A

Budget measures

INTRODUCTION

This chapter sets out the measures in Budget 2000 and includes those announced since Budget 99. The effects¹ of the Budget measures on Government revenues are set out in Tables A.13 and A.14 and explained in Appendix A1. Tax changes announced in Budget 99 or earlier which take effect after this Budget are set out in Appendix A2. Appendix A3 provides estimates of the revenue costs of some of the main tax allowances and reliefs.

PERSONAL TAXES AND SPENDING MEASURES

Income tax 2000-2001

Bands, rates and personal allowances

The personal allowance will increase to £4,385 as already announced. The age-related personal allowances and income limit, the starting and basic rate limits, blind person's allowance and, where applicable, the married couple's allowance and widow's bereavement allowance will all rise in line with statutory indexation.(14)

Working Families' Tax Credit and Disabled Person's Tax Credit

The tax credit for children under 16 in the Working Families' Tax Credit (WFTC) and Disabled Person's Tax Credit (DPTC) will be increased by £4.35 from June 2000.(22) Other weekly rates and thresholds will rise in line with the Rossi index from April.(c) In addition, the credit for children under 11 rises by £1.10 above indexation in April 2000 to align it with the credit for children aged 11-16.(22)

The DPTC additional child credit for each disabled child will be extended to WFTC from October 2000.(d)

Two administrative reforms to the WFTC and DPTC from May 2001 will allow a new claim to be made immediately on the birth of a child to reflect the family's change of circumstances and will enable any mother who works 16 hours or more prior to the birth of a child and who is in receipt of Statutory Maternity Pay or Maternity Allowance to meet the work criteria for WFTC and DPTC.(23)

10p rate extended to savings

As announced in the Pre-Budget Report, the 10p starting rate of income tax will be extended to savings income with effect from 6 April 1999. Whether an individual has income from earnings, a pension or savings they will now benefit from the 10p rate on the first £1,500 of their taxable income in 1999-2000.(b)

Stakeholder pensions

A simplified and integrated tax regime for defined contribution pensions will be introduced in April 2001. This will facilitate the introduction of stakeholder pensions as announced by the Secretary of State for Social Security on 22 February 2000.(e)

ISA subscription limits

The higher ISA overall subscription limit of £7,000 and the £3,000 cash sublimit available for 1999-00 will be extended for a further year.(43)

Other measures

The rate of relief on the first £30,000 of certain life annuity loans (often called Home Income Plans) taken out before 9 March 1999 will be fixed at 23 per cent. (*)

The maximum earnings for which pension provision may be made with income tax relief (the "earnings cap") will be increased in line with statutory indexation to £91,800.(*) As announced on 7 March 2000, the tax charge on the repayment by occupational pension schemes of surplus employee additional voluntary contribution funds will be reduced from 33 per cent to 32 per cent from 6 April 2000.(*)

Individuals who file their Self Assessment tax returns over the internet in 2000-01 and pay any tax due electronically will receive a discount of £10.(10)

As announced on 25 February 2000, from 6 April 2000 the rate of deduction applying to payments made to subcontractors who have not been granted a certificate under the Construction Industry Scheme will fall from 23 per cent to 18 per cent.(47)

Payments to participants under the Employment Zones initiative will be exempt from tax and NICs from April 2000.(*)

Table A.1: Bands of taxable income 2000-2001

1 The rate of tax applicable to savings income in Section 1A ICTA 1988 remains at 20 per cent for income between the starting and basic rate limits.
2 The rates applicable to dividends are 10 per cent for income up to the basic rate limit and 32.5 per cent above that.

Table A.2: Income tax allowances 2000-2001

1 Tax relief for these allowances is restricted to 10 per cent.

2 This is also the maximum relief for maintenance payments where at least one of the parties is aged 65 before 6 April 2000.

3 This will not be available in respect of deaths occurring after 5 April 2000.

Table A.3: Working Families' Tax Credit and Disabled Person's Tax Credit

¹ The 11-16 and 16-18 child tax credits apply from the September following the 11th and 16th birthday respectively.

² The disabled child tax credit in the Working Families' Tax Credit is to be introduced from October 2000.

³ The rate applies from June 2000. The rate for April and May is £21.25 a week.

Income tax 2001-2002

Children's Tax Credit

The Children's Tax Credit will be worth up to £442 a year. This is an increase of £26 on the amount announced in Budget 99.(21)

Effects on the Scottish Parliament's tax varying powers - statement regarding Section 6 of the Scotland Act 1998

A one penny change in the Scottish variable rate in 2000-2001 could be worth approximately plus or minus £240 million, broadly unaffected by these changes. In the Treasury's view, an amendment of the Scottish Parliament's tax-varying powers is not required as a result of these changes.

