HM Treasury 1

8 November 2000

PRE-BUDGET REPORT: BUILDING LONG-TERM PROSPERITY FOR ALL

The opportunity to raise Britain’s long-term productivity performance and deliver greater employment opportunity and rising prosperity for all is set out by Chancellor Gordon Brown today in the Pre-Budget Report.

Further reforms to ensure that a strong economy goes hand in hand with a fair and inclusive society are outlined, including new help for pensioners and steps to protect and improve the environment. 

The Pre-Budget Report, Building Long-term Prosperity for All, describes the opportunity which hard won economic stability now offers.  Entrenching a culture of stability and working together to raise Britain’s productivity performance is the key to delivering a more prosperous and fairer Britain.

The Chancellor has already begun to consult on the issues and proposals outlined in this Pre-Budget Report, and consultation will continue in the run up to the spring 2001 Budget.

Key Pre-Budget Report announcements include:

• increasing the Winter Fuel Payment, which is set at £150 for future years, to £200 for this winter – over 8 million pensioner households with 11.5 million people will gain; 
  
  
• raising the basic state pension by £5 a week next year and £3 a week the year after for a single pensioner, and by £8 a week next year and £4.80 the year after for pensioner couples.  This means raising the basic state pension to £72.50 a week in April 2001 and £75.50 a week in April 2002 for single pensioners.  For couples an increase to £115.90 a week in April 2001 and to £120.70 in April 2002;
  
  
• increasing the Minimum Income Guarantee for poorer pensioners by lifting the lower rates to equal its highest rate for a single or a couple, raising this in line with earnings each year, and then increasing it further in the next two years by the same real increase as the basic state pension, so that all pensioners – including the poorest – gain fully.  From April 2001, the new, simplified MIG will be £92.15 a week for single pensioners and £140.55 a week for couples rising to at least £100 for single pensioner and £154 for a pensioner couple from April 2003;
  
  
• new proposals for a Pension Credit from 2003 to reward low and modest income pensioners, and alongside this, proposals for tax changes in 2003-04 to benefit older taxpayers.  The Secretary of State for Social Security is publishing a consultation paper tomorrow, Thursday 9 November, outlining detailed proposals which pave the way for further tax and benefit integration;
  
  
• an additional £200 million will be paid directly to schools in 2000-01 to provide further help to tackle repairs;
  
  
• a cash freeze in Budget 2001 in all road-fuel and other oil duties, costing £560 million in 2001-02;
  
  
• consultation on a carefully targeted package of measures for road transport in Budget 2001 worth the equivalent of a 4p real terms cut in duty for a motorist and 8p in real terms for hauliers, including cuts in duty on Ultra-Low Sulphur Petrol and Diesel, extension of the ‘small car’ vehicle excise duty (VED) threshold to 1,500cc (backdated to November 2000), reform of lorry VED (with, as a first step current year rebates costing up to £265 million), abolition of VED on tractors, support for driver training and a new ring-fenced fund worth £100 million for vehicle modernisation;
  
  
• retaining the current £7,000 annual ISA contribution limit, including the £3,000 cash sub-limit, for a further five years until April 2006 rather than reducing it to £5,000 (£1,000 cash);
  
  
• a new package of measures to reduce the impact of VAT on small businesses allowing them to manage their entry into the VAT system, reduce their VAT administration burden and improve their cash flow;
  
  
• expansion of the Enterprise Management Incentives (EMI) so that small businesses can make more flexible use of the benefits in a way best suited to their needs;
  
  
• taking forward the new Community Investment Tax Credit and Community Development Venture Fund proposed by the Social Investment Taskforce, to stimulate more private investment in under-invested communities;
  
  
• a new £1 billion package of tax concessions over a period of five years to help regenerate Britain’s cities, including the abolition of stamp duty for all property transactions in Britain’s most disadvantaged communities;
  
  
• a new Job Transition Service to provide extra help where large-scale redundancies hit, helping the people affected to move into new jobs; and
  
  
• an extension of the New Deal for lone parents starting from Autumn 2001 to provide help and support to all lone parents who are not working, or who are working less than 16 hours a week, that will benefit an additional 150,000 lone parents.

DELIVERING ECONOMIC STABILITY

Through pre-emptive action and tough choices under the new frameworks for fiscal and monetary policy, the Government is delivering economic stability.  Steady and stable growth is being accompanied by record levels of employment, historically low inflation and sound public finances.

Locking in economic stability and ensuring no return to the boom and bust cycles of the past provides the essential platform from which to make the long-term choices and investment which will secure sustainable increases in productivity and employment, higher living standards and better public services for all.

The updated projections in the Pre-Budget Report show that the Government remains on track to meet its two strict fiscal rules, with the fiscal stance at least as tight as set out in Budget 2000.   

PROVIDING STRONG PUBLIC SERVICES

Budget 2000 set firm spending limits for the next three years, consistent with meeting the Government’s fiscal rules while delivering substantial new investment in Britain’s key public services. 

Through prudent management of the public finances, success in reducing unemployment and by reducing fraud and waste, Spending Review 2000, which reported in July provides new resources for priority services including health, education, transport and fighting crime.

The Pre-Budget Report announces:

• an additional £200 million paid directly to schools in 2000-01 to provide further help to tackle repair problems and thereby contribute to raising standards; and

• £5 million to help establish the new National e-Learning Foundation and lever-in significant private sector funding. It will provide portable information and communications technology (ICT) equipment offering Internet access, initially in disadvantaged areas.

MEETING THE PRODUCTIVITY CHALLENGE

Raising Britain’s productivity performance is the key to achieving higher long-term growth and sustained increases in living standards.  It offers the prospect of low inflation, low and stable interest rates and higher growth.

The productivity challenge is one which must be met by everyone working together, at a national level and by promoting enterprise in every region of the UK.  That is why last month the Chancellor called on the CBI and the TUC to work with management, unions, educationalists and others in all regions and in all sectors of the economy to confirm the priorities that need to be addressed and how they can be met.   

The Government’s aim is to achieve a faster rise in productivity than in Britain’s major competitor countries over the next decade, and the Pre-Budget Report describes further steps the Government is taking to meet the productivity challenge:

• a new package of measures to reduce the impact of VAT on small businesses, allowing them to manage their entry into the VAT system, reduce their VAT administration burden and improve their cashflow; (see separate press notice C&E 1 for further details);
  
  
• an extension of capital gains tax business assets taper relief to help more employees benefit when they sell their shares. To coincide with the changes announced in Budget 2000, this will, subject to consultation, be made available from April 2000 to employees of a range of non-trading companies, alongside employees of trading companies who are already eligible (see press notice REV 2 for further details); 
  
  
• the Chancellor has also announced further help for companies which may face large and unpredictable National Insurance liabilities on share options awarded to their employees (see press notice REV 2 for further details); 
  
  
• to help smaller companies attract the skilled employees they need to realise their growth potential, the Government intends to expand the Enterprise Management Incentives (EMI) so that small businesses can make more flexible use of the benefits in a way best suited to their needs.  The Government will consult on abolishing the limit on the number of employees and replacing it with a limit on the total value of shares under EMI option, and expand this limit from £1.5 million to £2.5 million per company (see press notice REV 2 for further details);
  
  
• abolition of out-dated requirements for companies to withhold tax on most intra-UK interest and royalty payments, simplifying the administration for payers and avoiding cash flow issues for the recipients.  This should help to enhance competition in the financial services sector (see press notice REV 5 for further details);
  
  
• expansion of the scope of the consultation on the taxation of disposals of substantial shareholdings, to consider the issues surrounding a deferral relief regime in more detail and, as part of a wider discussion on competitiveness, whether alternative approaches, including the possibility of a form of exemption regime, might be appropriate (see press notice REV 5 for further details);
  
  
• the radio spectrum is an essential raw material for many of Britain’s most promising industries of the future. The Government will be launching an independent review of spectrum management to ensure that the framework keeps up with the pace of change;
  
  
• in Budget 2000, the Chancellor asked Paul Myners of Gartmore Investment Management to carry out an independent review of institutional investment in the UK.  The review will make its final report in time for Budget 2001.  In the meantime it has put forward two proposals aimed at increasing security for members of pension schemes, improving investment decision making and removing barriers to investment in venture capital by pension funds. Mr Myners proposes replacing the Minimum Funding Requirement (MFR) and changing the law regarding investment in limited partnerships. Both recommendations will be considered as part of wider consultation; 
  
  
• following the recommendations made to the Chancellor by Ronald Cohen’s Social Investment Taskforce in October, the Government will consult widely on the proposal for a Community Investment Tax Credit, with a view to taking it forward as early as possible; and will work closely with the venture capital industry and others on setting up the first Community Development Venture Fund.  The Government will also encourage banks to disclose their individual lending activities to businesses in under-invested communities; and
  
  
• Spending Review 2000 announced a strengthened role and additional resources and flexibility for the Regional Development Agencies (RDAs), including a cross-departmental ‘Single Pot’ budget from April 2002.  As part of a major step towards this, there will be significantly increased freedom for the RDAs for next year.  The Pre-Budget Report sets out further details of a more than doubling of budgetary flexibility for RDAs. This will enable them to switch resources between individual programmes and target resources more effectively.  Also new Strategy Funds for each RDA will help them meet their economic aims that cannot be delivered through existing funding streams.  A total of £30 million across all RDAs will be available and will act as a prototype for the Single Pot. Further measures to promote regeneration are set out in the section on Improving the Environment.

INCREASING EMPLOYMENT OPPORTUNITY FOR ALL

The Government is committed to creating employment opportunity for all to fulfil its long-term employment ambition that, by the end of the decade, there will be a greater proportion of people in work than ever before. 

The Pre-Budget Report announces:

• a new Job Transition Service to provide extra help where large-scale redundancies risk swamping the local labour market, particularly in high-unemployment areas or where there is a high dependency on one industry.  The new Service will help people made redundant move into new jobs, building on existing provision such as Rapid Response Units, and working closely with others such as the Regional Development Agencies and Learning and Skills Councils.  It will also provide help for others, such as the long-term unemployed, who may be affected more indirectly; and
  
  
• an extension of the New Deal for lone parents starting from Autumn 2001 to provide help and support to all lone parents who are not working, or who are working less than 16 hours a week, will benefit an additional 150,000 lone parents.  
  
  

FAIRNESS FOR FAMILIES AND COMMUNITIES

The Government is committed to building a fairer and more inclusive society in which everyone can benefit from rising prosperity.  The Pre-Budget Report describes the next stage of the Government’s reforms to tackle child poverty, provide security in old age, reward saving, and ensure the tax system is fair and efficient.

Supporting families and tackling child poverty

Abolishing child poverty within 20 years and to halve it in ten years is a firm Government commitment.  Spending Review 2000 introduced a new Public Service Agreement target to reduce the number of children living in low income households by at least a quarter by 2004.

This year there are real signs of progress being made in reducing the high levels of poverty that built up over the past two decades.  In the three years to Spring 2000, the number of children living in households where no-one is in work fell by more than 250,000.  The Pre-Budget Report sets out the Government’s strategy to abolish child poverty as it develops a new integrated system of support for families and children.

