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A package of reforms to the business tax system to enhance the ...
A package of reforms to the business tax system to enhance the

competitive UK business environment, promote investment and

innovation, improve access to finance for SMEs and encourage

enterprise in disadvantaged communities, was announced today.

Paymaster General, Dawn Primarolo, said:

'A competitive business environment coupled with a modern tax system

is vital to underpin strong economic growth in the UK. This Budget

takes further steps to strengthen the business environment and to

ensure that all regions in the UK are able to share in a dynamic and

enterprising economy'.

The Economic Secretary, John Healey, said:

'For too long inadequate access to skills, finance and new

technologies has held businesses back from achieving their full

growth potential. This Budget builds on existing measures to tackle

these barriers to growth and takes further steps to cut red tape for

small business. These reforms will help narrow the long-standing

productivity gap with our competitors, and ensure that the UK remains

one of the best places for businesses to start and grow.'

Budget 2003 also takes further steps to modernise and simplify the

tax system, cut red tape and reduce the administrative burden on

business. The measures outlined today will offer benefits for up to

3.7 million businesses in the UK.

Innovation, investment and skills

To encourage innovation, investment and training by small businesses,

Budget 2003:

- extends 100 per cent first-year capital allowances for information

and communication technology until 31 March 2004, to encourage up

to 3.7 million businesses to invest in information technology and

succeed in the knowledge economy;

- introduces improvements to research and development (R&D) tax

credits for all companies, including a review of the R&D

definition, the reduction of the minimum expenditure threshold to

£10,000 and extension of the co verage of the large company scheme,

making it easier for SMEs in particular to access the credits;

- a new package in partnership with high street banks to support

advice and training by small businesses, including the creation of

a web-based training directory;

- more details on the extension of Employer Training Pilots to six

further Learning and Skills Councils areas, as announced in the

2002 Pre-Budget Report; and

- the establishment of the employer-led task force on Modern

Apprentices, to ensure that the MA scheme meets the needs of firms

across a range of sectors, of all sizes.

Access to finance

To improve access to finance for SMEs, Budget 2003 launches a new

consultation, Bridging the Finance Gap: a consultation on improving

access to growth capital for small business, to examine the scope


- applying the highly successful US Small Business Investment Company

model to the UK;

- further enhancing the effectiveness of the Enterprise Investment

Scheme, Venture Capital Trusts and the Small Business Firms Loan

Guarantee; and

- improving the tax treatment of the incidental costs of equity


Regulation and compliance costs

Budget 2003 supports businesses with measures to reduce regulation

and compliance costs, and simplify the tax system, including:

- aligning the Company Law definitions of small and medium-sized

companies with the maxima allowed under EU law, as soon as the new

EU maxima come into force. This will:

- extend less onerous accounting and reporting arrangements to more

small companies; and

- allow more businesses to benefit from the 40 per cent plant and

machinery and 100 per cent ICT allowances.

- the recent launch by the DTI of the no-nonsense guide to government

rules and regulations to help people setting up in business;

- measures to promote employee share schemes, reducing the burdens on< p/=""> employers who offer these schemes to their employees;

- a package of measures to simplify capital gains tax, including a

relaxation of reporting requirements in cases where there is no


- consultation on a package of measures designed to increase fairness

in the recovery of VAT;

- following consultation, the introduction from 1 December 2003 of a

scheme to reduce import VAT compliance costs for approved


- consultation in this summer on raising the statutory audit

threshold, releasing more SMEs from audit obligations, with plans

to be set out in the Pre-Budget Report;

- specific measures to help small and newly-registered businesses

reduce their VAT compliance costs by up to £1,000, improve cash

flow and manage their entry into the VAT system. These include:

- increasing the annual taxable turnover limit in line with inflation

from £55,000 to £56,000, from 10 April 2003 lifting 2,000 small

business out the of the VAT regime;

- increasing the turnover ceiling to £150,000, from 10 April 2003,

for businesses wishing to use the flat-rate scheme and for newly

registered businesses wishing to use the annual accounting scheme;

- relaxation of automatic late payment penalties for more businesses,

with turnover of up to £150,000; and

- a new incentive scheme to encourage small businesses into the VAT

system. The scheme includes reduced penalties for late


- fairer and more consistent regulatory enforcement at the local

level through revised guidance on the voluntary Enforcement

Concordat - with the Government standing ready to introduce

statutory codes of enforcement practice if necessary;

- further action by the National Statistician to minimise the load of

statistical surveys, building on the success of the ONS

modernisation programme, including the rationalisation of some

surveys, the wider use of administrative data and the greater use

of new technology in data collection;

- producing revised and simplified guidance on the Data Protection

Act to assist small businesses by the end of May;

- more business secondees to government to take forward reviews of

the construction, transport and environmental service sectors to

identify deregulatory measures; and

- reform of the Construction Industry Scheme in April 2005, to reduce

the regulatory burden on businesses.