Inheritance tax

Threshold

The threshold will be increased by statutory indexation to £234,000.(42)

Taxes on capital gains

Capital gains tax rates and annual exempt amount

As announced in the Pre-Budget Report, from 6 April 2000 capital gains falling within the starting rate band will benefit from the 10p rate.(*) The annual exempt amount will be increased by statutory indexation to £7,200.(-)

Capital gains tax business assets taper

The business asset taper will be reduced to four years for business assets disposed of on or after 6 April 2000, with the gain tapered as shown below. From 6 April 2000, employee shareholdings in all trading companies and all shareholdings in unquoted trading companies will qualify for the business asset taper. In addition, the business asset taper will apply to shareholdings of 5 per cent or greater in quoted trading companies.(4)

Table A.4 Capital gains tax business assets taper

Stamp duty

Rates and thresholds

From 28 March 2000, stamp duty rates will be increased on transfers of land and property (excluding shares) over £250,000 and less than £500,000 from 2.5 per cent to 3.0 per cent and from 3.5 per cent to 4.0 per cent for land and property over £500,000.(37)

The threshold for the zero rate of stamp duty applying to rents for leases for up to 7 years is increased from £500 to £5,000.(*)

Intellectual property

The stamp duty charge on transactions in intellectual property, including patents, trademarks and copyrights, will be abolished with effect from 28 March 2000.(2)

Registered Social Landlords

From Royal Assent, additional reliefs will be introduced for property transfers to Registered Social Landlords (RSLs). These include a general relief for resident-controlled RSLs and a relief for transfers from local authorities to RSLs to help the Large Scale Voluntary Transfer Programme.(38)

National insurance 2000-2001

Table A.5: National insurance contribution rates 2000-2001

¹ The limits are defined as LEL - lower earnings limit; PT - primary threshold; ST - secondary threshold; and UEL - upper earnings limit.

² The contracted-out rebate for primary contributions in 2000-01 is 1.6 per cent of earnings between the LEL and UEL for all forms of contracting out - contracted-out salary-related schemes (COSRS), contracted-out money purchase schemes (COMPS) and appropriate personal pensions (APPs).

³ The contracted-out rebate for secondary contributions is 3 per cent of earnings between the LEL and UEL for contracted-out salary-related schemes. For contracted-out money purchase schemes, the employer's contracted-out rebate varies according to the age of the employee. For appropriate personal pensions, the total rebate (primary and secondary combined) applicable to earnings is, like the rebate for COMPS, related to the age of the employee.

⁴ No NICs are actually payable but a notional primary Class 1 NIC will be deemed to have been paid in respect of earnings between LEL and PT to protect benefit entitlement.

Table A.6: Self-employed national insurance contribution rates 2000-2001

¹ The self-employed may apply for exception from paying Class 2 contributions if their earnings are less than, or expected to be less than, the level of the Small Earnings Exception (SEE).

National insurance 2001-2002

As announced in the Pre-Budget Report, the rate of employer national insurance contributions will be reduced by 0.3 percentage points from April 2001. This will help ensure that all the revenues from the climate change levy are recycled to business.

Table A.7: National insurance contribution rates 2001-2002

For footnotes see Table A.5.

National insurance contributions 2002-2003

The revenues from the aggregates levy will be recycled through a further reduction in the rate of employer national insurance contributions of 0.1 percentage points from April 2002.(15)

Table A.8: National insurance contribution rates 2002-2003

For footnotes see Table A.5.

Benefits 2000-2001

Sure Start Maternity Grant

From autumn 2000, the Sure Start Maternity Grant will be increased by a further £100 to £300.(24)

Income-related benefits

Income-related benefits for children under 16 will be increased by £4.35 from October 2000 in line with the increases in the Working Families' Tax Credit.(22)

New Deal 50 plus payments

Payments made under the New Deal 50 plus programme are exempted from tax from 25 October 1999, when the scheme commenced.(*)

Pensioners

From December 2000, the Winter Allowance to every household with a person aged 60 or over will be increased to £150 from the current level of £100.(26)

Benefits 2001-2002

Transition to work

From spring 2001, the Government will introduce a package of measures to ease the transition into work.(16, 17, 18, 19, 20)

Pensioners

As announced in the Pre-Budget Report, the minimum income guarantee for pensioners will be uprated by earnings rather than prices. The lower capital limit will be doubled from £3,000 to £6,000 and the upper limit increased from £8,000 to £12,000.(25)

BUSINESS TAXES AND SPENDING MEASURES

Tax on business profits

Capital allowances

Permanent first year capital allowances for small and medium sized enterprises will be introduced at a rate of 40 per cent.(8)

100 per cent first year allowances will be introduced for investments by small enterprises on information and communications technology in the three years starting 1 April 2000.(9)

From Royal Assent, capital allowances will be made available to lessors under the Government's Affordable Warmth Programme.(54)

A package of measures will be introduced to simplify, clarify and deregulate the capital allowances system. In addition, lessors will be able to claim capital allowances on the original cost to the lessee where new machinery and plant is sold and leased back provided certain conditions are met.(*)

Capital allowances will be available for oil companies using machinery and plant under an oil production sharing contract. This will apply to expenditure on or after 21 March 2000.(*)

As announced in the Pre-Budget Report, 100 per cent first year capital allowances for energy saving investments (see climate change levy below) will be introduced from April 2001.

