syndicates held through the MAPA as if it were a single direct holding. In addition, tax roll-over relief will be extended to include members' interests in syndicates, whether held directly or through a MAPA. (61)

Stamp duty

Rates and thresholds

From 16 March 1999, stamp duty rates will be increased on transfers of land and property over £250,000 and less than £500,000 from 2.0 per cent to 2.5 per cent and from 3.0 per cent to 3.5 per cent for land and property over £500,000. (58)

Compliance and administration

Interest will be added to repayments of stamp duty and charged on duty paid late, as is the case for other taxes. Penalties will be increased to modern levels and the fixed duties will be raised to £5. Stamp duty will be charged in multiples of £5. These measures will take effect from 1 October 1999.

The Government will clarify the statutory provisions which enable the Treasury to make regulations for the administration of stamp duty reserve tax.

As announced on 29 January 1999, a loophole will be closed by restricting relief for foreign currency bearer instruments to its intended purpose, which is to assist companies borrowing money in other countries.

Measures will be introduced to clarify the stamp duty rules for foreign currency bearer shares and redenomination of the currency of shares in a depositary receipt scheme or clearance service. A relief will also be provided to allow depositary interests in foreign shares to be traded in the UK. (32)

Unit trust and oeics

The Government will introduce a clearer and easier framework for stamp duty reserve tax to replace the existing stamp duty regime for unit trusts and open-ended investment companies (oeics) from October 1999. (*)

National insurance 1999-2000

Employers

Employers' Class 1B liability will be deductible for tax. (*)

Table 1.4: National insurance contribution rates 1999-2000

Table 1.5: Self-employed national insurance contribution rates 1999-2000

National Insurance 2000-2001

Employees

From April 2000, the threshold of earnings above which people will pay NICs will increase to £76 per week. A zero rate of NICs will apply on earnings between the previous lower limit and the new threshold, to protect benefit entitlement. The threshold of earnings above which employees will pay no NICs (the upper earnings limit, UEL) will increase to £535 per week. (12)

Employers

From April 2000, employer NICs will be extended to those benefits-in-kind which are already subject to income tax. (29)

Self-employed

reach £72.50 per week) will be reduced from £6.55 to £2 per week. It is assumed that the

starting point for Class 2 NICs will be indexed to £73.50 from April 2000. At the same time, the

starting point for Class 4 NICs will be aligned with the income tax personal allowance at £85

per week, and the contribution rate increased to 7 per cent. The upper profits limit rises with

the UEL, described above. (13)

9·2% 12·2%

Table 1.6: National insurance contribution rates 2000-2001

Table 1.7: Self-employed national insurance contribution rates 2000-2001

National insurance 2001-2002

Employees

From April 2001, the threshold of earnings below which people will not pay NICs will increase to £87 per week, aligning it with the income tax personal allowance. The UEL will increase to £575 per week. (11)

Employers

The rate of NICs paid by employers will be reduced by 0.5 percentage points in April 2001, offsetting the cost to business of the climate change levy (see "Climate change levy" below). (14)

Self-employed

The upper profits limit will increase to £575 per week, in line with the UEL. (13)

Table 1.8: National insurance contribution rates 2001-2002

Personal tax avoidance

Measures to prevent parents avoiding tax by placing assets in a bare trust for their children will be introduced. (*)

Loopholes in the anti-avoidance rules relating to inheritance tax and lifetime gifts will be closed, effective from 9 March 1999. (*)

A provision will be introduced to prevent the abuse of extra-statutory concessions which defer a tax charge. (-)

Benefits 1999-2000

Maternity pay

Maternity Allowance will be extended to all women earning less than the lower earnings limit for NICs but at least £30 per week, to be paid at 90 per cent of previous earnings. (23)

Income Support

Premium for children under 11 years in Income Support will be increased by £4.70 from October 1999. (19)

Continuing Income Support for lone parents starting work

From October 1999, lone parents who have been claiming Income Support for at least six months and move into work and are claiming WFTC will be able to claim a "run-on" in their Income Support at the existing level for two weeks. (16)

Employment Credit for the over-50s

Workers aged over 50, who have been out of work and claiming benefits (Jobseeker's Allowance, Income Support, Incapacity Benefit or Severe Disablement Allowance) for more than six months (or if their partner has been claiming a dependant's allowance in one of these benefits for them for six months, and neither partner is working), will be eligible for an in-work top-up payment of £60 per week, for 52 weeks, if they move into work for more than 30 hours a week. £40 will be available to those moving into part-time work, of between 16 and 30 hours per week.

A New Deal for the over-50s will provide personalised advice and support, complementing the Employment Credit. The over-50s will be eligible for in-work training grants of up to £750 to help them acquire accredited training. Pathfinders will start in October 1999, with a national roll-out in 2000. (15)

New Deal for 18-24 year olds

The Government intends to announce pilots during 1999 to make the initial gateway at the beginning of the New Deal more intensive. The gateway will also be made more intensive for people remaining in the gateway for more than three months.