Modernising and simplifying the tax system

The Government is committed to modernising the tax system so that it

keeps pace with the way in which business is conducted and changes in

the business environment. Budget 2003 announces:

- further consultation in the summer on reform of the corporation tax

system, setting out the Government's strategy for taking forward

reform. The Government will consider the reform of corporation tax

in its broader European and international context;

- promotion of the use of modern communication methods to reduce

administrative costs for government and business, and ensuring

prompt payment by requiring electronic payment of in-year PAYE and

other statutory deductions;

- removal of Petroleum Revenue Tax from 1 January 2004 from new

business contracts completed on or after Budget day involving the

third party use of pipelines and other infrastructure in the North

Sea. The Government will also consult on further ways to increase

levels of North Sea exploration and maximise economic recovery of

North Sea oil and gas; and

- a consultation to be published shortly on proposals to simplify the

procedure for paying Manufactured Overseas Dividends (MODs) without

accounting for withholding tax.

Enterprise in disadvantaged areas

The Government wants to encourage enterprise and investment in all

regions of the UK. Building on the removal of stamp duty on all

commercial property transactions in Enterprise Areas, the Government


- invest £16 million over two years to fund Enterprise Advisers, to

work alongside headteachers in around 1,000 secondary schools in

deprived areas. Enterprise Advisers will complement the Davies

Review pilots to investigate how best to provide pupils with five

days of enterprise experience in their school career. These will

begin in 2003 and cover around 250 secondary schools, including a

number of schools in the 2,000 Enterprise Areas. Rigorous

evaluation of the pilots will inform a national roll-out from


- introduce a new £1 million Enterprise Promotion Fund, to support

private and voluntary sector creativity in promoting enterprise

awareness across schools, business and the wider non-business

community. The Fund will offer resources to projects meeting

specific enterprise objectives and demonstrating significant

private sector support;

- improve services available to SMEs with action by HM Customs &

Excise for businesses in Enterprise Areas to increase awareness of

its services and the piloting of enhanced forms of support to


- evaluate investment in a new community venture capital fund,

building on the positive beginning of the Bridges Community

Development Venture Fund, to make investments in growth enterprises

in disadvantaged communities; and

- consider how enhanced capital allowances for particular types of

expenditure in Enterprise Areas could tackle specific market

failures to encourage business investment in these areas.

To help support development by enterprise in disadvantaged areas, the

Government will also participate in a series of events planned by

NatWest and the Royal Bank of Scotland for Enterprise Areas, which

will bring together local stakeholders such as local authorities and

RDAs, as well as the p rivate sector, to review the channels through

which local economic activity can contribute to wider neighbourhood



Research and development (R&D) tax credit

The present definition of R&D for tax purposes is contained in

guidelines published by the DTI, which were subject to wide

consultation before they were set out in 2000. The Government wishes

to ensure that the definition still reflects the full range of

innovative activities carried out by UK R&D companies. A consultation

will seek views on how the current R&D guidelines can be improved.

The Government will also consider whether any extensions to the

current definition should be limited initially to the SME scheme.

Companies currently only receive the R&D tax credit when they spend

more than £25,000 on R&D in an accounting period. This threshold will

be reduced to £10,000, allowing more SMEs in particular to claim the


Some companies use cutting edge software in their R&D that may have a

very short useful life, the costs of which are not currently covered

by the credit. Subject to consultation on a definition, to focus the

credit where it is most needed, the Government proposes to extend the

credit to cover such costs.

At present, a company cannot claim the R&D tax credit for costs of

employees who spend less than 20 per cent of their time on R&D; if

they spend more than 80 per cent of their time on R&D, it can claim

100 per cent of them. To simplify the credit and allow more R&D time

to qualify this rule will be replaced by a simple apportionment.