As a result of personal tax and benefit reforms announced so far in the current Parliament, by 2001:

• households with children will be, on average, £850 a year better off in real terms; and
  
  
• a family with two children and a gross income of £12,500 a year will be £2,600 a year better off in real terms.

Fairness for pensioners

Over the past 20 years, the gap between the incomes of rich and poor pensioners has grown dramatically. The Government is committed to developing policies which enable all pensioners to share in rising national prosperity, and which tackle this growing inequality.

The Government’s first priority has been to help the poorest pensioners in greatest need. Around 2 million pensioners now benefit from the extra support the Government introduced through the Minimum Income Guarantee (MIG). But the current system continues to penalise pensioners with low and modest incomes who have worked hard to build up savings and second-tier pensions for their retirement.

So the Government’s priority for the next Parliament is to also reward savings for pensioners on low and modest incomes.

The new Pension Credit will deliver substantial gains to all pensioners on low and modest incomes from 2003. But ahead of this, the Government is determined to deliver more benefits to them straight away. The Government will therefore:

• increase the Winter Fuel Payment, which is set at £150 for future years, to £200 for this year. So this winter, 8.5 million pensioner households will be eligible for £200 – almost £4 a week – double the amount of last year’s payment;
  
  
• increase the basic state pension by £5 a week next year and £3 a week the year after for single pensioners, and by £8 a week next year and £4.80 next year for pensioner couples.  This increases the basic state pension to £72.50 a week in April 2001 and to £75.50 a week in April 2002 for single pensioners.  For couples an increase to £115.90 a week in April 2001 and to £120.70 in April 2002;
  
  
• increase the MIG by raising its lower rates to equal its highest rate for a single or a couple, increase this in line with earnings, and then increase it further, so that all pensioners – including the poorest – will benefit from the real increase in the basic state pension.  From April 2001, the new, simplified MIG will be £92.15 a week for single pensioners and £140.55 a week for couples.

So from 2003 when the Pension Credit is introduced, based on current forecasts, no pensioner need live on less than £100, or £154 if a couple, and the basic state pension, reflecting the return to normal price uprating, will be at least £77 a week for single pensioners and £123 for couples.

The Government’s tax and benefits reforms will mean that next year the average pensioner household will be £580 – over £11 a week – better off since 1997.

Around 2 million poorest pensioners will next year be at least £15 a week, £780 a year, better off compared to 1997.  And of the total £4.4 billion extra being spent next year alone on pensioners as a result of the Government’s measures, over £2 billion of this will be spent on the poorest third – around 5 times what they would have received if the basic state pension had been linked to earnings.

The Secretary of State for Social Security is publishing a consultation paper tomorrow, Thursday 9 November, outlining detailed proposals for a Pension Credit to be introduced from 2003.  The Pension Credit will:

• reward low and modest retirement incomes above the level of the basic state pension: a cash reward for every pound of second-tier pension, earnings or investment income for those on the Credit;
  
  
• modernise the system by abolishing the unfair capital rules and intrusive weekly means test; and
  
  
• act to end pensioner poverty by simplifying and increasing the MIG and by linking this to the rise in earnings throughout the next Parliament.

By linking the guaranteed minimum income level and maximum Credit to earnings, the Pension Credit will ensure that low and modest income pensioners on the Credit will get, year on year, a greater increase in support than they would get from a n earnings link in the basic state pension.

In designing the Credit, the Government will build on the progress made since 1997 in bringing the tax and benefit systems closer together. Most pensioners have no income tax to pay, and the Credit will not be taxable.  But for those who do, subject to consultation, the Government proposes to:

• raise the age-related personal allowances in 2003-04 by £240 – more than price indexation. On present predictions this would mean increases to £6,560 for those aged 65 to 74 and to £6,850 for those aged 77 or more; and to
  
  
• raise this new allowance by reference to the rise in earnings rather than prices throughout the remainder of the next Parliament.

Over 3 million pensioners aged 65 or more will benefit from the increase in the age-related allowance.  (See separate press notice REV 1 for further details of the tax changes.)

Supporting saving

The Government wants more people to enjoy the benefits of savings for independence throughout their lives, security if things go wrong and comfort in old age.  It is helping people to save by creating the right environment and the right incentives and providing information to help them make the right saving choices.

ISAs are a key element of the Government’s strategy for encouraging saving and they have made a successful start.  Over 9.3 million ISA accounts were opened in their first year and £28.4 billion paid in – a third more than was put into TESSAs and PEPs in their last, and most successful, year. ISAs’ success is continuing into the second year with over £9 billion being invested in the first quarter of 2000-01. 

ISAs, particularly mini-cash ISAs, have also attracted relatively more low-income savers than TESSAs or PEPs.  More than a quarter of mini-cash ISAs are held by people with household incomes of less than £11,500 a year, compared to around one in five TESSAs and one in six PEPs. 

An independent study of the ISA market, carried out for the Treasury by consultants McKinsey & Co has found that CAT standard ISAs have achieved value for money by setting an interest rate floor for cash ISAs and a cap on charges for equity ISAs.  A typical saver investing £3,000 a year in an equity ISA would pay £35 a year less in charges than someone investing in a non-CAT ISA.

The Pre-Budget Report takes further steps to support saving:

• the Government will build on the success of ISAs by retaining the £7,000 annual contribution limit for a further five years until April 2006.  It will also keep the £3,000 limit for cash, which will benefit many younger savers and those on lower incomes for whom mini cash ISAs have been particularly attractive;
  
  
• 16 and 17 year olds will be able to take out cash ISAs for the first time from April 2001;
  
  
• all PEPs will follow the more generous ISA rules on investments, transfers and administrative procedures;
  
  
• FSA proposals to modernise investment marketing rules (polarisation) will give savers greater choice and confidence in choosing products and will promote competition.  They will also help to improve access to stakeholder pensions and other innovations such as financial supermarkets; and
  
  
• a separate Treasury paper, published alongside the Pre-Budget Report, Helping People to Save, describes the Government’s strategy for removing the barriers which discourage personal saving, the steps taken so far and the way ahead to increase saving among low and middle-earners.   

Further details on ISAs can be found in the separate press notice REV 3 and further details on polarisation are in the separate press notice HMT 2.

A fair and efficient tax system – at home and internationally

Betting duty

Following the consultation announced in Budget 2000, the Government believes there is scope to modernise the way betting is taxed in the UK that would provide the right competitive environment for the UK betting industry to thrive, both domestically and internationally, taking full advantage of e-commerce opportunities while protecting the long-term revenues from betting duty and giving punters a better deal.  The Gross Profits Tax reform outlined in the consultation document is one approach to such a modernising reform. 

Further discussions with the bookmaking industry will be held on how to guarantee that the benefits of any reform could be fairly shared, so that these objectives can be achieved, with a view to an announcement in Budget 2001.  (see Notes for Editors 1)

Vaccine research

HIV/AIDs, malaria and TB kill 5 million people a year - most in the developing countries. But research on vaccines suitable for addressing diseases in developing countries remains minimal. The Government has therefore set in hand urgent work to investigate the problem and come forward with new proposals.  Working alongside and feeding into a wider review being carried out by the Performance and Innovation Unit, the Treasury will look at a range of tax options, building on the consultations already underway with the pharmaceutical industry. 

IMPROVING THE ENVIRONMENT

The Government is committed to ensuring that high and stable levels of growth and rising economic prosperity are achieved while protecting and, where possible, enhancing the environment.  The action already taken, together with that planned, means that the UK is on course to go beyond its Kyoto target to cut greenhouse gas emissions by 12½ per cent below 1990 levels by 2008-2012, and to move towards its domestic goal to cut carbon dioxide emissions by 20 per cent by 2010.  The Pre-Budget Report takes further steps in this direction:

Modernising road transport

The Government announced an affordable, carefully targeted series of measures to help modernise road transport, increase access to cheaper motoring for people who need to use their cars, and continue to protect the environment.

The package would reduce hauliers’ costs by the equivalent of 8 pence per litre in the price of diesel in real terms and motorists’ costs by the equivalent of 4 pence per litre in the price of petrol in real terms.

The main measures, which will be implemented in Budget 2001 are:

• a cash freeze in all road-fuel and other oil duties - a real terms cut in the price of petrol and diesel of 1½ pence per litre, costing £560 million in 2001-02;
  
  
• conditional on the oil companies guaranteeing nationwide availability, the duty on Ultra-Low Sulphur Petrol (ULSP) will be reduced by a further 2 pence in Budget 2001, widening its differential with standard unleaded petrol to 3 pence per litre.  ULSP can be used in all cars which use unleaded petrol;
  
  
• also conditional on the cut in ULSP, and to maintain the existing balance between the most commonly available diesel and petrol, a 3 pence per litre cut in duty on Ultra-Low Sulphur Diesel (ULSD) in Budget 2001;
  
  
• an extension of the ‘small car’ threshold for vehicle excise duty (VED) from 1,200cc to 1,500cc, backdated to 1 November 2000 costing £250 million a year helping an additional 5.4 million car owners;
  
  
• a 50 per cent cut in, and reform of, VED for lorries costing £300 million a year and as a first step in this reform £265 million (up to 50 per cent reduction) will be available to rebate VED fees for this financial year;
  
  
• abolishing VED on tractors and other agricultural vehicles;
  
  
• support for the haulage industry with a new driver training scheme, and a ring-fenced fund worth £100 million to include incentives or allowances to help modernisation of the vehicle fleet, including introduction of cleaner lorries and new technology.

All these measures, except for the road-fuel and oil duty freeze and the rebate of lorry VED this financial year, are subject to consultation. (See separate press notice HMT/DETR 1 for more details.)

Tackling climate change and improving air quality

• from April 2001 there will be an immediate increase in authorised mileage rates.  This will bring benefits to those who use smaller, cleaner private cars for business trips.  The rates for larger cars will be frozen.  To encourage the use of bicycles for short business trips, the cycle rate will be raised from 12p to 20p.  The Government will also consult with interested parties about introducing new statutory rates for all cars from April 2002;
  
  
• assisting and encouraging employers in smaller companies to set up Travel Plans to help their employees to travel to work without using their cars, by reducing the size of works buses qualifying for tax exemptions from 12 to 9 passenger seats;
  
  
• to improve road safety and encourage cycle use, the Government will remove VAT from the purchase of cycle helmets with effect from 1 April 2001;
  
  
• negotiations with over 40 energy intensive sectors entitled to rebates on the climate change levy are almost completed.  The Government and the sectors concerned are now engaged in ensuring that the final arrangements are concluded to enable participants to receive discounts from the introduction of the levy on 1 April 2001;
  
  
• as previously announced, £100 million of revenue from the climate change levy will be recycled as enhanced capital allowances for firms making energy saving investments.  The Department of the Environment, Transport and the Regions (DETR) will shortly publish a full list of the qualifying technologies; and
  
  
• building on the £30 million announced in Spending Review 2000 to provide a financial incentive for firms to take on binding emissions reduction targets, a DETR consultation paper is being published today including new proposals for the basic rules of an Emissions Trading Scheme.  The Government is seeking comments with a view to putting the broad framework in place in time to allow trading to start in April 2001, with firms signing up to emission targets starting in 2002.