Pensioners

From 1999-2000, the Winter Allowance to every pensioner household will be increased to £100 from its current level of £20. (26)

Benefits 2000-2001

Maternity pay

Self-employed women will become entitled to the full rate of Maternity Allowance from April 2000. (23)

Sure Start Maternity Grant

From April 2000, the Social Fund maternity payment will be renamed the Sure Start Maternity Grant. The payment for each child will be doubled to £200 and will be paid following contact with a health professional or local Sure Start programme. (22)

Child Benefit

Child Benefit will be increased by around 3 per cent in real terms from April 2000, to be worth £15 for the first child and £10 for subsequent children per week. (21)

Income Support

Premium for children under 11 years in Income Support will be increased by a further £1.05 over and above indexation in April 2000. (19)

Pensioners

In April 2000, the minimum income guarantee for pensioners will be uprated by earnings rather than prices. (25)

BUSINESS TAXES AND SPENDING MEASURES

Tax on business profits

Corporation tax

A new 10 per cent rate of corporation tax will be introduced from 1 April 2000, for profits up to £10,000, also benefiting companies with profits up to £50,000. (1)

Tax credits for research and development

The Government will introduce new tax credits for spending by small and medium-sized companies on research and development. The new plans will be introduced in 2000 and the Inland Revenue is publishing a technical note on 10 March 1999. (3)

Capital allowances

First year allowances for small and medium-sized businesses introduced in 1997 will be extended for one year until 1 July 2000 at a rate of 40 per cent. (2)

Other measures

A measure will be introduced to help football clubs adjust to new accounting rules on intangible assets. These rules affect the way in which the cost of players is deducted from profits. The measure will prevent the need for early payments of tax, relating to existing players, which would otherwise have arisen in the transition to the new accounting rules. (55)

Tax relief for donations of equipment or trading stock by businesses is being extended to cover all charitable causes. (51)

Value added tax

Registration threshold

The VAT registration threshold will be increased broadly in line with inflation to £51,000 from 1 April 1999. The deregistration threshold will increase from £48,000 to £49,000. Customs and Excise will be working further with business to explore whether it is possible to cushion the impact of VAT registration on growing businesses. (54)

VAT grouping

Following consultation during 1998, the requirement for 90 days' notice for applications for group treatment will be removed. Customs and Excise will be able to remove any members from existing VAT groups, mirroring powers to refuse applications. Circumstances in which Customs and Excise will normally invoke their revenue protection powers will be clarified in a business brief. Criteria for including foreign companies in VAT groupings will be redefined. (34)

Modernising VAT and other indirect taxes

The rule allowing certain VAT-exempt business activities to be ignored and all input tax to be reclaimed will be withdrawn with effect from 10 March 1999. (33)

From 10 March 1999, the scope of the VAT exemption relating to financial intermediary services, payment and credit transfer services and credit management services will be clarified to restore the position that existed before recent legal challenges. (35)

Legislation will be introduced to make investment gold exempt from VAT from 1 January 2000. It will implement EC Directive 98/80/EC. Industrial gold and jewellery will remain liable to VAT. (*)

The Government will introduce a power to impose a penalty on customers providing incorrect certificates to claim eligibility for reduced rate fuel and power. (*)

The Government will clarify legislation providing a two year time limit for Customs and Excise to penalise VAT-registered businesses not complying with requirements to submit details of sales to VAT-registered businesses in other EU member states. (*)

Membership subscriptions to organisations with political, religious, patriotic, philosophical or philanthropic aims will become exempt from VAT. (36)

Interest payments will be charged at a commercial rate on late payment of Customs duty debts. Traders will be able to claim interest payments for late repayments of a valid duty claim. (*)

Drawback legislation will be further standardised to prevent potential loss of revenue through drawback on non-commercial exports of oil. (*)

North Sea fiscal regime

The timetable for delivery of some petroleum revenue tax (PRT) returns will be relaxed. (-)

Pre-July 1975 gas contracts

The Government will ensure that, in line with previous practice, the PRT exemption for gas sold to British Gas under a pre-July 1975 contract can continue following transfer to another company of an interest in a relevant gas field. (*)

Tax avoidance and evasion by business

Direct taxes

The Government will extend anti-avoidance legislation which counteracts the artificial techniques that strip value out of subsidiaries prior to sale to avoid tax liabilities. (31)

Loopholes in the rules for North Sea corporation tax and petroleum revenue tax which could be exploited by the sale and leaseback of North Sea assets will be closed. (-)

New rules will prevent companies avoiding tax by channelling UK dividends via controlled foreign companies. (30)