The scope of the large company scheme is to be widened to allow SMEs

to claim, where they are not entitled to the SME credit because they

receive state aid or another subsidy. This more closely aligns the

position of SMEs to that of large companies.

Training package to develop small businesses

This new packag e, in partnership with banks, supports the development

of small businesses and includes measures for banks to promote to

SMEs the benefits to training, and signposting them to a new

web-based training directory. A steering group chaired by Sue

Brownson OBE, chief executive of Blue Bell BMW and member of the

Small Firms Council, will oversee the management and development of

the support package. The group will include banks, the Small Business

Service, University for industry/Learndirect, small business

organisations and a range of entrepreneurs.

Access to Finance

The Government is publishing today a consultation document, Bridging

the finance gap: a consultation on improving access to growth capital

for small businesses examining the ability of SMEs to access the

finance they need to invest and grow. Although businesses are better

able to access finance than they were a decade ago, thanks to a more

stable macroeconomic environment, there remain difficulties for

businesses with growth potential and viable business plans seeking to

raise equity funding in sums of less than £1 million.

The consultation document considers the scope to apply a variant of

the US Small Business Investment Company (SBIC) model in the UK.

SBICs have made an important contribution to the development of the

US venture capital sector, and now account for 58 per cent of all

venture capital investments in US small businesses. The consultation

also explores options to enhance further the Enterprise Investment

Scheme (EIS) and Venture Capital Trust (VCT) scheme so that they

better address the equity gap. The EIS and VCT schemes have played a

significant and growing role in the supply of private equity funding

in recent years.

The Government's approach to improving access to finance recognises

that stimulating demand for growth capital is as important as raising

its supply. The Government will therefore be working with the

accountancy profession in the coming months to explore ways to

improve the quality of financial advice available to SMEs. In

addition, the consultation invites views on whether the tax treatment

of the incidental costs incurred by SMEs in raising equity finance

presents a significant obstacle to businesses seeking equity funding.

Company Law Changes and Capital Allowances

The EU maxima are currently under review with changes to be confirmed

later in the summer. Legislation to establish the new definitions

will be introduced as soon as the new EU maxima come into force.

Raising the Company Law thresholds will increase the number of

businesses eligible for the 40 per cent first year capital allowances

for plant and machinery expenditure by small and medium-sized

businesses and, until they expire on 31 March 2004, the 100 per cent

first year allowances for ICT expenditure by small businesses.

Start-up guide

'The no-nonsense guide to: Government rules and regulations for

setting up your business' is a comprehensive guide bringing together

information from across Government to help entrepreneurs understand

which regulations apply to them and what services are available to

help them. It will be available from a range of public and private

sector intermediaries, including Business Links, and can be accessed

online at, or via the DTI Publications

Orderline on 0870 150 2500.

Simplification of employee share schemes

The Government has introduced measures to modernise and simplify

employee share schemes, including:

- changes to the Company Share Option Plan (CSOP), to remove the rule

which denies tax relief on options exercised within three years of

a previous exercise, and measures to simplify the approvals


- changes to the Share Incentive Plan (SIP) to allow employees to

purchase partnership shares out of annual bonuses, give employers

flexibility in how the y determine salary for the purchase of

partnership shares, ensure employees moving between employers

within a group are not disadvantaged and align the holding period

for dividend shares with the holding period for the base shares;

- changes to the Save As You Earn (SAYE) share option scheme to

provide employees with a right to exercise their option where they

lose their jobs through injury, disability, redundancy or

retirement following a company take-over or restructuring; and

- extension of the time limit from 30 to 90 days for employees to

reimburse the PAYE tax paid on their behalf by the employer. The

new 90-day period will also apply for national insurance purposes

on charges that arise if the PAYE tax paid is not reimbursed.

Capital gains tax (CGT)

Budget 2003 introduces measures to support enterprise and simplify

CGT, including:

- relaxation of the rules which determine whether the capital gains

pages of a tax return need to be completed for 2003-04 onwards;

- a more generous treatment for losses arising after 9 April 2003

where people dispose of certain rights to future payments which

they acquired when selling assets; and

- simplification of the rules applying where people obtain certain

earn-out rights in exchange for shares or debentures and want the

rights to be treated as securities so that a CGT rollover treatment

can apply. Rights conferred after 9 April 2003 will automatically

be treated as securities unless people elect otherwise.

The Government remains committed to exploring opportunities for

further simplification of CGT, including the treatment of foreign


VAT: Making input tax recovery fairer

The Government will shortly launch a consultation on measures

designed to make the rules for the recovery of input tax fairer. The

consultation runs until 31 August 2003 and the Government is keen to

hear the views of taxpayers, their advisers and representative


Simplified accounting for VAT at import

Following detailed consultation announced in Budget 2002, changes to

the duty deferment system will be introduced from 1 December 2003,

allowing approved importers to provide reduced or zero security

against deferred VAT payments. The new system will deliver up to £80

million a year in compliance savings for UK importers.

VAT reforms for small business

A range of reforms will help small and newly registered businesses

reduce their VAT compliance costs, improve their cash flow and manage

their entry into the VAT system. The increase in the annual taxable

turnover limit maintains the UK's threshold as the highest in the EU.

Businesses wishing to trade below the threshold need not register for

VAT (although they may register voluntarily if they wish). The

de-registration threshold is increased from £53,000 to £54,000,

ensuring that businesses trading around the threshold do not have to

register and de-register as their turnover fluctuates.

Audit Threshold

In 2000 the Government raised the statutory audit threshold from

£350,000 to £1 million, freeing up an additional 150,000 companies

from the obligation of an independent audit. The Government is

currently reviewing the impact of that change and will consult in the

summer on possibilities for increasing the threshold further to ease

the burden on more companies. The Government will set out its plans

in the Pre-Budget Report.

Enforcement Concordat

The Government's Enforcement Concordat embeds the principles of good

enforcement into the practice of central and local government

enforcers. However, implementation of the Concordat's principles of

good enforcement has been inconsistent and monitoring has been

insufficient to gain an accurate picture of the effects the Concordat

has on enforcement practice.

On 6 March the Government p ublished a consultation document

Enforcement Concordat: Good Practice Guide for England and Wales,

which seeks to improve the performance of enforcement bodies so that

they apply the principles of good enforcement consistently. The

guidance also seeks views on arrangements for monitoring the

performance of enforcement bodies.

The Regulatory Reform Act provides Government with a reserve power to

set out statutory codes of practice in enforcement. The Government

stands ready to exercise this power should some enforcers continue to

use over-zealous means of enforcement in contravention of the


Reform of the Construction Industry Scheme

A consultation paper was published in the 2002 Pre-Budget Report,

proposing major reform of the Construction Industry Scheme. The new

proposals included replacing CIS documentation with an Inland Revenue

run verification service and periodic returns, and a new employment

status declaration to help the Construction Industry get the

employment status of its workers right.

In response, the Construction Industry showed broad support for the

new proposals, and is now invited to work with the Inland Revenue to

implement the new scheme in April 2005.

Corporation tax

The August 2002 consultation document, Reform of Corporation Tax,

explored three areas for potential further reform, with an aim of

reducing the tax distortions in the current regime and producing a

modern, coherent and competitive tax system reflecting the reality of

today's business environment. It analysed:

- the tax treatment of capital assets not covered by earlier reforms;

- rationalisation of the schedular system; and

- the differences in the treatment of trading and investment


Over 150 written responses to the document were received. A series of

consultative meetings was held in autumn 2002 with representative

groups and business. During 2003 there has been a fur ther series of

meetings with representatives of particular sectors of industry to

explore the issues in more depth. A second consultation document will

be published in the summer setting out the Government's strategy for

taking forward these reforms, and considering them in their broader

European and international context.

The Government is determined to protect the corporation tax system

against legal challenges under European law, particularly where these

challenges have the potential to undermine international agreements.

The continuing consultation on corporation tax reform will provide

the opportunity for the Government to discuss with business the

legislative options to ensure that the UK regime remains robust.

Electronic payment

To promote modernisation, from April 2004 mandatory electronic

payment of PAYE will be introduced for large employers, moving away

from current outmoded and less secure paper-based systems. This

reduces administrative costs for government and business and will

ensure prompt payment and prevent the unfair exploitation of the

current cheque payment rules, which can be used to delay transfers to

the exchequer. The cash flow advantage, currently enjoyed by

businesses that pay by cheque on the due date, will be built into the

system and will not be affected by the change.