Regenerating our cities and protecting our countryside

• As part of its commitment to regenerate Britain’s cities and encourage better use of brownfield land – issues addressed by Lord Rogers in the June 1999 report of the Urban Task Force – the Government will introduce in Budget 2001 a new stamp duty relief for all property transactions in Britain’s most disadvantaged communities to stimulate the property market and encourage urban renewal (see press notice HMT/DETR 2 for further details);
  
  
• the Pre-Budget Report also announces the intention to introduce an accelerated payable tax credit for cleaning up contaminated land; provide immediate tax relief for the costs incurred by property owners in converting redundant space over shops and other commercial premises into flats for letting; introduce a reduced VAT rate for the services of converting residential properties into a different number of dwellings (for example, houses into flats); and adjust the scope of the existing zero rate to cover renovated residential property which has been empty for 10 years or more;
  
  
• the Government will consider the case for providing tax relief for Urban Regeneration Companies, and will be writing to the European Commission today on the scope for reducing VAT on repairs to listed buildings that are used as places of worship (see HMT/DETR 2 for further details); and
  
  
• a new £35 million aggregates Sustainability Fund will deliver environmental benefits to the areas subject to the environmental costs of quarrying.  The Fund will be introduced alongside the aggregates levy in April 2002.  The Government is now holding discussions with the devolved administrations on whether there is scope for setting up a UK-wide Fund with shared objectives that maximise the environmental benefits.

NOTES FOR EDITORS

1.         Customs and Excise will publish a summary of views provided as part of the consultation exercise on the taxation of betting in the UK.  This will be available on its website www.hmce.gov.uk.  Access to the full set of responses can be arranged by contacting Customs and Excise (Gail Kerr, tel: 0161 827 0907). 

HM TREASURY CONTACT POINTS:

Press enquiries:                    020 7270 5238

Non-media enquiries:           020 7270 4558

HM Treasury 2

8 November 2000

MODERNISING INVESTMENT SALES

CAT ISAs and stakeholder pensions could be available through High Street and internet savings supermarkets early next year following liberalisation of marketing rules for some investment products announced today.

The Financial Services Authority (FSA) proposes to modernise the rules about the way some savings and investment products can be sold (polarisation rules). This means that investment advisers currently restricted to selling the products of a single company (tied agents) will be able to offer products from a range of providers.

Welcoming the proposals, Economic Secretary Melanie Johnson said:

“Savers will be the winners from the FSA recommendation to modernise the rules on polarisation. Enabling tied agents to offer a wider range of savings vehicles will pave the way to provide more real choice for consumers and help to encourage the savings habit.

“These proposals work with the grain of market developments. They support Government efforts to promote good value savings products and reflect the introduction of new products, new sales technology, and changing customer expectations. They will also work well with other modernising developments, for example, decision trees for stakeholder pensions, to help improve savings decisions. 

“The proposals will provide the opportunity to develop High Street and internet savings supermarkets and other innovative new ways for savers to get better access to a wider choice of products and advice, provided that the basis of that advice is made clear.

"It means that banks, building societies and insurers, as well as experts or specialists in particular areas, which have only been able to sell their own products will soon be able to offer greater choice of products, or fill gaps in their existing product range.

“This welcome modernisation to meet changing customer needs will encourage responsible financial planning and better serve consumers’ long term interests.”

FSA Chairman Sir Howard Davies has written to the Economic Secretary, setting out his view that the FSA can best deliver its statutory responsibility to improve competition in financial services, while protecting consumers' interests, by updating and modernising its polarisation rules. Melanie Johnson has welcomed the proposals. Copies of both letters are attached. The FSA will now proceed with reform of the rules for marketing savings and investments.

Rules for selling products that have minimum standards or are distributed in a way which helps customer self-selection of investments will be relaxed in the near future. Buyers of CAT standard ISAs, the new stakeholder pensions available from 1 April 2001, and direct offer sales, including fund supermarkets, will be among the first to benefit.   

The FSA also plans to look further at more radical action to modify polarisation rules for other products, alongside a wider review of what customers are told about savings and investments and the people who sell them. The FSA Consumer Panel has said this approach makes sense.

These changes could affect all retail investment products and lead to significant changes in the structure of retail distribution and sales of savings and investment products. This process could - after further consultation - result in new rules being in place in 2002. The FSA proposal to publish next year tables of information about several ranges of retail financial products, including endowment policies, investment bonds, mortgages, personal pensions and pooled fund ISAs, will complement this initiative.

NOTES TO EDITORS

1.         What is polarisation?

Polarisation is a set of rules made by the regulatory authority about the way some savings and investments can be sold. At present, these can only be sold either by tied salesmen (who can only sell the products of a single provider), or by independent financial advisers (IFAs) (who must consider a range of products across the whole retail market to identify the most suitable product for the customer they are advising).

These rules came into effect in 1988 to tackle problems that arose in a much less critical and sophisticated market. The polarisation rules apply to:

• life policies
  
  
• personal pensions
  
  
• collective investment schemes, and investment trust saving schemes whether held in a PEP, ISA or otherwise.

What effect would the FSA proposals have?

Tied agents will if they wish, be able to sell the products of several providers (‘multi-tied’), increasing consumer choice and stimulating competition. But existing IFAs will not be obliged to abandon their independent status under a more liberal regime. This would continue to be recognised and IFAs’ business relationships with their clients, and potential clients, would continue as before.

The FSA’s two stage approach would start with consultations on liberalising  polarisation rules as they apply to stakeholder pensions, CAT standard ISAs, and direct offer sales. The selling rules that apply to other products, such as life insurance and unit trusts, would be considered alongside a wider review of what customers are told about savings and investments and the people who sell them.

What processes are involved?

The report of the Director General of Fair Trading (DGFT) The Rules on the Polarisation of Investment Advice was published on 3^rd August 1999 (OFT press release 29/99). It considered the effect of the polarisation rules on competition in the industry.

The DGFT presented his report to the Chancellor under the Financial Services Act 1986, which allows the Treasury to make a decision in response, if it considers it necessary. The Treasury has not exercised this right as it considers that the FSA=s proposed changes to its regulatory rules would achieve the necessary objectives in promoting consumer protection and enhance competition.

The FSA will, as normal, consult on its proposed rule changes. Once the Financial Services and Markets Act 2000 comes into effect next year, it will be open for the Office of Fair Trading to consider the effects of the new regime, on competition in the market place.

2.         The FSA confirmed it would go ahead with the publication of comparative information tables in June 2000 (FSA press release 73/2000).

3.         Media enquiries should be addressed to Charles Keseru in the Treasury press office on 020 7270 5188.

HM Treasury/DETR 1

8 November 2000

A FAIR DEAL FOR TRANSPORT AND THE ENVIRONMENT

Chancellor Gordon Brown announced today an affordable and targeted series of measures to help modernise road transport and increase choice for access to cheaper motoring for people who need to use their cars, while continuing to protect the environment.

 With the duty freeze, the package for consultation would cut hauliers’ costs by the equivalent of 8 pence per litre in the price of diesel and motorists’ costs by the equivalent of 4 pence per litre in the price of petrol in Budget 2001.

The Deputy Prime Minister, John Prescott said:

"This is a good deal for everyone. We've had to make some tough choices balancing demands to help the transport industry with a need to protect the environment and to help our towns and cities.

"We were asked to listen and we have done just that. But it's no good governments showing special favours to one side or another. The Government's first priority has been to maintain a stable economy. And we are now seeing the benefit of that for the whole country."

The main measures, to be implemented in Budget 2001 are:

·              a cash freeze in all road-fuel and other oil duties - a real terms cut in the price of petrol and diesel of 1½ pence per litre, costing £560 million in 2001-02;

·              conditional on the oil companies guaranteeing nationwide availability, a cut in the duty on Ultra-Low Sulphur Petrol (ULSP) by a further 2 pence widening its differential with standard unleaded petrol to 3 pence per litre.  Ultra-Low Sulphur Petrol can be used in all cars which use unleaded petrol;

·              also conditional on the cut in ULSP, and to maintain the existing balance between the most commonly available diesel and petrol, a 3 pence per litre cut in duty on Ultra-Low Sulphur Diesel (ULSD);

·              an extension of the ‘small’ car threshold for vehicle excise duty (VED) from 1200cc to 1500cc, backdated to 1 November 2000 costing £250 million a year, helping an additional 5.4 million car owners;

·              a 50 per cent cut in, and reform of, VED for lorries, costing £300 million a year - and as a first step in this reform up to £265 million will be available to rebate VED fees for this financial year;

·              abolishing VED on tractors and other agricultural vehicles;

·              support for the haulage industry with a new driver training scheme, and a ring-fenced fund worth £100 million to include incentives or allowances to help modernisation of the vehicle fleet, including introduction of cleaner lorries and new technology.

All these measures, except for the road-fuel and oil duty freeze and the rebate of lorry VED this financial year, are subject to consultation.

Road fuel duties

Fuel duties have played an important role in helping the UK meet its Kyoto target for reducing greenhouse gas emissions.  However the environmental benefits of higher fuel prices must be balanced with the Government’s social and economic objectives.  Recognising the continuing high price of oil since the Budget, and the other measures taken by the Government to tackle climate change, duty on all fuels will be frozen in nominal terms in the next Budget.  This is expected to cost £560 million in 2001-02.

Poor local air quality is responsible for up to 24,000 premature deaths in the UK each year.  ULSP offers real benefits to local air quality and can be used in any car that uses unleaded petrol.  In Budget 2000 the duty was cut by 1 pence from 1 October 2000 and ULSP is now coming on to the market.  Given the environmental benefits, the Government wants to encourage and speed up the take-up of ULSP. 

The Government therefore intends to reduce the duty on ULSP by widening its differential with standard unleaded petrol by a further 2 pence per litre in Budget 2001.  This cut would be conditional on the oil companies guaranteeing nationwide access to its environmental benefits.  In these circumstances, the duty on ULSP would therefore have been cut by a total of 3 pence per litre since Budget 2000.  Reducing the duty on ULSP would cost around £385 million in 2001-02.

Similarly, in these circumstances, the Government believes that it would be appropriate to reconsider the level of duty on the fuel that makes up virtually all diesel sold in the UK, ULSD.  Taking account of the role of diesel in determining the transport costs of British business and since ultra low sulphur fuels offer significant benefits over conventional fuels, the Government would bring the duty rate of ULSD down by 3 pence per litre to maintain the existing balance between duty rates on the most commonly available petrol and diesel.  This would cost £615 million in 2001-02.

In response to arguments that lead replacement petrol is no worse for the environment than unleaded petrol the Government proposes, subject to a full and proper assessment of the environmental implications, to remove the duty premium on lead replacement petrol, a 2 pence cut in duty. 

In the longer term, the challenge will be to ensure that Britain has cleaner, greener road transport.  Today the Chancellor invited industry to develop practical proposals for alternative environmentally-friendly fuels, and will announce major reductions in duty rates for the most promising of these fuels in Budget 2001.