Legislation will be introduced to allow taxpayers and the Inland Revenue to agree in advance how the arm's length principle is to be applied in relation to specific cross-border (or cross-North Sea "ring-fence") transactions . (*)

Following a recent adverse decision by the Privy Council, legislation will be introduced to tax sums paid by landlords to induce tenants to take out a lease, sometimes called reverse premiums. (37)

Value added tax

Following consultation, an existing anti-avoidance measure on construction services will be replaced with a new anti-avoidance measure better targeted on abuse. (*)

Anti-avoidance provisions that prevent businesses artificially inflating their recovery of VAT on the construction of non-residential buildings by lease and leaseback will be extended from 10 March 1999. (60)

Loopholes that could allow VAT to be avoided or too much bad debt relief to be claimed when debts are assigned to other parties will be closed from 10 March 1999. (*)

A loophole that could allow businesses to qualify for repayment supplement by lodging their VAT return early will be closed from 9 March 1999. (*)

A loophole that might allow the capital goods scheme to be exploited for tax avoidance will be closed from 10 March 1999. (*)

Provision of personal services

Provision of personal services through intermediaries can provide scope for tax avoidance, leave workers unprotected by employment law and result in the loss of benefit entitlement. New legislation will be introduced to tackle this problem. Changes to tax and NICs rules will take effect from 6 April 2000. (28)

Incentives for investors and entrepreneurs

Venture Capital Challenge

The Government will introduce a new Venture Capital Challenge of £20 million from the Capital Modernisation Fund (CMF). (The CMF is described under "Public services" below.) This will be invested in new funds for early stage high-technology businesses in partnership with project investors. The funds will operate throughout the UK and will have a strong regional dimension.

Corporate venturing

The Government proposes to introduce a tax incentive in Budget 2000 to promote corporate venturing. The Inland Revenue will issue a technical note on 10 March 1999 setting out the proposal in more detail.

Serial entrepreneur-ship

The Government will take steps to prevent the incidence of capital gains tax acting as a barrier to investors in the Enterprise Investment Scheme who want to dispose of their investments and reinvest the gains in other EIS companies. Such investors deferring a chargeable gain from an EIS investment by reinvesting it in another EIS company will benefit from the capital gains tax taper on a cumulative basis, calculating taper relief for the deferred gain by reference to the combined ownership period. (*)

Incentives for employees and managers

New all-employee share scheme

The Government will introduce a new all-employee share scheme in Budget 2000, to allow employees to buy shares from their pre-tax salary and to receive free shares, with further tax incentives for longer term shareholding. Any gains arising on shares held for three years in the scheme will be tax-free. There will be greater flexibility in the ways in which employers can give shares as well as tax benefits and payroll services. The details are set out in a technical paper issued by the Inland Revenue on 9 March 1999. An advisory group drawn from practitioners, business and other experts will help the Inland Revenue design the details of the new scheme and consider what measures could be specifically introduced to make employee share ownership more attractive to smaller companies. Draft legislation will be published as part of the Pre-Budget Report and the changes will be introduced in Budget 2000.

Enterprise Management Incentives

The Government will introduce a new Enterprise Management Incentives scheme in Budget 2000, limited to small higher risk trading companies. The Inland Revenue will issue a technical note on 10 March 1999 setting out the proposed scheme in more detail. The advisory group for the all-employee share scheme will also be closely involved in its design.

Science and new technology

Reforming intellectual property taxation

The Inland Revenue is issuing a technical note on 10 March 1999 to look at options to simplify tax treatment of intellectual property and ensure that all related expenditure is relieved, with the aim of introducing a reform in Budget 2000.

Tax relief on mobile telephone licences

A new relief will be introduced in 2000 for the cost of such licences. (*)

University Challenge

The Government will provide an additional £15 million to fund more high-quality proposals through University Challenge.

Electronic commerce and computers

New legislation will allow Customs and Excise and the Inland Revenue to accept tax returns electronically over the Internet. The first services being developed by Customs and Excise will enable businesses to send VAT registrations, returns and payments, with a pilot planned for 1999-2000 and expansion as soon as possible. The Inland Revenue will start accepting Self-Assessment returns and PAYE annual returns as soon as possible.(-)

The Government intends to offer a discount on returns filed via the Internet. Other measures to help small businesses use new technology for administrative purposes are described above under "Administrative help for small businesses". Later this year, the Driver and Vehicle Licensing Agency will run a pilot scheme for Vehicle Excise Duty relicensing over the Internet or by telephone.

The Government will ensure that computers up to £2,000 in value loaned by employers to their employees will not be taxed as a benefit-in-kind. (4)

Education and training

Individual Learning Accounts

The Government will introduce Individual Learning Accounts (ILAs). The first "starter" accounts will open in 1999-2000. For each of these accounts, the Government will provide £150 for spending on education and training, when the holder commits £25.