Petroleum Revenue Tax

The lower tariff levels arising from the exemption from petroleum

revenue tax of new North Sea tariff business should encourage optimum

use of pipelines and other infrastructure on the UK continental

shelf, promote the development of marginal North Sea projects and

facilitate the cross-flow of business with neighbouring North Sea

countries. The Government will consult the industry on whether there

are further cost-effective, targeted measures, whether on tax or in

other areas, to increase the current low level of exploration, and

help maximise economic recovery in the North Sea.

Manufactured Overseas Dividends (MODs)

MODs must normally be paid under deduction of tax. However, the vast

majority of overseas recipients are entitled to be paid without

deduction, subject to a certification procedure. That procedure is

time-consuming and imposes administrative costs. Therefore, the

Government is consulting on proposals that would allow MODs to be

paid to non-UK recipients without accounting for tax. This should

reduce costs and give UK based firms access to a wider range of

trading partners.

Enterprise in disadvantaged areas

>From Budget day stamp duty has been removed on all commercial

property transactions in Enterprise Areas - the most disadvantaged

areas of the UK. This follows the exemption from stamp duty of all

transactions below £150,000 in these areas in November 2001. The

Inland Revenue website has a full list of those areas eligible for

the stamp duty exemption, at

Customs and Excise will be taking measures to improve their services

to SMEs in disadvantaged areas through:

- a programme of awareness raising events in Enterprise Areas,

designed to encourage businesses to attend Business Advice Open

Days. These events provide the opportunity for businesses to obtain

face-to-face advice from Customs, and a wide range of other

Government agencies. Details of events planned can be found at ; and

- pilots of enhanced support services to businesses in disadvantaged

areas - three operating across the north of England (West

Yorkshire, Tyne and Wear and East Lancashire), working with small

businesses approaching the VAT registration threshold. Another will

be based in Salford and work in the north of England with small

businesses experiencing unexpected difficulties in meeting their

VAT obligations.


Employee Share Schemes

Tax and national insurance inc entives are available under the

following schemes, subject to Inland Revenue approval:

- Company Share Option Plan, (CSOP) - up to £30,000 worth of share

options can be given to selected staff. As long as these are kept

for at least 3 years and no more than 10 years then no tax or NICs

is payable;

- Share Incentive Plan, (SIP) - an all employee share plan which

provides for tax and NICs relief on up to £9,000 worth of shares

each year; and

- Save As You Earn, (SAYE or Sharesave) - an all employee share

option plan which allows employees to save directly from their

earnings an agreed monthly amount between £5 to £250 for a period

of 3 or 5 years. At the end of the agreed period the employee can

either buy shares in the company at up to 20 per cent discount or

receive a cash bonus, tax and NICs free.

Capital gains tax

The measures announced today have emerged from consultation with the

Capital Gains Tax Review Group (set up in 2000). They build on a

package of measures introduced in Finance Act 2002.

Making input tax recovery fairer

The rules relating to the recovery of VAT on purchases (input VAT)

have remained untouched for several years. Among the factors

influencing the Government's decision to review the scope for reform


- recognition that the rules are in some instances unfair, obscure

and place unnecessary burdens on business and Government; and

- growing pressure for change from within the land and property


The Government's reform proposals address a range of issues including

VAT incurred on purchases prior to VAT registration, VAT and the

option to tax buildings, and VAT recovery following a change of

intention about the use of a purchase. Copies of the consultation

document may be found on the Customs & Excise website.

VAT flat-rate scheme and annual accounting scheme

In Budget 2002, the Chancellor announced that the qualifying turnover

ceiling for these schemes would increase from £100,000 to £150,000 in

April 2003.

The flat-rate scheme offers significant compliance cost savings for

businesses, by reducing their record-keeping requirements and

simplifying their calculation of VAT due.

The annual accounting scheme allows businesses to make one annual VAT

return rather than monthly or quarterly returns, with interim

payments during the year and a final balancing payment with their

annual return. This helps businesses to reduce compliance costs and

to manage their cash flow throughout the year.

VAT incentive scheme

The scheme is part of the Government's new VAT strategy, which was

published in Protecting Indirect Tax Revenues alongside the 2002

Pre-Budget Report. It identifies small businesses, which may be

liable to register for VAT, and aims to provide advice, support and

incentives to help them move into the VAT system.

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