Quarterly payments of corporation tax

The rate of interest charged on underpayments of corporation tax under the quarterly instalment arrangements will be reduced by 1 percentage point from 2 per cent to 1 per cent over base rate. The change will be made by regulation as soon as possible after 21 March 2000. In addition, the de minimis exemption for quarterly instalment arrangements will be increased from £5,000 to £10,000 for accounting periods ending on or after 1 July 2000.(13)

Loans with interest rates linked to profits

From 21 March 2000, companies will be able to claim relief for interest paid on certain commercial loans ('ratchet loans') with interest rates linked to profits. Transfers of ratchet loans will also be exempt from Stamp Duty.(*)

Notional transfers of assets within groups

From 1 April 2000, simplification to capital gains rules will allow companies in groups to match gains and losses without the current need to move assets around the group prior to disposal(*).

Modernisation of rules for groups of companies

From 1 April 2000, the rules for group relief and company gains will be modernised to include groups established through companies resident anywhere in the world and will be extended to include UK branches of overseas companies.(11)

Rollover relief for substantial shareholdings

Subject to consultation in the summer, the Government is minded to introduce in Budget 2001 rollover relief for gains on the disposal by companies of shareholdings in other companies that amount to a substantial percentage of the shares in issue. This measure would broadly align the treatment of gains from the disposal of such shareholdings with the treatment of gains from the direct disposal of qualifying business assets other than shares.

Changes to double taxation relief

Double taxation rules will be changed from April 2000 to help branches of international companies avoid being taxed twice. From 1 July 2000, the double taxation relief rules will be changed to limit the use of so called mixer companies to shelter low taxed foreign profits from UK tax.(12)

Overseas life assurance business

The definition of this business will be relaxed to enable life assurers to write more business with overseas policyholders. (-)

Abolition of withholding tax on international bonds

Withholding tax rules for Paying and Collecting Agents of international bonds and foreign dividends will be abolished from April 2001 and instead the Inland Revenue will collect routine information about the savings income of all individuals. Provisions for new Tax Information Exchange Agreements and extended powers to meet requests for information from other tax authorities will take effect from Royal Assent.(5)

Other measures

As announced on 14 January 2000, the arrangements for traders to compute their profits in a non-sterling currency used in their accounts will be extended to all companies for accounting periods beginning on or after 1 January 2000 and ending on or after 21 March 2000.(*)

For accounting periods beginning on or after 1 January 2001, the benefits gained by insurance companies and Lloyds members through setting excessive provisions for future liabilities will be removed.(30)

Capital gains roll-over relief was extended to UK oil licences with effect from 1 July 1999. (*)

As announced on 12 August 1999, subject to state aid clearance, an optional tonnage-based tax regime for shipping will be introduced for accounting periods starting on or after 1 January 2000.(a)

The Inland Revenue will publish in the summer a further technical note on reform of the taxation of intellectual property. This will consider whether tax relief should be given to companies for the cost of purchasing goodwill and other intangible assets.

The Inland Revenue will consult in the summer on changes proposals to modernise the rules for deduction at source from payments for the use of intellectual property.

As announced on 25 November 1999, a new transitional relief scheme will phase in changes in rate bills arising from the revaluation of non-domestic rates in England on 1 April 2000, with greater protection offered to smaller properties.(j)

Relief will be given for the cost of acquiring capacity (Indefeasible Rights of Use) on submarine telecommunications cables.(*)

The rules governing tax relief for films are being clarified, defining film rights eligible for tax relief and the income and expenditure covered by current legislation.(-)

Value added tax

Registration thresholds

The VAT registration threshold will be increased broadly in line with inflation to £52,000 from 1 April 2000. The deregistration threshold will increase from £49,000 to £50,000.(46) The level at which businesses deregistering from VAT can ignore tax due on goods on hand at deregistration will be increased from £250 to £1,000.(*)

Modernising VAT

A power to impose a penalty for businesses in the gold trade who fail to comply with key requirements of the investment gold scheme will be introduced from Royal Assent.(*)
Two other minor changes to VAT exemptions are included in the Budget.(48, 49)

Extending the reduced VAT rate for energy saving materials

A new reduced VAT rate for installation of energy saving materials in all homes will be introduced. In addition, the existing reduced VAT rate for grant funded installations of energy saving materials will be extended to include publicly funded installations of central heating and security measures in the homes of poorer pensioners and energy efficient heating measures in the homes of the less well-off. The changes apply from 1 April 2000.(53)