From 2000, ILAs will offer their holders: discounts of 80 per cent of the cost of certain key courses such as computer literacy; discounts for everyone of 20 per cent on eligible courses, on spending of up to £500 per year; tax relief to employers on contributions to employees' ILAs; and tax relief to employees on their employers' contributions providing that the employer is contributing to the ILAs of their lowest paid employees on similar terms. This will be supplemented by spending within the Department for Education and Employment's Departmental Expenditure Limit on discounts for ILA holders. (5)

Higher rate tax relief on vocational training will be abolished from 6 April 1999, and the remaining relief will be abolished in 2000-2001. (6)

Administrative help for small businesses

Small Business Service

The Government will create a Small Business Service (SBS) to co-ordinate advice and support to small and medium-sized businesses across England. It will have a new role to help business comply with regulations and to improve the quality and coherence of delivery of Government support programmes. It will also run the Department of Trade and Industry's Enterprise Fund and the new Venture Capital Challenge for high technology (see above). It will also offer a new automated payroll service for small employers.

Payroll

In addition to the new automated payroll service offered by the SBS, the Government will establish new national standards for computer payroll software. Further use of new technology to help small businesses is described above under "Science and new technology".

The limit for Pay As You Earn (PAYE) quarterly payments by employers will be increased to £1,000, allowing more small employers to pay PAYE quarterly rather than monthly. (-)

Business support

The Inland Revenue will introduce new business support teams working closely with the SBS to help small businesses and new employers. The service will include the offer of a half-day's one-to-one advice. There will also be a new helpline service for new employers and a range of improved guidance material.

Customs and Excise will conduct a national survey during 1999 to obtain information about current business views to inform service improvements. Support available for newly VAT-registered businesses will be expanded to include a business support programme for new exporters and importers.

Both the Inland Revenue and Customs and Excise will provide support to the Business Links network and will together hold a series of 14 business open days over the next 15 months.

ENVIRONMENTAL TAXES AND SPENDING MEASURES

Climate change levy

A climate change levy on the business use of energy will be introduced from April 2001. The levy will apply to electricity, gas, coal and other solid fuels used by industry, commerce, agriculture and the public sector. A consultation document is published on 9 March 1999 and the rates applying to different fuels will be set in Finance Bill 2000. (38)

The main rate of employer NICs will be reduced by 0.5 percentage points so that the introduction of this levy does not increase the overall burden of tax on business (see "National insurance" above). (14)

Subject to any practical and legal constraints, the Government intends to set significantly lower rates for those energy intensive sectors agreeing targets for improvements in energy efficiency which meet the Government's criteria.

Extra support will also be provided to promote energy efficiency and encourage renewable sources of energy, through energy audits and advice for small and medium-sized firms and a "carbon trust" to promote new low-carbon and energy-efficient technology. (39)

Transport and the environment

Company car taxation

The company car tax regime will be reformed fundamentally. From April 2002, the existing charge on 35 per cent of the car's list price, subject to business mileage and age-related discounts, will be replaced with a charge on a percentage price of the car graduated primarily according to the level of the car's carbon dioxide emissions. These reforms will be introduced on a revenue-neutral basis. The Inland Revenue will consult further on the details of how the graduation might work, with a view to bringing forward legislation in Finance Bill 2000. To pave the way, the existing business mileage and age-related discounts are being reduced from April 1999. (44)

Green transport plans

From 6 April 1999, the employee benefits tax charge will be removed from: works bus services; subsidies to public bus services for which employees pay the same fare as other members of the public; bicycles and cycling safety equipment; and work-place parking for bicycles. Employers will also be allowed to pay tax free for alternative transport to help employees to get home when normal car-sharing arrangements break down. (40)

In addition, where employees use their own bicycles for business travel, capital allowances and a tax-free allowance of 12 pence per mile for business cycling are being introduced.

The rural transport fund, introduced in Budget 98, will benefit by a further £10 million from the Capital Modernisation Fund, matched by the Department for Environment, Transport and the Regions, over the next two years.

Road fuel duties

In line with its commitment to increase road fuel duties by at least 6 per cent in real terms on average a year, the Government proposes to increase duties from 9 March 1999 as shown in Table 1.9. (42)

Table 1.9: Changes to duties on road fuels and other hydrocarbon oils

The duty on road-fuel gases will be cut by 6.13 pence per kg. The duty differential between ultra-low sulphur diesel and ordinary diesel will be widened to 3 pence per litre.

The duty differential between diesel and unleaded petrol is also widened to 3 pence per litre. Duty on higher octane unleaded petrol (super-unleaded or Lead Replacement Petrol) will increase by 3.57 pence per litre but will be cut from 1 October 1999 to 2 pence per litre above unleaded petrol. (43)

Duty on gas oil and fuel oil also increases, by 0.21 pence per litre and 0.47 pence per litre respectively from 9 March 1999. (41)

Bus fuel duty rebate

The rates of fuel duty rebate paid to local bus operators by the Department of Environment, Transport and the Regions will be increased in line with the changes in fuel duty rates set out above.

Vehicle Excise Duties

The normal rate of Vehicle Excise Duty (VED) for cars, taxis and vans will increase by £5 to £155 per year for licences taken out after 9 March 1999. From 1 June 1999, all cars with engines up to 1,100 cc will be eligible for a reduced rate of VED of £100. In Budget 2000, VED rates will be set to secure a revenue-neutral system in 2000-2001 and 2001-2002. A graduated VED system for cars based primarily on carbon dioxide emissions will be introduced in Autumn 2000 for cars first registered from that time. (46)

VED for new classes of lorries with 11.5 tonne axle weights will rise for licences taken out after 9 March 1999. (47)

Most VED rates for lorries have been frozen, pending the results of the review announced in Budget 98. (48)

The maximum reduction in VED for lorries and buses meeting a low emissions standard will be doubled to £1,000. (*)

Plating procedures will be changed, to ease administrative and cost burdens on hauliers. (-)

Land use and water quality

Landfill tax

As announced in Budget 98, the standard rate of landfill tax will be increased from £7 per tonne to £10 per tonne from 1 April 1999. The Government intends that the rate will increase by £1 per tonne each year from April 2000 until at least April 2004. (45)

As announced in Budget 98, regulations will be introduced to exempt inert waste used in restoring landfill sites and filling mineral workings from 1 October 1999.

A number of changes will be made to the environmental bodies scheme to clarify the rules and make it easier for landfill operators to support environmental projects, including research and education on recycling.

Extraction of aggregates

The Government will shortly publish draft legislation for a tax on the extraction of hard rock, sand and gravel used as aggregates. Before coming to a final decision on whether to implement a tax, the Government will pursue with the quarrying industry the possibility of voluntary environmental improvements. If the industry is unable to agree or deliver a sufficiently tough package, the Government will introduce an aggregates tax.

Water quality and pesticides

The Government is continuing work on options to minimise the environmental impact of pesticide use, including a possible tax or charge. It will shortly publish research commissioned by the Department of Environment, Transport and the Regions, and will seek views on the issues discussed there.

OTHER INDIRECT TAXES

Excise duties

Tobacco duties

The duties on most tobacco products will be increased by 6.33 per cent, typically 17.5 pence on a packet of 20 cigarettes, equivalent to 5 per cent in real terms, on 9 March 1999. The duty on hand-rolling tobacco will remain unchanged. (49)

Table 1.10: Changes to tobacco duties

Alcohol duties

There will be no change in duty on alcoholic drinks, with the exception of the duty on sparkling cider with an alcoholic strength exceeding 5.5 per cent but less than 8.5 per cent which will be increased to £1.61 per litre, to align it with the rate on lower-strength sparkling wine, from 9 March 1999. (50)

Future duty changes

From Budget 2000, the timing of any changes in duties on alcohol and tobacco will be aligned with the Budget cycle.

Gaming duty

The gaming duty bands will be increased on 1 April 1999 by 2.75 per cent in line with inflation during the twelve months to 31 December 1998. (*)

Pools betting duty

Pools betting duty will be reduced from 26.5 per cent to 17.5 per cent, with effect from 28 March 1999. This will help the pools companies to combat their declining turnover The companies have guaranteed to continue their contributions to the Foundation for Sport and the Arts and to the Football Trust until at least March 2002. (56)

Fraud and evasion

The Comprehensive Spending Review provided for £35 million additional resources, including over 100 extra Customs officers, to tackle excise duty fraud and evasion. In addition, there will be an independent evaluation of strategy in this area, concentrating on measures to counter the growing threat of tobacco smuggling by organised crime.

Insurance premium tax

The standard rate of insurance premium tax will be increased from 4 per cent to 5 per cent with effect from 1 July 1999. (59)

PUBLIC SERVICES

Capital Modernisation Fund

The Comprehensive Spending Review created a £2.5 billion Capital Modernisation Fund (CMF), of £1 billion in 2000-2001 and £1.5 billion in 2001-2002. £250 million will be brought forward to 1999-2000, so that the allocation in the later years is changed to £1 billion in 2000-2001 and £1.25 billion in 2001-2002. The Government announced on 9 March 1999 the first allocations from the CMF.

Table 1.11:Budget 99 measures

Table 1.11:Budget 99 Measures

APPENDIX 1A: EXPLAINING THE COSTINGS

This appendix explains how the effects of the Budget measures on tax yield are calculated. In the context of these calculations, the tax yield for measures may include amounts for other charges to the Exchequer and, for Customs and Excise, penalties.