Modernising motor taxation

In addition to the changes in fuel duties the Government is proposing, subject to consultation:

·              extending in Budget 2001 the ‘small car’ threshold for the reduced rate of VED for cars from 1,200cc to 1,500cc, subject to consulting with the motoring organisations.  This will reduce the annual cost of VED by £55 for over 5 million cars, costing around £250 million a year over the next three years, and widening the choice for affordable motoring for people who need a car for their day-to-day life.  Furthermore, the Government intends to backdate this arrangement to November 2000 at a further one-off cost of £100 million;

·              reforming authorised mileage rates from April 2001 to bring benefits to those who use more efficient private cars for business purposes. The Government will be consulting with interested parties on the introduction of a new statutory system from April 2002 which will pay a single mileage rate to all drivers, irrespective of vehicle size.  Interim rates from April 2001 will deliver immediate benefits to drivers of smaller cars - while allowing drivers of larger cars time adjust;

·              introducing a green transport package.  A package of measures to encourage green transport will include removing VAT from the purchase of cycle helmets, increasing the mileage rate paid for cycle use for business trips from 12 pence to 20 pence, introducing a new passenger rate of 2 pence per mile and reducing the size of works buses qualifying for tax exemptions from 12 to nine passenger seats.  This aims to encourage smaller companies to set up Travel Plans to help their employees to travel to work without using their cars.

If the Government introduces all the measures that it is consulting on, including the freeze and reduction in fuel duties, then the total value of this package to motorists will be about £1½ billion, equivalent to a 4 pence cut in duty in real terms.  It will also provide new incentives, offer extra incentives for more environmentally-friendly petrol, and help will be targeted at those who have no alternative to driving.

A modern and competitive haulage industry 

An efficient haulage industry is good news for British industry.  For the haulage industry the Government unveiled a package of measures aimed at tackling the problems the industry faces:

·              it intends to reform lorry Vehicle Excise Duty next year by reducing rates and restructuring its system of bands so as to improve its environmental signals and simplify the system. In total, lorry VED will be cut by around £300 million per year – a cut of over 50 per cent.  A consultation document on the details of these reforms has been published today and the Chancellor will announce the results of the consultation in Budget 2001;

·              the Government intends to implement transitional arrangements as a first stage of this reform.  Up to £265 million will be available to rebate VED fees for this financial year, in keeping with legal constraints.  This will mean cuts of fifty per cent for many of the largest vehicles, worth up to  £4,000 each.  The Department of the Environment, Transport and the Regions will announce, in the next few days, the detailed arrangements for this scheme.  The Government intends that the first payments will be made before the end of the year and all payments before the end of January 2001;

·              the Government intends to introduce some form of user charging, such as a ‘vignette’, intending that no UK hauliers will be adversely affected by this new charge.  This will end the unfairness that UK hauliers face road charges when they work in many other EU countries, but foreign hauliers pay nothing for the damage they do to UK roads;

·              to encourage hauliers to drive newer, cleaner, less-damaging lorries, the Government intends to launch a ring-fenced fund of £100 million to offer further incentives or allowances for scrapping older more polluting lorries or encouraging cleaner lorries and technology.  It will consult the haulage industry on detailed arrangements;

·              the Government will review training in the industry.  More efficient routes, more careful driver training and more efficient use of lorries all improve the efficiency of British industry and often have environmental benefits.

Combined with the general duty freeze and proposed cuts in duty on ULSD, the total value of the package that the Government is now consulting on will be worth £750 million to the haulage industry.  This is equivalent to a cut of 8 pence per litre off fuel duty for hauliers in real terms, but targeted to improve the competitiveness of the industry while ensuring that hauliers have incentives to protect the environment.

Reducing costs for farmers

Subject to consultation the Government will abolish VED on tractors and other similar agricultural vehicles in Budget 2001.  These measures will save the farming industry around £9 million per year, and come on top of other measures that the Government has announced in recent months to support farming.

NOTES FOR EDITORS

Fuel duties and differentials

1.                  In abolishing the fuel duty escalator in the 1999 PBR and Chancellor said that future changes in fuel duty would be taken in the light of the Government’s environmental, economic and social objectives. In Budget 2000, the Chancellor did not increase fuel duties in real terms in light of the increase in oil prices, the lowest increase in fuel duties for eleven years.  Today the Chancellor announced that, taking account of the continued high level of oil prices and the Government’s other measures to tackle climate change, all fuel duties will be frozen in Budget 2001.  This will include non-road fuel duties such as ‘red diesel’.

2.                  The Government has successfully used duty differentials to encourage the take up of cleaner fuels to improve local air quality.  By widening the differential by 3 pence it ensured that the diesel market converted to Ultra Low Sulphur Diesel.   The take up of Ultra-low sulphur diesel is described in the HM Customs and Excise paper ‘Using the fuel system to encourage the take up of cleaner fuels: the experience of Ultra-low sulphur diesel’.

3.                  As announced in the last Budget, the Government introduced a new duty rate on Ultra Low Sulphur Petrol that was 1 pence per litre below the rate on unleaded petrol at the beginning of October.  To encourage the faster take up of Ultra-low Sulphur Petrol, the Government will cut the duty on this fuel by a further 2 pence in Budget 2001, if the oil companies guarantee nationwide access to its environmental benefits.

4.                  Currently Ultra-Low Sulphur Diesel is taxed at the same rate as unleaded petrol.  However if ultra low sulphur petrol becomes the most common form of petrol, the Government will cut the duty on Ultra Low Sulphur Diesel to bring it in line with the duty on Ultra Low Sulphur Petrol, which would require a 3 pence cut. 

Vehicle excise duty for cars

5.                  A reduced VED rate for cars was announced in Budget 1999 for all cars with engines below 1,100cc and introduced on 1 June 1999.  This gave a £55 VED cut to drivers of 1.8 million cars.  Engine size is the best available proxy for measuring the fuel efficiency of existing cars, for which emissions data is unavailable.

6.                  The Road Haulage Forum brings DETR, Treasury and DTI ministers together with individual haulage operators, the Freight Transport Association, the Road Haulage Association and the Transport and General Workers’ Union.

7.                  In Budget 2000 it was announced that the reduced rate would be extended to apply to all existing cars with engines up to 1,200cc from 1 March 2001, giving a £55 cut to an additional 2.2 million small car owners.   In addition there will be a refund of up to £55 for those who owned cars with engine sizes between 1,100cc and 1,200cc in the year before 1 March 2001.

8.                  The Government intends in Budget 2001 to increase the threshold for the reduced rate further to 1,500cc, subject to discussion with motoring organisations.  This increase would be backdated to 1 November 2000.  This will increase the number of cars that qualify for the reduce rate by over 5 million, including 670,000 Ford Escorts, 115,000 VW Polos, 75,000 Honda Civics and 46,000 Mazda 323.  As a result of this increase over a third of existing cars will qualify for the lower rate.

Package for the haulage industry

9.                  The Chancellor announced a review of lorry VED in Budget 98. To inform this, the Government commissioned a consortium of experts to produce a report on lorry track and environmental costs (referred to as the NERA report). This report was published in April 2000.  The Government has decided to consult on proposals for reform that would reduce lorry VED by £300 million per year at the same time as improving its environmental signals and simplifying the system. Further details can be found in the consultation document published today by HM Treasury, ‘Consultation on reform of VED for lorries’. As a transitional first step in this reform, the Government will make available £265 million.  The Government intends that the first payments will be made before the end of the year and all payments before the end of January 2001.

10.             The Government also intends to introduce some form of lorry road-user charging, such as a ‘vignette’, subject to consultation. The main objective of this charge would be to ensure that foreign hauliers contribute towards the road and environmental costs that they impose in the UK. The Government intends that UK hauliers would not pay more as a result of this charge.

11.             The creation of a ring-fenced fund of £100 million to support modernisation in the haulage industry and secure environmental objectives of around £100 million and the review of training programmes for haulage are designed to address specific concerns raised by the industry both in the Road Haulage Forum and bilateral meetings.

12.             Farmers will benefit from lower transport costs due to the freeze and proposed cut in duty on ULSD. In addition to this, the Government proposes that VED on tractors and other similar agricultural vehicles – which is already at the special concessionary rate of £40 per annum – will be abolished, subject to consultation especially with the National Farmers’ Union and the police about ensuring that controls over insurance, maintenance and theft remain. In addition to the benefit farmers will derive from the general measures announced and other measures that have been announced to help farmers, this targeted measure is worth over £9 million to the farming industry.

13.       Media enquiries should be directed to either the Treasury Press Office on 020 7270 4420 or the DETR Press Office on 020 7944 3066.

HM Treasury/DETR 2                                                                                               

8 November 2000

£1 BILLION PACKAGE TO REGENERATE BRITAIN’S TOWNS & CITIES

A comprehensive package of measures worth an accumulative £1 billion over five years was announced today in the Pre-Budget Report to help make Britain’s towns and cities better places to live and work and so stimulate enterprise and employment.

This package underlines the Government’s commitment to creating an urban renaissance.  Enterprise and wealth creation are vital to reviving our towns and cities.

The package represents a substantial response to the recommendations made in Lord Rogers’ Urban Task Force Report Towards an Urban Renaissance. It will go a considerable way towards harnessing the potential of derelict and under-used buildings and sites and bring them back into productive use.

The Government’s proposals will also help boost enterprise and investment in disadvantaged communities, and respond to recommendations to Ronald Cohen’s Social Investment Task Force report Enterprising Communities: Wealth Beyond Welfare.

Welcoming the announcement, the Deputy Prime Minister, John Prescott, said:

“This package of measures is a major step forward in bringing about an urban renaissance.  It demonstrates the Government’s commitment and determination to regenerate Britain’s towns and cities and, in particular, ensure that our most disadvantaged communities’ benefit. 

“It will form an important part of our strategy for supporting the growth and development of towns and cities in England which we will be setting out shortly in our Urban White Paper.”

The Paymaster General, Dawn Primarolo, said:

“These targeted tax cuts complement and build on the measures we have already put in place to revive our most disadvantaged communities.  The benefits of growth and development are shared by all our communities, regenerating our towns and cities whilst managing pressure for development in our rural communities.”

The Government plans to introduce a number of measures in Budget 2001 in response to the Urban Task Force report:

·                    Stamp duty exemption for disadvantaged communities

            Stamp duty will be abolished for all property transactions in Britain’s most disadvantaged communities to stimulate the property market and encourage urban renewal.

·                    Accelerated payable tax credits for cleaning up contaminated land

            Giving property investors immediate tax relief for their clean-up costs - instead of having to wait until the land is sold - will make more projects to regenerate derelict sites more viable for the benefit of local residents and businesses, will help address the legacy of the past and reduce the pressure on greenfield sites.

·                    100 per cent capital allowances for creating ‘flats over shops’ for letting

            Immediate tax relief to property owners for the costs of converting redundant space over shops into flats for letting, encouraging better use of the vacant and under-utilised space above shops and other commercial premises, and helping to bring more life into commercial districts.

·                    VAT reform to encourage additional conversion of properties for residential use

            A package of VAT measures to encourage the creation of additional homes.  This will involve cutting the VAT rate to 5 per cent for residential conversions and removing the VAT burden on developers renovating and selling houses which have been empty for at least 10 years. These steps will help encourage the redevelopment and re-use of buildings, helping to reduce pressure for greenfield development as well as improving the urban environment for local residents.

