Budget 2003 Press Notice PN 06: Supporting Business and Entrepreneurship

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 coverage 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 webbased 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 for:

• 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 finance.

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 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 liability;
  
  
• 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 businesses;
  
  
• 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 notification.
    
    
• 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 will:

• 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 2005-06;
  
  
• 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 businesses;
  
  
• 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 private sector, to review the channels through which local economic activity can contribute to wider neighbourhood renewal.

Details

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 credit.

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 package, 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 late 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 www.businesslink.gov.uk/setup, 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 process;
  
• changes to the Share Incentive Plan (SIP) to allow employees to purchase partnership shares out of annual bonuses, give employers flexibility in how they 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 acquiredwhen 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 currency.

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 bodies.

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 anaccurate picture of the effects the Concordat has on enforcement practice.

On 6 March the Government published 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 Concordat.

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 companies.

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 further 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 www.inlandrevenue.gov.uk/so/disadvantaged.htm.

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 www.hmce.gov.uk ; 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.

Notes for Editors

Employee Share Schemes

Tax and national insurance incentives 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 are:

• 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 sector.

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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Further information and all published documents relating to the Budget may
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