The general approach

The revenue effect of a Budget measure is generally calculated as the difference between the tax yield from applying the pre-Budget and post-Budget tax regimes to the levels of total income and spending at factor cost expected after the Budget. The estimates do not therefore include any effect the tax changes themselves have on overall levels of income and spending. They do, however, take account of other effects on behaviour where they are likely to have a significant and quantifiable effect on the yield and any consequential changes in revenue from related taxes. These include estimated changes in the composition or timing of income, spending or other tax determinants. For example, the estimated yield from increasing the excise duty on tobacco includes the change in the yield of VAT on that duty and the change in the yield of VAT and other excise duties resulting from the new pattern of spending. Where the effect of one tax change is affected by implementation of others, the measures are generally costed in the order in which they appear in Table 1.11. There are some exceptions described under the headings 'Income tax allowances' and 'National insurance contributions' in the notes below.

The non-indexed base column in Table 1.11 shows the revenue effect of changes in allowances, thresholds and rates of duty from their pre-Budget levels (these levels include the effect of any measures, such as the real increases in fuel and tobacco duties, previously announced but not yet implemented). The indexed base columns strip out the effects of inflation by increasing the allowances, thresholds and rates of duty in line with prices in this and future Budgets (again taking account of measures previously announced but not yet implemented). Measures announced in this Budget are assumed to be indexed in the same way in future Budgets.

The indexed base has been calculated on the assumption that each year excise duties and VAT thresholds rise in December (January for alcohol and March for fuels) and allowances and thresholds other than VAT and gaming duty bands, rise in April, in line with the increase in the RPI over 12 months to the September following the Budget. The VAT threshold and gaming duty bands are assumed to rise in April in line with the RPI increase over the year to the previous December. For the year to December 1998, the RPI increase was 2.8 per cent. The commitments for real increases in fuel and tobacco duties of 6 and 5 per cent are also built in.

These costings are shown on a National Accounts basis. This aims to recognise tax when the tax liability accrues irrespective of when the tax is received by the Exchequer. It replaces the receipts basis used in previous years and is consistent with other Government publications. However, some taxes under the National Accounts basis are still scored upon receipt, principally due to the difficulty in assessing the period to which the tax liability relates. Examples of such taxes are corporation tax, self assessment income tax, inheritance tax and capital gains tax.

Notes on Individual Budget Measures

Anti-avoidance measures

The yields represent the estimated direct effect of the measures with the existing level of activity. Without these measures, there could be a significant future loss of revenue currently included in the baseline.

New 10 per cent corporation tax rate for the smallest companies

The full effect will not arise until 2002-03 when the cost will be £140 million.

Extension of first year allowances for SMEs

There will be some increase in tax in later years as the balance of unrelieved capital expenditure carried forward is reduced by the higher allowances. The revenue effects include those for companies and unincorporated businesses.

Research and development tax credit

The costs are based on the proposals issued for consultation. The full effect will not arise until 2002-03 when the cost will be £150 million.

Income tax allowances

The income tax measures are costed in the following order: changes to personal allowances, tax bands, tax rates and tax credits. The income tax measures shown in Table 1.11 are therefore costed in the order shown except that the increases to the personal allowances for older people are costed before the indexation of other allowances and limits and the new 10 per cent rate.

The cost includes indexing the personal allowance which was announced in the PBR.

Abolition of married couple's allowance

The full yield from abolition for all married couples would be £2·5 billion in 2001-02.

Children's Tax Credit

The full year equivalent to the cost in 2001-02 is £1·7 billion.

Working Families Tax Credit

The costs represent the increased expenditure on the Tax Credits. The resulting savings on Social Security benefits are included in effect of the Income Support measure.

National insurance contributions

The measures are costed in the order shown in Table 1.11 except that the measure to extend employer national insurance contributions to all benefits in kind subject to income tax is costed before the reduction of the employer contribution rate.

Controlled foreign companies: taxation of dividends

The full effect will not arise until 2003-03 when the cost will be £50 million.

Transition to new accounting rules for football clubs

There are further yields of £15 million in 2002-03 and £10 million in 2003-04 making a net overall effect of nil.

Quarterly payments of PAYE for small employers

Under the new National Accounts basis, the costs of this measure are shown as 'nil'. However the costs in receipt terms as employers defer paying tax by up to two months is estimated as £100 million in 1999-00, £30 million in 2000-01 and £20 million in 2001-02.

Tax relief on mobile telephone licences

The cost in later years is provisionally estimated as £15 million a year.

Excise duties

The cost of changes in excise duty rates under the National Accounts basis depends partly on the extent to which manufacturers and wholesalers anticipate expected increases by releasing their goods early so as to pay duty at pre-Budget rates. Costings for excise duties normally take into account the anticipated level of such forestalling on the timing of accrued liability. This effect can be significant for pre-announced increases, particularly for tobacco products.

The calculation of the expected effect of changes in duty rates on consumer demand for excise goods assumes that any change in duty is passed on in full to consumers from the date of the change in duty rate.