The Government will also:

·                    monitor the development of Urban Regeneration Companies (URCs) and keep under review the case for how a tax relief might help.

·                    explore with the European Commission the scope for reducing VAT for listed buildings that are places of worship to help restore our national heritage.

In addition, the Government’s Modernising Local Government Finance: A Green Paper is consulting on a number of local fiscal measures including:

·                    rate relief for small businesses which would apply throughout England;

·                    the introduction of a supplementary business rate as one option for funding Town Improvement Schemes; and

·                    the introduction of a Local Tax Reinvestment programme allowing local authorities to retain additional council tax and business rate income resulting from successful regeneration.

The Government welcomes Ronald Cohen’s report and in response will:

·                    work closely with the venture capital industry and others on setting up the first Community Development Venture Fund;

·                    encourage banks to disclose their individual lending activities to businesses in under-invested areas;

·                    work with the Charity Commission to encourage the role of charities in community development finance;

·                    continue to play an active role in support of Community Development Financial Institutions and consider how to take forward the proposal for a “champion” for community development finance; and

·                    consult widely on the proposal for a new Community Investment Tax Credit, designed to encourage private investment in both not-for-profit and profit-seeking enterprises in under-invested communities.

The Government will also:

·                    fund the Regional Development Agencies to develop City Growth Strategies. These will help cities build on their often-overlooked competitive advantages and expand their existing business base; and

·                    sponsor with the private sector the Inner City 25, which will showcase some of the fastest growing, unquoted companies in our most under-invested inner-city areas.  Like the Inner City 100 in the United States, this will demonstrate in a very powerful way that inner-city locations can offer real opportunities for business growth.

 
NOTES FOR EDITORS

1.         The Urban Task Force, chaired by Lord Rogers, published its report Towards an Urban Renaissance in summer 1999. The Task Force made 105 recommendations aimed at reversing urban decline and attracting people back into cities, towns and urban neighbourhoods.

2.         The Pre-Budget Report announcements make significant progress in responding to the recommendations made in the report. A formal response to Lord Rogers’ recommendations will be made in the Urban White Paper, which will be published shortly.

3.         Several elements of the urban regeneration package will require EU State Aids clearance, and the appropriate applications will be made to the European Commission in due course.

4.         The Social Investment Task Force, chaired by Ronald Cohen, published its report Enterprising Communities: Wealth Beyond Welfare, in October 2000.  The report recommended that the Government puts in place a new strategy aimed at stimulating enterprise and wealth creation in under-invested communities, in particular by developing a more robust community development finance sector in the UK.  The report can be found on the internet: www.enterprising-communities.org.uk.

5.         Media enquiries should be directed to the Treasury Press Office on 0207 270 4420 or the DETR Press Office on 020 7944 3044.

Inland Revenue 1

8 November 2000                                                                                                                          

INCOME TAX ALLOWANCES AND NATIONAL INSURANCE CONTRIBUTIONS

As part of a package of measures for pensioners, the Chancellor also announced that age-related tax allowances for 2001-02 will be increased in line with indexation.  And, to accompany the introduction of the Pension Credit from 2003, the Chancellor announced proposals, subject to consultation, to increase the personal allowances for people aged 65 or more by £240 over indexation in 2003-04.  Those new levels of allowance would then be uprated each year for the remainder of the next Parliament by reference to the rise in earnings.

National Insurance

The March 1999 Budget announced a package of National Insurance reforms designed to improve work incentives for employees and reduce burdens on employers. As part of this package, the starting point for employees' National Insurance contributions (NICs) will be aligned with that for employers and the income tax personal allowance from April 2001. This means that the starting point for both employees’ and employers' NICs in 2001-02 will also be £87 a week.


DETAILS

To simplify the tax system for older taxpayers, the Chancellor has decided to announce the levels of age-related tax allowances for 2001-02 and 2002-03 in his pre-Budget reports.  So he announced today that the age-related allowances and the income limit for 2001-02 will rise by indexation.  The personal allowance for someone aged 65 to 74 will rise by £200 to £5,990 and the allowance for someone aged 75 or more by £210 to £6,260.  The 2001-02 levels of age-related allowances, and the income limit, are set out in Annex 1. 

For 2003-04, as part of a package of tax and benefit reform designed to bring the two systems closer together, the Chancellor has announced proposals to raise the personal tax allowances for people aged 65 or more by £240 over and above indexation.  On current forecasts, that would mean the allowance for someone aged 65 to 74 rose to £6,560 and that for someone aged 75 or more to £6,850.  A basic rate taxpayer with income below the income limit would gain £1 a week from the increase and over 3 million people would benefit.  For the remainder of the next Parliament, the age-related personal allowances would then rise each year by reference to the increase in earnings rather than prices. 

National Insurance

The Paymaster General, Dawn Primarolo MP, announced the following changes to National Insurance Contributions today.

For employers and employees:

·        In line with the Social Security Contributions and Benefits Act 1992, the Lower Earnings Limit for primary Class 1 contributions is to be raised to £72 a week. It is set at the level of the basic Retirement Pension for a single person from April 2001 and rounded down to the nearest pound.

·        The Primary Threshold for primary Class 1 contributions will be aligned with the Secondary Threshold for secondary Class 1 contributions and the weekly amount of the income tax personal allowance at £87 a week. This means that no tax or Class 1 contributions will actually be paid on earnings below this level.

·        In line with the Chancellor’s announcement in the 1999 Budget, the Upper Earnings Limit for primary Class 1 contributions will be raised to £575 a week to ensure a fair base of earnings liable to such contributions.

·        The rate of secondary Class 1 contributions payable by all employers is to be reduced by 0.3 per cent, from 12.2 per cent to 11.9 per cent.

For the self-employed:

·        The rate of Class 2 contributions is to remain at £2 a week.

·        Self-employed people with earnings below the annual Small Earnings Exception can apply to be exempted from paying Class 2 contributions. This limit will be raised by £130 to £3,955.

·        The annual lower and upper profits limits for liability to Class 4 contributions will be raised respectively by £150 to £4,535 (in line with the income tax personal allowance) and by £2,080 to £29,900, to maintain the link with employees’ earnings liable to Class 1 contributions and ensure a fair base for contributions by the self-employed.

For those paying voluntary contributions:

·        The rate of Class 3 voluntary contributions will be increased by 20 pence to £6.75 a week.

For share fishermen:

·        The special rate of Class 2 contributions, which allows them to build entitlement to contributory Jobseekers’ Allowance in addition to the other contributory benefits available to the self-employed, will remain at £2.65 a week.

For Volunteer Development Workers:

·        The special rate of Class 2 contributions which entitles them to the full range of contributory benefits, will be increased by 25 pence to £3.60 in line with the statutory formula of 5 per cent of the primary Class 1 Lower Earnings Limit.

Although benefit expenditure from the National Insurance Fund will broadly match income, a prudent working balance throughout the coming year needs to be maintained. In accordance with section 2(2) of the Social Security Act 1993, the maximum Treasury Grant which may be made available to the Fund in 2001-02 shall not exceed 2 per cent of the estimated benefit expenditure for that year. Similar provision will be made in respect of the Northern Ireland National Insurance Fund.  A draft re-rating order, accompanied by a report by the Government Actuary, will be laid before Parliament in due course.

A table which sets out the rates, earnings limits and thresholds for National Insurance Contributions proposed for 2001-02 is attached in Annex 2.


NOTES FOR EDITORS

1.      The announcement today confirms that the personal allowance, the age-related allowances and the income limit will be increased next year in line with statutory indexation.  Income tax allowances are uprated each year in line with indexation unless legislation is passed to override its effects. Statutory indexation is based on changes to the Retail Prices Index in the year to September, so this early announcement does not affect the amount of the increase.  A statutory instrument has been laid today in the usual way, confirming the effect of indexation on the personal allowance, age-related allowances and the income limit for 2001-02.

2.     Estimates of the yield of National Insurance Contributions will be included in the Government Actuary’s report on the draft of the Social Security (Contributions) (Re-rating and National Insurance Funds Payments) Order which will be laid before Parliament as usual.

3.    More information on the measures proposed for pensioners can be found in the consultative document issued today by the Secretary of State for Social Security (The Pension Credit. A Consultation Paper.)


INLAND REVENUE PRESS OFFICE

Media enquiries to:               020 7438-6692 / 6706 / 7327

                                      Out of hours: 07860 359544)                                 

Non-media enquiries to:     020-7438-6420 / 6425 (office hours only)

Internet site: www.inlandrevenue.gov.uk

PRESS RELEASE ANNEX 1

Income Tax Personal and Age-related Allowances 2001-02

* Married couple’s allowance given at the rate of 10%.

PRESS RELEASE ANNEX 2

National Insurance Contributions

Inland Revenue 2

New measures to encourage more employees to take a stake in their company were announced by the Chancellor today.

The three measures, which will boost productivity by increasing employee commitment to growth in the enterprises where they work, will:

· help more employees benefit from the generous business assets rate of taper relief from capital gains tax when they sell their shares. Business assets taper relief is, subject to consultation, to be made available from April 2000 to employees of a range of non‑trading companies, alongside employees of trading companies who are already eligible;.

·  expand the Enterprise Management Incentives so that smaller businesses can make more flexible use of the benefits in a way best suited to their needs, to help recruit and retain a wider range of staff they need to help grow the company; and

·  address the uncertainty regarding unpredictable National Insurance liabilities on the growth in value of some employee share options that were granted to employees between 6 April 1999 and 19 May 2000.  Legislation will be brought forward to allow companies to settle these liabilities rather than having them continue to accrue.


DETAILS

Capital gains tax taper relief

1.      The measure will simplify the tax system and reduce compliance costs.  Employee shareholders will no longer always have to consider whether the company where they work is trading. As a result, many companies, in particular listed companies, will no longer have to address this question on behalf of their employees.

2.      Employees, including part-time employees, of the company in which they hold shares (or of any company in the group) will qualify.   Officers of a company are at present treated in the same way as employees and this will continue.

3.      The new definition of business assets will apply to disposals on or after 6 April 2000, and to periods of ownership from 6 April 2000, thus coinciding with the changes announced in Budget 2000. Where shares qualify as business assets only from that date, an apportionment of the eventual gain will be necessary so that part qualifies for business asset taper and the balance for non-business asset taper.  The apportionment will be carried out under existing rules.

4.      The introduction of the new measure will be subject to suitable revenue protection. Rules will be needed to prevent people obtaining an unfair tax advantage by securitising their personal assets in companies of which they are directors or employees. One option would be to continue to require close companies to be trading if shares in them are to qualify as business assets. The Inland Revenue will consult on the rules to set in place to achieve this protection.

5.      Comments on the proposal generally, the rules to prevent exploitation and the  extent of the compliance cost savings will be welcome and should be sent by 13 December 2000 to:

mal.thomas@ir.gsi.gov.uk

6.      Further details are likely to be announced in the Budget 2001. Subject to the outcome of consultation, the Government intends to include the measure in the Finance Bill 2001.

Enterprise Management Incentives

7.      At present, 15 key employees can each be granted options over shares worth up to £100,000.  So companies are allowed to grant EMI options over a maximum of £1.5 million of their shares at any one time. 

