REV/HMT 3

27 November 2001

ENTERPRISE AND INNOVATION - THE KEY TO A MODERN BUSINESS ENVIRONMENT

A new tax credit to boost R&D and innovation in larger companies will further the Government's ambition to close the productivity gap between the UK and its main competitors, the Chancellor announced today.

Following an initial consultation after Budget 2001, the Government has decided to adopt a version of a volume-based credit - a design strongly favoured by earlier respondents. The Government will launch a further consultation shortly on options for the design of a volume-based credit, recognising the importance of working in partnership with business.

Also announced today was a package of measures to build on the Government's radical reform of the corporate tax regime.

In response to recent consultations with business, the Government is publishing consultative draft legislation on:

an exemption for capital gains and losses on substantial shareholdings to ensure that important business decisions on corporate restructuring and reinvestment are made for commercial, rather than tax, reasons; and
a new regime for providing relief to companies for the costs of intellectual property, goodwill and other intangible assets to encourage businesses to take advantage of new opportunities in the emerging knowledge-based economy.

The Government intends, subject to consultation, to introduce these measures from April 2002.

This Pre-Budget Report also announces:

publication, later this year, of draft legislation on a new regime for the taxation of corporate debt, financial instruments and foreign exchange gains and losses from October 2002 to provide longer-term stability and transparency for business;
improvements to the capital gains tax (CGT) business assets taper relief for disposals from April 2002 to enhance the competitiveness of the UK regime;
consultation on an optional scheme to enable companies to pay cross border royalties without deducting tax at source; and
changes to the Construction Industry Scheme to help ensure that companies suffering deductions under this scheme can engage employees and other subcontractors and continue to meet their tax liabilities.

The Government is today publishing the Inland Revenue's review of links with business - a report recommending the improvement of the Revenue's operational links with large corporates.

This Pre-Budget Report also introduces a package of measures to reduce further the tax burden on small businesses and those who invest in them. For more information, see the following press notice.

Internal links

REV/C&E1 Boosting Investment and Growth for Small Businesses

DETAILS

R&D Tax Credit

The Government published a consultation document Increasing Innovation in Budget 2001. This set out the case for a new R&D tax credit for large companies and invited comments on two options:

an "incremental" scheme, giving extra tax relief based on the additional amount of R&D spending; and
a "volume" credit, giving extra tax relief based on the total amount of R&D spending.

The consultation document Increasing Innovation is available below in Adobe Acrobat Portable Document Format (PDF). If you do not have Adobe Acrobat installed on your computer you can download the software free of charge from the Adobe website.

For alternative ways to read PDF documents and further information on website accessibility visit the HM Treasury accessibility page.

Media links

PDF file of A Consultation Paper: Increasing Innovation

A further consultation document will be launched on next month, summarising the responses received and outlining progress on designing the scheme. The aim of this further consultation will be to consider options for the design of a volume-based R&D tax credit.

Substantial Shareholdings

The Government is today publishing draft legislation providing details of a relief for capital gains and losses on substantial shareholdings. It is proposed that for disposals on or after 1 April 2002, gains will be exempt, and losses not allowable, where:

a trading company, or a member of a trading group disposes of shares in a trading company, or the holding company of a trading group (or sub-group); and
a substantial shareholding has been held throughout a 12 month period ending not more than 12 months before the disposal.

Alongside the draft legislation, the Inland Revenue is publishing a Statement of Practice which gives guidance on the calculation of underlying tax on foreign dividends received by companies.

The full draft legislation with outline explanatory notes on the proposed exemption and a partial Regulatory Impact Assessment has been placed in the House of Commons and may be obtained by post from:

Inland Revenue
Capital and Savings
Room 121
New Wing
Somerset House
Strand
London WC2R 1LB

It may also be downloaded from the Inland Revenue website.

External links

Inland Revenue website

Intellectual Property, Goodwill and Other Intangible Assets

The Government is also publishing draft legislation on a new regime for providing relief to companies for the costs of intellectual property, goodwill and other intangible assets:

covering the costs of acquiring intangible assets where no relief had previously been available; and
ensuring that relief for future acquisitions will be given on a consistent basis, following, as far as possible, the amortisation reflected in companies' accounts.

Draft legislation for the new regime, together with a commentary and a partial Regulatory Impact Assessment has been placed in the House of Commons, and may be obtained by post from:

Inland Revenue
Business Tax
Room 4W3
22 Kingsway
London WC2B 6NR.

It may also be downloaded from the Inland Revenue website.

Corporate Debt, Financial Instruments and Foreign Exchange Gains and Losses

In addition, the Government will shortly be publishing details of a new regime for corporate debt, financial instruments and foreign exchange gains and losses. The new tax regime will:

merge the separate legislation on foreign exchange gains and losses, with appropriate amendments, into the legislation on corporate debt and financial instruments. This will simplify the legislation and minimise compliance burdens for both business and the Inland Revenue;
extend the scope of the financial instruments regime to give certainty for most derivative contracts, including those which had not been developed when the original rules were introduced; and
address the issue of connected party bad debt, as the rules defining what is meant by 'connected' have been causing problems in practice and they will be changed to operate more fairly.

