Abacus Online June 2001 ENTERPRISE FOR ALL - THE CHALLENGE FOR THE NEXT PARLIAMENT The Chancellor Gordon Brown has wasted no time in announcing a package of measures to be introduced during the early stages of this Governmental term. The measures are being introduced to tackle the productivity gap with Britain's major competitors. They include: radical reform of the UK's competition regime; a Capital Gains Tax (GCT) regime that is overall more favourable to enterprise than that of the USA; modernisation of insolvency laws with abolition of Crown Preference; better tax treatment for share options, extending Enterprise Management Incentives to larger companies; a Green Paper, later this year, on reforming the planning system; a review of the long-term retail savings industry led by Ron Sandler; a major review of the role of enterprise and business in education led by Sir Howard Davies; new measures to help small businesses grow including extension of the 10p corporation tax rate and help with VAT compliance; a review of payroll services to small business; an immediate review of the DTI's support to business, starting with industrial manufacturing; targets for each of the English regional venture capital funds. We have summarised the tax measures for you and given some comment as to the intention of the changes and their likely impact. CGT Business Asset Taper Relief - 10% Tax After Just 2 Years From April next year, the effective rate of CGT on business assets will fall to a maximum of 10% after just two years rather than the current four. The proposals are summarised below:

[row[/row]

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

Example Gordon acquired a business asset in June 2000. Under the existing regime it would appear he would have to wait until June 2004 to be eligible for maximum 75% taper on any gain. Under the new proposals, Gordon is eligible for 75% taper from June 2002.

Clearly these changes make an already generous regime more generous still. The gap between rates of taper relief on business and non-business assets therefore looks set to widen still further. The Government has said that they will consider whether changes to the regime for non-business assets should also be made to improve incentives for investment and help businesses attract finance.

Enterprise Management Incentives (EMI) - Motivate Key Employees With 10% Tax Carrot

EMI options are attractive because the rate of capital gains tax payable on any gain realised on ultimate disposal of the shares begins to taper as soon as the options are granted. Under the new capital gains tax regime, this will mean tax is payable at an effective rate of 10% for a higher rate taxpayer after two years from the grant of the option.

The Government now proposes, subject to consultation, to allow companies with gross assets up to £30 million (currently the limit is £15 million) to use the EMI scheme. The £30 million limit is expected to become effective in April 2002. The Treasury expects 6,000 more companies to become eligible for the scheme which has so far attracted 1,000.

Corporation Tax

A new 10% starting rate of corporation tax was introduced on 1 April 2000. However, it only applies to companies with profits up to £10,000. Companies with profits between £10,000 and £50,000 pay tax at an overall rate of between 10% and 20% with the 20% small companies rate applying once profits reach £50,000.

Gordon Brown proposes, with effect from next year, to extend the 10% band. It is not yet clear what the new threshold will be, but the intention is clearly to reduce the corporation tax bills for more small companies.

VAT

Two main changes have been announced or progressed.

The first is the removal of automatic fines for late payment of VAT for businesses with turnover below £100,000. In general, under the current system, businesses that fail to make their VAT payments on time go onto the 'default surcharge' regime for a minimum 12 month period. Under this regime, they face escalating penalties if they default on any further payments. Penalties will be levied in future only following a written communication offering help and advice to sort out problems. The change reflects an effort to change the perception of tax authorities as 'interfering or threatening' and is intended to help up to half a million businesses.

The second is the introduction of an optional flat rate scheme for smaller firms. Under the proposed scheme, businesses could avoid having to account internally for VAT on all their purchases and sales. VAT would instead be calculated as a percentage of their taxable turnover. The Government estimates that this could cut compliance costs for more than 300,000 businesses.

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