8.      Many of the smaller higher risk companies that can use EMI have said that the limit of 15 employees is not flexible enough for their type of business, because share options are important to attract larger numbers of highly skilled workers.  The Government is keen for these smaller enterprises to be able to use EMI in the way that will best meet their business needs. 

9.      The Government will, subject to consultation, abolish the limit on the number of employeesand replace it with a limit on the total value of shares under EMI option which would be raised from its current £1.5 million to £2.5 million per company.  This will help eligible smaller higher risk companies to recruit the staff they need to help them achieve their growth potential.

10. The Inland Revenue will consult on what exact changes are needed to achieve the Government’s objectives.  Comments on the proposed changes are welcome and should be sent by 13 December to:

Richard Lambert
Inland Revenue
Capital and Savings
Room 138
New Wing
Somerset House
Strand
London WC2R 1LB.

Richard.V.Lambert@ir.gsi.gov.uk

11. Further details are likely to be announced in the Budget 2001. Subject to the outcome of consultation, the Government intends to include the measure in the next Finance Bill.

National Insurance on Share Options

12. National Insurance Contributions are charged on gains arising when share options are exercised outside an Inland Revenue approved scheme if the shares are readily convertible into cash. While employers can plan for NICs on regular pay, it is not as easy for them to plan for NICs on share options, particularly where the share price is volatile.

13. Legislation was introduced this summer to allow employees to agree that they will pay the employer’s NIC when they make a gain on their share options.  However, some companies have said that they cannot make such agreements with their employees if an option has already been awarded.

14. To help companies that granted options after 6 April 1999 legislation will be introduced at the earliest opportunity to limit the amount of the NIC payable on options granted between 6 April 1999 and 19 May 2000. The liability will be limited to the gain attributable to the growth in company share price up to 7 November 2000. 


NOTES FOR EDITORS

Capital gains tax taper relief

15. Capital Gains Tax (CGT) taper relief was introduced in the Finance Act 1998. The relief reduces the amount of a capital gain that is charged to tax on the disposal of an asset; the reduction increases the longer the asset has been held after 5 April 1998. Taper relief applies to the capital gains of individuals, trusts and the personal representatives of deceased persons, but not to the capital gains of companies.

16. Different tapers apply to business assets and non-business assets.  The taper reduces the effective CGT rates for a higher rate CGT payer from 40 per cent to 10 per cent for business assets and from 40 per cent to 24 per cent for non-business assets.

17. The Finance Act 2000 broadened the range of assets that qualify as business assets with effect from 6 April 2000. Business assets now include:

·       shares owned by employees and officers in a trading company where they work;

·       shares in unlisted trading companies; and

·       shares in listed trading companies provided that the individual controls not less than 5 per cent of the voting rights.

18. Most businesses are treated as trading, but investment companies and property investment companies are not. Companies that are mainly trading, but that have more than an insubstantial amount of non‑trading activities are also not treated as trading.

19. There will be no change to the requirement for shares held by non‑employee shareholders to be in trading companies in order to qualify as business assets.

20. Taxpayers will benefit from the relief on disposals of assets when they calculate their CGT liability under self‑assessment. The April 2001 Helpsheet IR 279 Taper Relief will include information about the proposals, and a revised version will be issued after the next Finance Bill has received Royal Assent.  These helpsheets will be available on the Inland Revenue’s website (www.inlandrevenue.gov.uk) and from the Orderline on 0845 9000 404.

21. Close companies are defined in legislation. Close companies include companies that are controlled by five or fewer people.

Enterprise Management Incentives

22. Enterprise Management Incentives were introduced in Finance Act 2000 after a successful period of consultation. The incentives are proving to be popular.   The Inland Revenue has been notified that more than 100  companies have awarded EMI options to over 530 employees up to the end of October.

23. EMI share options can be granted by trading companies with gross assets of no more than  £15m.  This size limit is the same as used for other tax incentives aimed at encouraging equity investment in small, higher-risk unquoted trading companies; the Enterprise Investment Scheme, Venture Capital Trusts, and the Corporate Venturing Scheme.

24. Currently under EMI, companies can grant up to £100,000 worth of share options to each of 15 key employees, effectively limiting the total value to £1.5 million per company.  The options are normally free of Income Tax and National Insurance charges. When the shares are sold, capital gains tax taper relief normally starts from the date the options were granted.

National Insurance Contributions

25. Since 6 April 1999 National Insurance has been payable by both employer and employee on the gains arising when share options are exercised outside an Inland Revenue approved scheme and where the shares are readily convertible into cash.

26. Companies with very volatile share prices expressed concern that their exposure to an unpredictable NICs liability on unapproved share options could endanger their investment strategies and damage their future growth by deterring investors. Legislation was  introduced on 28 July in the Child Support, Pensions and Social Security Act 2000 to allow the employee to bear the employer’s NIC on share option gains, and changes in Finance Act 2000 gave employees tax relief for any of the employer’s NICs that they paid against the taxable gain on the share option.

INLAND REVENUE PRESS OFFICE

Media enquiries to:               020 7438 6692/6706/7327

(Out of hours: 07860 359544)

Non-media enquiries to:       020 7438 6420/6425

(Office hours only)

Inland Revenue 3

8 November 2000


ENCOURAGING BRITAIN TO SAVE


Measures to build on the success of Individual Savings Accounts (ISAs) were announced today by the Chancellor of the Exchequer.

These include:

• extending the current ISA £7,000 contribution limit (including up to £3,000 in cash) for a further five years until April  2006;
  
  
• allowing 16 and 17 year olds to open a cash ISA;

• extending ISA rules on investments, transfers and administrative procedures to PEPs, benefiting around 5½ million investors.     

Welcoming these announcements, the Economic Secretary Melanie Johnson said:

“ISAs are a continuing major savings success story. Last year, more than £28 billion was paid into over 9 million accounts – a third more than was invested in TESSAs and PEPs during their last, and most successful, year. In the first three months of this year, more than £9 billion has already been paid into over 5 million accounts.

“CAT-standard ISAs have achieved value for money by setting an interest rate floor for cash ISAs and a cap on charges for equity ISAs.  In the first year, a typical saver investing £3,000 a year in an equity ISA would have paid £35 less in charges than someone investing in a non-CAT ISA.

“We want to build on this success. Keeping the higher contribution limit for five more years will enable ISA-holders to continue to save more tax-free.

“Allowing 16 and 17 year olds to open a cash ISA extends the opportunity for tax-free saving to 100,000 under-18s who work and pay tax. This will build on our proposals to encourage financial literacy in the classroom by letting young people begin to save tax-free if they leave school and start work.”

The Inland Revenue and Treasury today announced a number of findings that illustrate the success of ISAs. These include:

• survey results showing that ISAs attract relatively more low-income and younger savers than TESSAs or PEPs; and

• a summary of independent research by McKinsey and Co on the effect of introducing benchmark standards for ISAs’ Charges, Access and Terms (CAT standards). 

Further details of these and the changes to ISA rules are set out below.

A separate Treasury paper, Helping People to Save, published alongside the Pre-Budget Report describes the Government’s strategy for encouraging personal saving, the steps taken so far and the way ahead to encourage saving among low and middle-earners.


DETAILS

ISA savings limits

1.         For the tax year 2000-01 savers can subscribe up to £7,000 overall, of which no more than £3,000 may go into cash and £1,000 into life insurance. This limit was to reduce for 2001-02 to an overall £5,000, of which no more than £1,000 could go into cash and £1,000 into life insurance.  This planned decrease in the limits will not now take place. Instead the overall £7,000 limit, and £3,000 limit for cash, will be retained until April 2006.                                                  

2.         In the first year of ISAs (1999-00) over £28.4 billion was paid into nearly 9.3 million accounts. 

3.         During the first quarter of ISAs’ second year (6 April 2000 to 5 July 2000) over £9.1 billion was paid into over 5.2 million accounts.  This exceeds the £7.3 billion paid into 3.5 million accounts in the comparable quarter (6 April 1999 to 5 July 1999) last year.

4.         The ISA take-up figures for the first quarter of 2000-01 show that:

·        over £4.9 billion was paid into mini ISAs including

- over £4.5 billion into cash        

- nearly £360 million into stocks and shares

            - £30 million into life insurance;

·        over £4.2 billion paid into maxi ISAs including

            - nearly £4 billion into stocks and shares

            - over £220 million into cash

            - £5 million into life insurance.

Incompatible ISAs 

5.            Investors who want to take out an ISA have the choice each year of one maxi ISA with a single manager for all ISA savings or up to three mini ISAs with different managers for different kinds of savings (cash, stocks and shares and life insurance).    

6.         The Inland Revenue’s initial analysis of annual returns from ISA managers for ISAs’ first year (1999-00) shows that around 99 per cent of investors did not take out more ISAs than they were entitled to. The Inland Revenue have identified around 85,000 investors who may have taken out incompatible ISAs.  Where it is established that such an ISA has been taken out and the investor is not entitled to the tax relief, the usual compliance rules for tax-relieved savings schemes will apply.

7.         All ISA application forms are required clearly to set out the rules which apply and should draw applicants’ attention to them.  All forms ask the investor to make a declaration that no other incompatible accounts have already been opened, for example that they cannot have a maxi and mini account in the same tax year.

8.         In addition each investor is sent a notice by their ISA manager near the end of the tax year telling them what type of ISA they have, and reminding them of the ISA rules.  This should help prevent ISA investors who made a mistake in the first year of ISAs from making the same mistake in the second year.

Research on ISAs

9.         An analysis of NOP Financial Research Survey for 1999-00 shows that ISAs have succeeded in attracting relatively more low-income and younger savers than TESSAs or PEPs.  More than a quarter of mini cash ISAs have been taken out by people with household incomes less than £11,500 per year, compared to around one in five TESSAs and one in six PEPs.  More than one in five mini cash ISAs have been taken out by people under 35, compared to one in six PEPs and TESSAs.  Also, more of the benefit of tax-free saving in ISAs goes to low-income and younger savers than was the case with TESSAs and PEPs, as they hold a higher proportion of ISA savings. 

10.            McKinsey & Co were commissioned by the Treasury to research the ISA market. Their study, which covered over half the market, found that half of all ISA funds under management are in CAT-standard funds, including over £1 billion in CAT-standard equity ISAs.

11.       Just over a third of CAT-standard equity funds in the study were actively managed rather than being run as tracker funds, showing that the fear that active management would be impossible within the 1 per cent charge cap was unfounded. And just over two thirds of that investment was made directly by savers showing that Investors have bought CAT-standard with confidence. CAT standards have also driven down costs - charges for CAT ISAs invested in Unit Trusts are roughly half the cost of non-CAT equivalents.

12.       The study confirms that ISAs are saver-friendly in other ways. ISAs are accessible to savers because CAT standards for minimum investments have been equalled and exceeded. The CAT standard for cash ISAs allows a minimum contribution of £10, but in practice the lowest regular saving limit is £1. When savers want to get at their money there are no long lock-ins for CAT cash ISAs and the overwhelming majority of cash ISAs are on instant or seven day access.

Changes being made following the review of the operation of ISAs

13.       Young people aged 16 and 17 will be able to take out a cash ISA from 6 April 2001. They will be able to subscribe to either a cash mini ISA or the cash component of a maxi ISA.  The contribution limits will the same as for cash ISAs held by those aged 18 and over (i.e. £3,000 a year until April 2006).  It is envisaged that a 16 or 17 year old will be able to continue to subscribe to his or her ISA, once he or she reaches 18, without having to make a new application for an ISA.

• there will no longer be a distinction between general and single company PEPs and all PEPs will follow the same rules.  Investors will be able to merge their existing general and single company PEPs if they wish ;
  
  
• investments which qualify for inclusion in PEPs will be the same as the less-restrictive range which can be included in ISAs. This means that PEP investors will, in the future, be able to invest in the listed shares of companies based anywhere in the world.  They will also have access to a wider range of investment funds, corporate bonds and gilts ;
  
  
• investors will be able to transfer part of a PEP to another PEP manager, and not just a whole PEP as at present ;
  
  
• PEP investors will no longer have to make a written request to their PEP manager to withdraw funds.  In future, they will be able to do this by telephone, fax or internet if they wish.

   

  NOTES FOR EDITORS

  Incompatible ISAs

  18.       As part of the compliance procedures the Inland Revenue will contact the ISA manager with whom the investor’s second ISA account is opened.  If this ISA account does turn out to be an incompatible ISA, the manager will close it down, returning investments to the investor.  The manager must also repay to the Inland Revenue any tax relief given in error.  Income and capital gains from the investment are taxable, and the manager will advise the investor what he or she needs to do about informing his or her tax office.
  
  19.       Investors who suspect that they may have an incompatible ISA should contact their ISA manager for guidance or can telephone the Inland Revenue’s ISA helpline – number 0845 604 1701.

  Review of the operation of ISAs

  20.       The review of the operation of ISAs was announced in the Budget this year, and began work in April 2000 after ISAs’ first full year. Responses have been received from a wide variety of respondents  - 12 savings industry representative bodies and consumer groups, 23 individual ISA providers and independent financial advisers, and six other respondents.  The review also involved discussions between the Revenue and some of the representative bodies and providers.

  Costs

  21.       The cost of retaining the existing £7,000 ISA contribution limit of £7,000 (£3,000 limit for cash and £1,000 for life insurance) until 5 April 2006 will be £20 million in the first year rising to £275 million a year after six years.  Extending ISAs to 16 and 17 year olds will have negligible costs. The costs of aligning the PEP and ISA rules are also expected to be negligible.

  Consultation on draft regulations

  22.       The Inland Revenue will publish draft regulations to implement the proposed changes to the ISA and PEP rules for consultation shortly, and is also considering any regulatory impact that the changes may have. (The regulations referred to in para 13 above, on Crest Depository Interest, will not be included in the consultation.)

  ISAs for 16 and 17 year olds

  23.       Section 660B of the settlements legislation in Part XV of Income and Corporation Taxes Act 1988 will apply to ISAs for 16 and 17 year olds, as it currently applies to other savings accounts for minors.  As a result, if a parent gives their child funds to invest in an ISA, and the investment income arising on all gifts from that parent to their child in the year exceeds £100, then all the investment income will be treated as the parents’ for tax purposes. Even though the income arises in an ISA, it will be taxable and the parent should report the income to their tax office.

  ISAs

  24.       ISAs were introduced from 6 April 1999.  Individuals who are both resident and ordinarily resident in the UK for tax purposes and are aged 18 or over (or from April 2001, 16 or over) can subscribe to an ISA.    Returns from ISA investments are free of income tax and capital gains tax and in addition a 10 per cent tax credit is paid on dividends from UK equities until 5 April 2004.  There is no lock-in and no minimum contribution.

  25.       An ISA can include three components: cash (including National Savings), stocks and shares and life insurance.  Husbands and wives have their own contribution limits.  Savers can subscribe each year to either one maxi ISA (which must offer a stocks and shares component and can have either or both of the other two components), or up to three mini ISAs, one for each component. Investors with matured TESSAs can also take out a TESSA-only ISA.

  PEPs

  26.       PEPs currently comprise general PEPs, which can include a range of authorised unit and investment trusts, UK and EU listed shares and UK corporate bonds, and single company PEPs which invest in the shares of one company.  No further contributions could be made to PEPs after 5 April 1999, but existing PEPs at that date can continue under their existing rules, and receive the same tax reliefs as ISAs.

   

  INLAND REVENUE PRESS OFFICE

  Media enquiries to:                        020 7438 6692/6706/7327

                                                              (Out of hours: 07860 359544)

  Non-media enquiries to:                        020 7438 6420/6425

                                                              (Office hours only)

  www.inlandrevenue.gov.uk

  
  

  Individual savings accounts

¹  Provisional.

Notes:

(a)     Totals may not equal the sum of the individual components due to rounding.

(b)     Average contributions are rounded to the nearest £10.

Inland Revenue 4

8 November 2000


MODERNISING STAMP DUTY

The new system for electronic conveyancing came one step closer today as the Government announced the introduction of legislation in the next Finance Bill to modernise the stamp duty rules to deal with electronic transfers of land and buildings. 

The Electronic Communications Act, which came into force earlier this year, will remove the need for transactions in land and buildings to be on paper. 

The change will help to modernise the tax system and underlines the Government’s firm commitment to removing legislative barriers to electronic dealings with government


DETAILS

The Stamp Duty charge on land transactions currently depends on the existence of paper documents.  Under the Electronic Communications Act, the legal requirement for certain transactions to be on paper will be removed.  In parallel with developments by the Land Registries of England, Scotland and Northern Ireland, this means that it will be possible for land to be transferred electronically.

Stamp Duty Reserve Tax, which applies to shares, is already accounted for and collected electronically and provides a recent precedent for modernising Stamp Duty on land and buildings.

As part of the design process for the modernised legislation the Inland Revenue intends to set up a Technical Advisory Group (TAG).  The TAG will consist of representatives from the Revenue, other government departments and external organisations.  With the assistance of the TAG it is intended that draft clauses will be published before Budget 2001 to allow time for detailed comment before the Finance Bill.

The Electronic Communications Act came into force on 25 May 2000.

Stamp Duty Reserve Tax was introduced in 1986 to deal with the electronic trading and settling of shares. It replaces Stamp Duty where the transfer is completed electronically.

INLAND REVENUE PRESS OFFICE

Media enquiries to:               020 7438 6692 / 6706 / 7327

                                                (Out of hours: 07860 359544)

Non-media enquiries to:       020 7438 6420 / 6425

                                                (Office hours only)

Inland Revenue information is on the Internet:

www.inlandrevenue.gov.uk

Inland Revenue 5

8 November 2000


A MORE COMPETITIVE ENVIRONMENT FOR BUSINESS

Enhancements to the competitiveness of the UK’s tax system were announced by the Chancellor today, providing a modern environment in which businesses can thrive. The package, which is subject to consultation:

• Removes out-dated requirements for companies to withhold tax on most intra-UK interest and royalty payments, simplifying the administration for payers and avoiding cash flow issues for the recipients.  This should help .to enhance competition in the financial services sector;
  
  
• Builds on the work undertaken since Budget by the Inland Revenue, together with business, to launch the next stage in the reform of the taxation of intellectual property, goodwill and other intangible assets;
  
  
• Expands the scope of the consultation on the taxation of disposals of substantial shareholdings, to consider the issues surrounding a deferral relief regime in more detail and, as part of a wider discussion on competitiveness, whether alternative approaches, including the possibility of a form ofexemption regime, might be appropriate; and
  
  
• Extends the on-shore pooling rules for Double Taxation Relief to allow relief for rates of foreign tax paid up to 45 per cent even if these arise at several levels in a chain of companies overseas.
  
  In addition to these measures, the Government is also looking to:
  
  
• Simplify and modernise the legislation concerning corporate debt, financial instruments and foreign exchange gains and losses;
  
  
• Clarify the tax treatment for the new Limited Liability Partnerships (LLPs);
  
  
• Adjust and simplify the calculation of foreign tax for Double Taxation Relief purposes, so that it applies in all cases as originally intended; and.
  
  
• Clarify the changes to the treatment of capital gains of companies introduced in this year’s Finance Act.
  
  
• Draft clauses for a number of the measures are being published today. Appropriate legislation for these measures will be introduced in the next Finance Bill.

Withholding tax on interest and royalty payments

The Government intends to abolish the requirement to deduct tax at source from most payments of interest or royalties between companies where the recipient company is within the charge to corporation tax on that income. This simplification builds on the Budget 2000 announcement to abolish withholding on international bond interest and the consultation on the taxation of intellectual property.  This change would mean that from 1 April 2001 the paying company would no longer need to deduct tax from most interest or royalties paid to such a company.

Mechanics

For interest or royalties to be paid gross, the paying company will need to be satisfied that the recipient is within the charge to UK corporation tax.  The Government is anxious to minimise the compliance burden on companies making such payments, whilst ensuring that gross payments are only made in appropriate circumstances.  Views would be welcome on the detail of procedures that the paying company would need to follow when making gross payments.

One possible approach would be to allow a paying company not to deduct tax where it had reasonable grounds for believing that the recipient company was within the charge to corporation tax (e.g. if the recipient company had an address in the UK).  But in certain circumstances (e.g. when payment is made to a nominee, whether or not in the UK) the paying company might decide to require further information before paying without deduction at source.

If it later turned out that the recipient company was not within the charge to corporation tax, the paying company would be liable to pay the tax that should have been withheld, with interest.  However, penalties would not be charged unless it should at the time have been clear to the paying company that the recipient company was unlikely to be within the charge to corporation tax.

Comments are invited on whether this approach would be acceptable or whether a different system might be preferable. For example, there would be less scope for uncertainty if precise rules set out the evidence  which companies should require to decide when tax should or should not be withheld, but this approach might seem inflexible.

Comments on the proposed changes are welcome.  Please e-mail them to guy.hooper@ir.gsi.gov.uk or alternatively send them [by 20 December 2000 to:

Guy Hooper

Inland Revenue
Business Tax
Room S 23, West Wing
Somerset House
Strand
London  WC2R 1LB

Intellectual property, goodwill and other intangible assets

The Inland Revenue published a Technical Note on 23 June 2000 setting out the options for reform in this area, and over 80 responses were received.

The consultations showed that there was considerable support for the aims of the Review, but also identified some issues which needed to be addressed.  The Inland Revenue is today publishing a further  Technical Note which sets out in more detail how a new regime might operate.

The new Note, 'Reform of the taxation of intellectual property, goodwill and other intangible assets: the next stage' may be downloaded from the Inland Revenue website www.inlandrevenue.gov.uk or obtained by post from:

Inland Revenue
Business Tax
Room 312
22 Kingsway
London

WC2B 6NR

The note considers firmer options for taking the reform forward, in the light of the responses received. It discusses the scope of the reform, considers how an accounts based reform would work in practice and looks at options for transition to the new regime.

Comments are invited on the note.  They should be sent to Jon Sherman at the address above by 20 December or emailed to jon.sherman@ir.gsi.gov.uk.  Earlier comments will be very welcome.