There has been extensive consultation on the detail of these changes. This has shown widespread support for the Government's intention to minimise compliance burdens, reduce economic distortions and limit avoidance opportunities so that all companies pay their fair share of tax and compete on a level playing field.

The new rules will apply for companies accounting periods beginning on or after 1 October 2002. This should ensure that companies have plenty of time to prepare for implementation.

Capital gains tax business assets taper

This Pre-Budget Report confirms improvements to the capital gains tax business assets taper relief, as announced in June 2001:

so that the effective rate of tax for a higher rate taxpayer is reduced to 20 per cent after a holding period of one year and 10 per cent after only two years; and
helping new and growing companies, for whom equity investments are a vital source of capital.

Legislation is to be introduced as part of the Finance Bill 2002 so that, with effect for disposals from 6 April 2002, the rate of CGT business assets taper relief will be:

Whole years asset held from 6 April 1998	Proposed new rates (disposals from 6 April 2002)		Existing rates
Whole years asset held from 6 April 1998	Percentage of gain charged to tax	Effective rate of tax for higher rate taxpayer (%)	Percentage of gain charged to tax	Effective rate of tax for higher rate taxpayer (%)
Less than 1	100	40	100	40
1	50	20	87.5	35
2	25	10	75	30
3	25	10	50	20
4 or more	25	10	25	10

The Government is also considering:

whether there is any case for changes to the capital gains tax regime for non?business assets in order to improve incentives for investment; and
various proposals it has received in response to the consultation launched in June 2001 on value-for-money options to simplify capital gains tax within the existing policy framework.

Construction Industry Scheme

The Government also intends to introduce changes to the Construction Industry Scheme, replacing from 6 April 2002 the existing legislation that provides for deductions made from payments to companies without certificates to be set against corporation tax. New legislation will allow these payments to be set off against PAYE, NICs and CIS liabilities.

Inland Revenue review of links with business

The Government is today publishing the Inland Revenue Review of Links with Business, which focuses on the Revenue's operational links with large businesses and draws on views from a wide range of industry sectors and professional advisers. It recommends ways to improve communications between large corporates and the Inland Revenue, and specific pressure points in the operation of the tax system for large corporates. The Government supports the recommendations and is grateful to business for its contribution to the review.

The review may be obtained by post or downloaded from the Inland Revenue website.

Cross Border Royalties

The Government proposes to introduce an optional scheme to enable companies to pay royalties overseas at the treaty rate of deduction, without seeking prior clearance from the Inland Revenue. Where a company has a reasonable belief that the non-resident recipient is entitled to relief under a double tax treaty in respect of the royalties, they may pay the royalty gross, or at a reduced rate of deduction at source, in line with the terms of the relevant treaty. Companies will be required to make a return of such payments. If it later turns out that treaty relief was not in fact due, the company will be liable to the tax (with interest and in limited circumstances penalties), which should have been deducted when making the payment.

The Inland Revenue is seeking the views of interested parties. Please send comments to:

Inland Revenue
International
Room 203,
Victory House
30-34 Kingsway
London WC2B 6ES

External links

Inland Revenue website

NOTES FOR EDITORS

The Government has made significant progress in creating a modern corporate tax regime. In particular, the Government has, since 1997, cut the main rate of corporation tax by 3 percentage points to 30 per cent - the lowest ever rate in the UK. This Pre-Budget Report builds on this progress by announcing a package of measures, focused on:

longer-term stability in a modern, knowledge-based economy; and
an attractive environment for investment.

Details of the exemption for gains on substantial shareholdings are available in a technical note published by the Inland Revenue. As well as draft clauses, related commentary and a partial Regulatory Impact Assessment, the note contains a summary of responses to the July 2001 Large Business Tax consultation, which invited responses on the design of a relief for capital gains on substantial shareholdings and a possible exemption of foreign dividends. The Government intends to introduce legislation in the 2002 Finance Bill.

Draft legislation for the new regime for intellectual property, goodwill and other intangible assets is included in a technical note published today by the Inland Revenue. The Government intends to introduce legislation in the 2002 Finance Bill.

On 26 July 2001, the Inland Revenue issued a consultation document - Corporate Debt, Financial Instruments and Foreign Exchange Gains and Losses. This set out the Government's proposals on how to:

repeal the 1993 Forex legislation and assimilate it into the financial instruments & loan relationship rules. These are as parts of the tax code which tax companies' borrowing and lending, including interest payments, and derivatives contracts;
extend the scope of the financial instruments rules to cover all derivatives;
reform the control rules and treatment of connected party bad debts in loan relationships; and
stop a number of avoidance schemes while rationalising the anti-avoidance provisions.

There were over 40 responses to the consultation document. The Government is very grateful for the considerable efforts made by respondents.

Details of the proposals will be available in a technical note to be published by the Inland Revenue shortly. This will contain a summary of responses to the consultation plus revised versions of draft clauses and related commentary. The Government intends to introduce final legislation in the 2002 Finance Bill.

Inland Revenue technical notes (as placed in the House of Commons) may also be obtained by post from the addresses given in the details section or downloaded from the Inland Revenue website.

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GOVERNMENT DEPARTMENT INTERNET SITES

Further information and all published documents relating to the Pre-Budget Report may be found on this website and those of the Inland Revenue and Customs and Excise: