2003 Pre-Budget Report

The Pre-Budget Report announces steps to promote the development of an enterprise culture across the UK:

• supporting a national campaign by Enterprise Insight to create a step change in the enterprise culture among young people in the UK;
• providing opportunities for selected participants in the New Entrepreneur Scholarship scheme to spend a term at a US business school; and
• setting up a forum for US and UK practitioners and policy makers to share best practice on enterprise education, work related learning and professional development for teachers.

The Government is committed to raising productivity across all regions of the UK. The Pre-Budget Report also includes specific measures targeted on promoting productivity, including:

• decisions on the mechanism for a scheme to reward local authorities for supporting economic growth in their area by allowing them to retain a proportion of increases in local business rate revenues to spend on their own priorities, to be finalised in Budget 2004; and
• subject to state aid approval, a scheme to provide 100 per cent capital allowances for the capital costs of renovating business premises vacant for a year or more in the 2,000 Enterprise Areas.

Reforms to research & development tax credits

The definition of R&D for tax purposes is being simplified. A draft new definition is being published today and the views of business will be sought before it comes into force. This clearer definition will reduce companies' compliance costs by making it easier for them to decide at the outset whether their activities will qualify for the credit. The definition of qualifying costs is also being clarified and widened to include materials consumed, software, water and fuel used directly in the R&D. In addition, the Government will continue discussions with business to understand whether any direct costs are outside the currently proposed change and how any such costs might be brought within the schemes while minimising compliance burdens and cost effectively supporting R&D. The Government will introduce changes to ensure the credit is available where large companies subcontract to non-corporation tax chargeable entities and will make minor changes to ensure that staff costs for benefits in kind do not qualify for the credit. The Government response to Defining Innovation, the consultation document published in the summer can be found on the Inland Revenue website.

Access to finance

Bridging the finance gap: next steps in improving growth capital for small business, published alongside the Pre-Budget Report today, sets out the Government's intention to take forward a pathfinder round of Enterprise Capital Funds (ECF), which will adapt the US Small Business Investment Company model and inform any decision about the scope for a long term ECF programme.

The paper sets out proposals to remove, from 6 April 2004, the current capital gains tax deferral relief for investments in Venture Capital Trusts (VCTs) and replace it with an enhancement, of equivalent value, to the incentives to invest through income tax relief. In light of the recent relative weakness of the VCT market, the paper also

sets out proposals to provide a temporary stimulus to VCT fundraising for a period of two years. The Government's favoured option is a temporary increase in the value of income tax relief from 20 per cent to 40 per cent, with the value of the additional 20 per cent paid directly to the VCT rather than the investor. Subject to discussion with the industry, the Government also intends to increase to £200,000 from 6 April 2004, both the annual investment limit for VCTs and the threshold for income tax benefits under EIS.

The Government also announces that it has asked Teresa Graham, a member of the Small Business Council, to undertake an independent review of the Small Firms Loan Guarantee to ensure that, in light of a changing debt market, small businesses continue to receive the support that they need to overcome barriers to raising debt finance. Because the demand for finance by businesses is as important as ensuring its supply, the paper also sets out a package of measures to promote knowledge and awareness among small businesses of the financing options available to them.

VAT flat rate scheme

The flat rate scheme was introduced in April 2002 and offers significant compliance cost savings for the smallest businesses by reducing their record-keeping requirements and simplifying the calculation of VAT due. Following a review of the scheme, improvements announced today and coming into effect on 1 January 2004 will include further simplification of the administration of the scheme to enable more businesses to benefit from overall compliance savings, new lower rates and recognising the particular demands of VAT on new business, a discounted rate of 1 per cent below the normal rates for newly-registered small businesses. The new rates will range from 2 to 13.5 per cent (1 to 12.5 per cent for newly-registered businesses), compared to existing rates of 5 to 14.5 per cent.

Construction Industry Scheme

The Chancellor announced in Budget 2003 that a new Construction Industry Scheme would be introduced in April 2005. This scheme has been developed in detailed discussions with the industry, who have expressed concern that the April 2005 start date would leave it insufficient time to prepare properly for the change. The Government therefore decided that, in order to ensure a smooth and orderly transition to the new scheme, implementation will be deferred until April 2006. The Government plans to include the necessary legislation in Finance Bill 2004. Further details can be found in PN6 Protecting Revenues press notice.

Small and medium-sized company thresholds

The Companies Act 1985 defines a company as a small or medium sized company for its first financial year if it meets two of more of the following requirements in that financial year. Once a company has qualified as a small or medium sized company it will continue to be a small or medium sized company unless it fails to meet two or more of the requirements for two years in a row. Where a large company reduces in size, to become a small or medium sized company it must meet two or more of the requirements for two successive years:

The DTI will be laying regulations shortly and it is expected that they will come into force in January 2004. The following increased thresholds will replace those above for accounting periods ending on or after the date the regulations come into force:

Employer Training Pilots

Employer Training Pilots (ETPs) were introduced in six local Learning and Skills Council (LSC) areas in September 2002 to test new measures to improve access to training. ETPs offer a package of support to help low-skilled people in work gain basic skills or their first level 2 qualification. Employers that offer their low-skilled staff paid time off to train are provided with compensation for wage costs (varying according to pilot area and size of firm). Training is free or heavily subsidised, and is delivered in the way that most suits the employers' businesses. Both employees and employers are offered free information, advice and guidance. The pilots were extended for a further year and doubled to cover six new areas in the 2002 Pre-Budget Report.

An independent evaluation of the first year of the pilots was published on 4 December 2003. The evaluation showed that ETPs are proving successful at engaging employers and their low-skilled employees in training. At the end of the

first year, over 3,000 employers and 14,000 employees were involved in the scheme. Over 70 per cent of employers taking part had fewer than 50 employees and 40 per cent had no previous contact with a government agency - suggesting that ETPs are reaching workplaces where training has not been a high priority in the past.

Building on the success of this programme, the Government is now extending ETPs for a third year. ETPs will launch in six further local LSC areas, bringing the total to 18 - a third of England. This will enable the Government to explore further the impact of the existing pilots on the demand for training.

Property Investment

A consultation will be published at Budget 2004 to consider the most appropriate structure and conversion charge for a tax transparent property investment trust, alongside the taxation of related property investment products. Following informal discussion with industry, the Government has also today published draft legislation showing how a model for the taxation of property derivatives might operate. This will also be of interest to those using or advising on the use of equity derivatives for investment purposes.

Renovation of business premises

The Government is currently discussing the State Aid implications of an allowance to help with the renovation of business premises in Enterprise Areas, which have been vacant for a year or more. Subject to state aid approval the Government aims to introduce the allowance in 2005; further details will be published at the Budget.

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GOVERNMENT DEPARTMENT INTERNET SITES

Further information and all published documents relating to the Pre-Budget Report may be found on the Internet at the following addresses:

HM Treasury www.hm-treasury.gov.uk/index.cfm

Inland Revenue www.inlandrevenue.gov.uk

HM Customs and Excise www.hmce.gov.uk