Groups of companies: group leaving charges and value shifting for inheritance tax (IHT)

Sections 101 and 102 of and Schedule 29 to Finance Act 2000 introduced wide- ranging changes to the rules for groups of companies.  Transitional provisions for the charge on a company leaving a group where an asset has been transferred within the group prior to 1 April 2000 were included in Schedule 29.  It has been argued they do not cover all the situations they had been designed to do.  This has led to uncertainty for taxpayers.

New rules will ensure there is no charge where there is:

• a transfer of an asset within a group prior to 1 April 2000 and subsequently the transferee company leaves the UK part of the group but remains within the worldwide group, or
  
  
• a transfer of an asset prior to 1 April 2000 within a UK group, and the principal UK company subsequently leaves the worldwide group along with its subsidiaries, but without the subsidiary that made the transfer.

Finally as consequence of the elective regime for intra group transfers introduced in section 101 a small change is required to the Inheritance Tax Act 1984 to ensure that a disposal following such an election does not trigger IHT value shifting rules.

NOTES FOR EDITORS

Abolition of withholding tax

Tax deduction at source is required when interest or certain royalty payments are made from one company to another, unless either both companies are in the same group and covered by a group income election or interest is paid to a bank.  This obligation ensures that the Exchequer receives the tax, but it also imposes an administrative burden on the payer who has to deduct the tax and pay it to the Inland Revenue under the quarterly payment arrangements.  Similarly, the receiving company may face the administrative burden of having to reclaim the tax if it cannot set it against a corporation tax liability.  The Budget 2000 Budget Note REVBN2J announced the abolition of the tax rules for financial institutions which act as Paying and Collecting Agents of international bonds and foreign dividends from April 2001.

The proposals announced today for interest and royalties payments apply only to payments made to companies within the charge to UK corporation tax in respect of the interest and royalties.  Payments  to individuals will continue to be paid net of tax.  This will avoid the necessity of a large number of non-higher rate taxpayers having to complete a self-assessment return.

Corporate Debt, Financial Instruments And Foreign Exchange Gains And Losses

The Technical Note on corporate debt, financial instruments and foreign exchange gains and losses invites public comment on proposed simplifications to the tax system  which would make it easier to understand and apply.  The note was foreshadowed in Budget 2000 Press Release REV/C&E2.

Double taxation relief

The Taxes Acts give relief for tax paid overseas if the profits would be taxed again when paid back to the UK as a dividend so as to prevent double taxation.  Pre FA 2000, if foreign tax already paid exceeded the UK tax payable on a dividend coming into the UK, the UK recipient could not get relief for all the foreign tax.  Offshore intermediate companies were therefore set up to mix high-and low-taxed dividends so that they came into the UK at an averaged rate.  FA 2000 introduced provisions to prevent this.  At the same time provisions were introduced allowing the excess tax paid up to a maximum of 45 per cent to be relieved against certain other dividends, or to be carried forward or backwards, or surrendered to other companies in the same group.

The formula used to calculate the maximum amount of underlying tax allowable will be changed.  At present it takes the dividend coming into the UK (D) and grosses it up by the maximum relievable rate (M):

            D x M  / (100 - M)

The formula will now add the actual underlying tax paid (U) to the dividend and multiply it by the maximum relievable rate:

            (D + U) x M.

These new proposals will mean that the FA 2000 provisions operate in the way in which they were intended.  In particular the changes in how eligible unrelieved foreign tax is calculated will significantly benefit UK groups who acquire existing business structures where tax in excess of 30 per cent is paid at several levels in that structure.

Taxation of gains on disposal of substantial shareholdings and taxation of intangible assets

The consultation on a new relief for gains on the disposal of substantial shareholdings held by companies and the taxation of intangible assets was announced in Budget 2000 Press Release REV/C&E2 and Budget Note REVBN2C.  The Technical Notes were announced in a Press Release issued on 23 June 2000.

INLAND REVENUE PRESS OFFICE

Media enquiries to:  020 7438 6692 / 6706 / 7327

                                                (out of hours: 07860 359544)

Non-media enquiries to:  020 7438 6420 / 6425

                                                (office hours only)

Inland Revenue information is on the Internet:

www.inlandrevenue.gov.uk

Inland Revenue 6

8 November 2000


CONSTRUCTION INDUSTRY SCHEME CUTTING COSTS THROUGH E-BUSINESS

Building on the review of the Construction Industry Scheme (CIS) undertaken since Budget 2000, the Government has decided to extend the scope of electronic data exchange, starting at the end of November 2000. 

As a first step, more subcontractors will be able to qualify for the CIS5 certificate which removes the requirement for them to present a certificate in person, and which allows contractors to provide details of payments electronically to the Inland Revenue. The Government believes that, in the longer term, big savings can be achieved through a more fundamental shift to electronic data exchange, and will continue to consult with the construction industry on the precise steps required to achieve that shift.

The changes to the CIS announced todaywill help around 8000 businesses and save over £1 million of administration costs across the industry.

DETAILS

1.         The Construction Industry Scheme is successfully identifying workers who have previously not declared their earnings to the Inland Revenue and the turnover test has ensured that the majority of subcontractors who supply only their own labour face tax deduction at source. As a result, over 100,000 construction workers are paying tax for the first time on their income. Over £1 billion has been deducted from subcontractors in the first year of the scheme. And the reduction in the rate of deduction to 18% from 6 April this year will mean that substantially fewer subcontractors will need to claim a repayment.

2.         The compliance tests which were introduced with the new scheme have been successful in making sure that even businesses which pass the turnover tests can only receive payments without deduction of tax if they have a history of good tax compliance.  The Government believes that the scheme is more effective than the previous scheme in tackling tax fraud and evasion within the industry.

3.         On 21 March the Chancellor announced that two consultative groups would be set up to review the scheme:

•           A Joint Working Group comprising officials from the Inland Revenue, the Department of the Environment, Transport and the Regions (DETR), and representatives from the Construction Industry.
  
  
•           A User Panel consisting of a cross-section of people from the industry who have hands-on experience of operating the Scheme.

4.         This review, carried out through the summer, aimed to identify ways to improve the scheme whilst continuing to protect the flow of revenue to the Exchequer. Both consultative groups have identified  electronic  business as the way to reduce substantially  the administration costs of the scheme.

5.         Allowing more businesses to qualify for a CIS5 certificate will automatically mean that payments made to them will be vouched using the CIS23 procedures, rather than the CIS 24 procedures. (The particulars on CIS 23s can already be sent electronically, unlike CIS 24s.) Additionally it will mean that representatives of those businesses will not have to present their certificates in person and this too will reduce their costs.

6.         The first change will be to reduce the turnover test for a CIS5 to £1 million.  This will take effect from the end of November.  The second change will be to allow partnerships to qualify for CIS5 certificates on the same basis as companies.  This change requires IT changes so cannot take effect before April 2001.

7.         The Inland Revenue has also been asked to continue to work with a wide and fully representative cross section of the industry to design a secure scheme that enables all data to be exchanged electronically: and to work on any transitional steps needed to help the industry meet the challenges of e-business. 


NOTES FOR EDITORS

8.         The new scheme that took effect from the 1 August was built largely on the principles of the old scheme. Changes to the Scheme were introduced in Schedule 27 Finance Act 1995 and Section 178 Finance Act 1996.  Further minor changes were introduced in Schedule 8 of Finance Act 1998.

9.         Changes were necessary because the rules that governed the entitlement to 714 certificates – which allowed subcontractors to be paid gross - proved increasingly ineffective in limiting the numbers of subcontractors who were paid without deduction.

10.       Under the new scheme, all subcontractors must register with the Inland Revenue and the majority must present their documents to the contractor before they can receive payment for work they have done. Vouchers need to be completed (either by the contractor or subcontractor) for all the payments that are made under the scheme. These are ultimately sent to the Revenue to facilitate compliance checks.

11.       The majority of subcontractors have been given a CIS4 registration card, which requires them to be paid after deductions on account of tax and class 4 National Insurance Contributions. The card carries a photograph of the cardholder and must be presented in person.

12.       The CIS6 certificate is issued to those subcontractors who pass the statutory tests and allows them to receive payment gross. It is the normal gross payment certificate available to those working within the industry. It carries a photograph of the certificate holder and must be presented in person.

13.       The CIS5 certificate (which replaced the old 714C) has up to now only been issued to companies that can make a business case – there are published rules – or have a turnover in excess of the set limit – this will now be reduced from £3 million to £1 million.  From April partnerships that meet the criteria will also be able to qualify. This certificate does not carry a photograph and need  not be presented in person, but the contractor completes a CIS23 voucher making it more secure than under the previous 714C scheme.

INLAND REVENUE PRESS OFFICE

Media enquiries to: 020 7438 6692 / 6706 / 7327 (Out of hours: 07860 359544)

Non-media enquiries to: 020 7438 6420 / 6425 (Office hours only)

www.inlandrevenue.gov.uk

CUSTOMS & EXCISE 1

8 November 2000


EASING THE IMPACT OF VAT ON SMEs

The Government is proposing to introduce a major package of measures from April 2001 to allow small firms to manage their entry into the VAT system, reduce their VAT administration burden and improve their cash flow. The package will include:

• extending the benefit of the cash accounting scheme to  40,000 traders by expanding the turnover limit from £350,000 to a new consolidated SME turnover level for VAT of £600,000.  This will help more small and medium sized enterprises (SMEs) manage their VAT, whilst easing their cash flow burdens.
  
  
• allowing at least 100,000 more businesses to benefit from lower compliance costs through the ability to file VAT returns on an annual rather than quarterly basis. The upper turnover limit for qualification will be raised from £300,000 again to the new consolidated SME turnover level of £600,000. 
  
  
• providing better advice for SMEs, through launching a lifelong business support programme and a national contact centre for general enquiries, extending the national importers and exporters programme and developing e-business measures.
  
  
• increasing the VAT threshold in line with inflation, keeping the UK threshold at the highest level in Europe. This will ensure that another 8,000 businesses will be entitled to operate without the need to charge VAT.
  
  
• consultation on rationalising the frequency of VAT payments due from traders under the annual accounting regime and introducing a lower SME turnover limit of £100,000, under which these SMEs will be able to:
  
  
• use a "flat rate scheme".  Within this scheme, SMEs will be able to calculate their VAT liabilitiesas a percentage of their turnover and avoid having to internally account for VAT on all of their purchases and sales.  The scheme would be designed to generate broadly the same amount of VAT payable, but would be simpler to use.
  
  
• enter the annual accounting  regime immediately rather than having to wait until they have completed a year of VATable trading.

NOTES FOR EDITORS

1.         Customs and Excise published the results of a consultation exercise into the impact of VAT registration on small and medium sized businesses on 9 March 1999. No immediate solutions to ease the impact were proposed. Since then, however, Customs  have held discussions and workshops with a wide range of academics, tax advisers and small business representatives, including the Confederation of British Industry, the Federation of Small Businesses and Manchester Business School to try to find acceptable solutions. The package announced above is the result of this exercise.  

This news release and other information about HM Customs and Excise can be found at our website:  www.hmce.gov.uk

Issued by Customs and Excise Headquarters

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