Climate change levy

This will be introduced in April 2001, raising around £1·75 billion in its first full year (2001-02). At the same time the Government intends to cut the main rate of employer national insurance contributions by 0·5 percentage points. Businesses will also benefit from measures aimed at improving energy efficiency and additional support for renewable sources of energy.

Landfill tax

The standard rate of landfill tax will rise by £1 a tonne each year from 2000 to at least 2004.

Higher octane unleaded petrol

This assumes that the cut in duty on 1 October 1999 will encourage take-up of higher octane unleaded petrol (rather than premium unleaded petrol) as a substitute for leaded petrol when that is banned from 1 January 2000.

APPENDIX 1B: TAX CHANGES ANNOUNCED BEFORE THE BUDGET

This appendix sets out a number of tax and national insurance changes which were announced before the Budget, the effects of which are taken into account in the forecasts.

Table IB.1:Revenue effects of measures announced since Budget 98

Inland Revenue taxes

Tax changes announced before the Budget

In order to achieve greater fairness in the new construction industry scheme, subcontractors are now able to count all their construction income as turnover for the purpose of the turnover test when applying for gross payment certificates. Effect has now been given to this measure under an extra-statutory concession published on 23 October 1998. It will allow many subcontractors running construction operations partly within the scheme to qualify for certificates. (1)

The Government announced on 5 March 1999 that nurses and other health care workers would be added to the list of employment groups that can get a flat rate allowance for the cost of cleaning and maintaining tools and special clothing. (2)

Payments of tax-relieved profit-related pay will be included in earnings that count towards the National Minimum Wage, ensuring that the agricultural sector is treated like other businesses from 28 July 1998. (3)

As announced on 29 January 1999, a loophole in the stamp duty reserve tax (SDRT) in connection with cross-border mergers will be closed with effect from 30 January 1999. The estimates shown represent the direct revenue effects of the measure and are particularly tentative. Much will depend on the extent to which UK companies take over overseas companies in future and how these transactions are structured. Without the new rule, there could be a significant loss of revenue in the future. (4)

On 15 February 1999, the government announced its intention to change the rules on deep discount securities and loan relationships to ensure that deferred charges on such securities remain assessable and that a defect in a definition of discounted securities is corrected. (5)

On 25 March 1998, the Government announced its intention to extend the time limit for 100% write-off of certain expenditure on British films. (6)

Tax relief for the salaries of employees seconded from business to educational establishments was introduced. (*)

An anomaly in PRT rules will be removed, enabling UK companies to compete more fairly for the business of transporting non-UK oil and gas through North Sea pipelines. (-)

Customs and Excise taxes

A court case ruling released on 18 March 1998 found that initial charges for non-self-select Personal Equity Plans (PEP) by PEP managers to PEP investors whose plans are based on shares should be exempt. The table shows the VAT no longer payable on these charges. (7).

A European Court of Justice judgement of 14 July 1998 found that foreign exchange transactions are supplies for VAT purposes. These supplies are exempt but when supplied to a person outside the EU, input tax is recoverable. The table shows input tax now recoverable (but not claims for blocked input tax on previous supplies). (8)

On 16 December 1998 Customs announced that the law had been amended to invalidate tax avoidance schemes exploiting a change to the VAT treatment of business cars which took effect from 1 August 1995. The table shows input tax recovered under the successful schemes. (9)

Table 1B.2:Measures announced in Budget 98 or earlier which take effect after this Budget

Inland Revenue taxes

The changes to the construction industry scheme will take effect from 1 August 1999. (1)

The Working Families Tax Credit and Disabled Person's Tax Credit replace Family Credit and Disability Working Allowance from 5 October 1999. (2, 3)

The reforms of corporation tax announced in the 1998 Budget to promote enterprise mostly come into effect in April 1999.

The revenue effects are uncertain and they largely depend on annual changes in corporation tax liability. When the transition is complete in 2003-04, the Exchequer cost is expected to be £1.6 billion a year (4, 5, 6, 7).

Tax relief on the married couple's allowance will be restricted from 15 per cent to 10 per cent from April 1999 and the 65s and over eligible for the age-related allowances will be fully compensated. (8)

The Individual Savings Account (ISA) will start on 6 April 1999. No new subscriptions to PEPs may be made and no new TESSAs can be taken out after 5 April 1999. The figures shown are the estimated revenue effects associated with the introduction of ISAs (including the residual cost of PEPs and TESSAs), measured against the baseline of continuing with PEPs and TESSAs with their current tax reliefs. (9)

The Chancellor announced in Budget 98 that scale charges for fuel provided for private motoring in company cars would increase by 20 per cent above revalorisation from 6 April 1998, and in each of the following four years. (10)

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 spread impact for those affected. (11)

Certain changes were announced in the Budget 98 to the rules for taxing gains from certain life insurances. Their purpose was to make the existing rules more effective in protecting tax revenue. The changes related to policies held in trust, overseas life assurance business, personal portfolio bonds and a requirement for certain overseas life insurers to have a tax representative in the United Kingdom. The revenue effects have been revised to incorporate changes made to the original proposals following consultation with the insurance industry. When the changes are complete, the annual yield is expected to be £120 million. (12)

The transfer pricing and controlled foreign company rules are being modernised and brought within the self assessment regime for companies which applies to company accounting periods ending on or after 1 July 1999. (13, 14)

Customs and Excise taxes

In the context of the above table, the indexed yield shows the revenue effect of the changes compared with revalorisation of the duty rates only.

The Chancellor said in the July 1997 Budget that road fuel duties would be increased on average by at least 6 per cent in real terms in future Budgets. (15)

The Chancellor said in the July 1997 Budget that tobacco duties would be increased on average by at least 5 per cent in real terms in future Budgets - one measure aimed at reducing tobacco consumption and dissuading young people from starting smoking. (16)

The Chancellor said in Budget 98 that the standard rate of landfill tax would be increased to £10 a tonne from April 1999. Following consultation, from October 1999 there will be an exemption for inert materials used in site restoration. (17)

APPENDIX 1C: TAX ALLOWANCES AND RELIEFS

This appendix provides estimates of the revenue cost of some of the main tax allowances and reliefs. The larger the reliefs, the higher rates of tax have to be in order to finance Government expenditure, other things being equal.

Tax reliefs can serve a number of purposes. In some cases they may be used to assist or encourage particular individuals, activities or products. They may thus be an alternative to public expenditure. In this case they are often termed "tax expenditures". There may, for instance, be a choice between giving tax relief as an allowance or deduction against tax, or by an offsetting cash payment.

Many allowances and reliefs can reasonably be regarded (or partly regarded) as an integral part of the tax structure - called "structural reliefs". Some do no more than recognise the expense incurred in obtaining income. Others reflect a more general concept of "taxable capacity": the personal allowances are a good example. To the extent that income tax is based on ability to pay, it does not seek to collect tax from those with the smallest incomes. But even with structural reliefs of the latter kind, the Government has some discretion about the level at which they are set.

Many other reliefs combine both structural and discretionary components. Capital allowances, for example, provide relief for depreciation at a commercial rate as well as an element of accelerated relief. It is the latter element which represents additional help provided to business by the Government and is a "tax expenditure".

The loss of revenue associated with tax reliefs and allowances cannot be directly observed, and estimates have to be made. This involves calculating the amount of tax that individuals or firms would have had to pay if there were no exemptions or deduction for certain categories of income or expenditure, and comparing it with the actual amount of tax due. The Government regularly publishes estimates of tax expenditures and reliefs for both Customs and Excise and Inland Revenue taxes. Largely because of the difficulties of estimation, the published tables are not comprehensive but do cover the major reliefs and allowances.

The estimates in Table 1C.1 below show the total cost of each relief. The classification of reliefs as tax expenditures, structural reliefs and those elements combining both is broad brush and the distinction between the expenditures and structural reliefs is not always straightforward. In many cases the estimated costs are extremely tentative and based on simplifying assumptions. The figures make no allowance for the fact that changes in tax reliefs may cause people to change their behaviour. This means that figures in table 1C.1 are not directly comparable with those of the main Budget measures.

Estimation of behavioural effects is notoriously difficult. The sizes of behavioural change will obviously depend on the measure examined and possible alternative behaviours. For example, removing the tax privileges of one form of saving may just lead people to switch to another tax privileged form of saving.

Table 1C.1 also gives details of reliefs relating to VAT, which is collected by Customs and Excise. It shows the estimated yield forgone by not applying the standard rate of VAT (17½ per cent) to goods and services which are currently zero-rated, reduced-rated, exempt or outside the scope of VAT. Estimates of the scale of structural reliefs for local authorities and equivalent bodies are also shown. Again, the figures are estimates and must be treated with caution. In line with the treatment of Inland Revenue taxes, they make no allowance for changes in behaviour.

The estimated costs of reliefs and allowances given in Table 1C.1 cannot be added up to give a meaningful total. The combined yield of withdrawing two related allowances would therefore be higher than the sum of individual costs. Similarly the sum of the costs of component parts of reliefs may differ from the total shown.

More details on individual allowances and reliefs can be found in the HM Treasury publication "Tax Ready Reckoner and Tax Reliefs".

Table 1C.1: Estimated costs of principal tax expenditures and structural reliefs

1 The effect of the Budget measures on Government revenues is set out in Table 1.11. The number in brackets after each measure refers to the line in Table 1.11 where its yield or cost is shown. The symbol "-"; means that the proposal has no effect on revenue. "*"; means that it has negligible effect on revenue, amounting to less than £3 million a year.