Reduced rate of VAT for women's sanitary products

From 1 January 2001, the rate of VAT on women's sanitary products will be reduced from 17¹/₂ per cent to 5 per cent.(41)

Securing the tax base

Direct taxes

A number of measures will be introduced, with effect from 21 March 2000, to prevent avoidance of CGT by individuals using trusts and offshore companies.(27)

As announced in the Pre-Budget Report, legislation will be introduced to withdraw from 9 November 1999 business assets gifts relief on the transfer of shares or securities to companies.(g)

Budget 2000 includes measures to strengthen the Controlled Foreign Company provisions, in addition to the designer rate measure announced on 6 October 1999.(32, k)

New rules for apportioning interest payable and income of life assurance companies will be introduced for accounting periods beginning after 31 December 1999 and ending on or after 21 March 2000.(29)

Schemes which allow stamp duty to be avoided when property is transferred to a company will be closed from 28 March, four other loopholes will be closed from Royal Assent and a mechanism will be introduced to allow new avoidance schemes to be countered as they arise.(28)

New rules will prevent oil companies reducing Petroleum Revenue Tax liabilities by deferring expenditure claims to periods when safeguard relief no longer applies. This will apply to expenditure on or after 21 March 2000.(33)

Measures were introduced with effect from 1 July 1999 to close a loophole that could allow oil companies to avoid paying PRT on tariff income by re-structuring their company interests in North Sea oil and gas fields.(-)

Legislation will be introduced to counter rent factoring schemes to take effect from 21 March 2000.(31)

Value Added Tax

From 21 March 2000, overseas businesses will no longer be able to dispose of their assets VAT-free where they have previously been allowed to recover VAT on the purchase of those assets.(34)

Incentives for investors and entrepreneurs

Corporate venturing

Budget 99 set out the Government's intention to introduce measures to promote corporate venturing. New tax reliefs will be introduced from 1 April 2000 to encourage companies to invest in small higher risk trading companies and form wider corporate venturing relationships.(3)

Improvements to EIS and VCT

The minimum holding period for investments under the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs) will be reduced from 5 years to 3 years for new shares issued on or after 6 April 2000. Other technical improvements will be made to both schemes.(7)

Contributions to Enterprise Agencies

Tax reliefs on contributions by traders to Local Enterprise Agencies, Training and Enterprise Councils, Local Enterprise Companies and Business Link organisations, due to expire on 1 April 2000, will be extended indefinitely.(*)

Incentives for employees and managers

New all-employee share plan

The Finance Bill will legislate for the new all-employee share plan announced in Budget 99. From April, companies will be able to send in draft plans to the Inland Revenue for approval.(1)

Enterprise Management Incentives

From Royal Assent, smaller high risk companies will be able to issue tax-advantaged share options to key staff. The number of employees per company will be 15, 9 more than the maximum 6 proposed in Budget 99.(6)

Administrative help for small businesses

More support for small employers

From April 2000, the Inland Revenue will expand the range of help available on payroll issues. This will include: doubling the size of the Inland Revenue Business Support Teams; increasing both the size and the scope of the work carried out by the New Enterprise Support Initiatives (NESI) helpline for new employers; and offering new employers a visit by a Business Support Team to help them with various payroll issues. New businesses will also be offered a detailed "health check" of their payroll systems. Business support teams will look to establish clear links with the Small Business Service.

The threshold for quarterly payments of employer deductions (including Pay As You Earn (PAYE)) will be increased to £1,500, allowing more small employers to pay quarterly rather than monthly.(-)

The Inland Revenue will publish a payroll software standard on 21 March 2000 providing accreditation for software that can accurately meet payroll commitments.

As announced on 16 February 2000, small businesses that file their 2001-02 VAT or PAYE end of year returns via the internet and pay the tax due electronically will receive a one off discount of £50 (or £100 for both). Unincorporated businesses can also qualify for the £10 discount on self-assessment income tax returns (see Income Tax 2000-2001 above). There will be an extra discount of £50 for small employers who pay tax credits to employees and qualify for the £50 PAYE discount. The PAYE and tax credits discounts will also be available to small employers using an internet payroll service.(10)

Other measures

Concessionary TV Licences

From November 2000, pensioners aged 75 and over will be entitled to have their household's TV licence paid for by Department of Social Security. The costings include the cost of giving refunds to eligible pensioners who will, by November, still have unexpired months left to run on their current licences.(i)

Charities tax package

As announced in the Pre-Budget Report, a package of measures will be introduced in April 2000 to boost giving to charity. Extra measures are included in Budget 2000. (39, h)

Capital gains tax

Legislation was introduced in Section 75 Finance Act 1999, to take effect from the date of the announcement on 16 June 1999, to counter avoidance of CGT through the purchase of trust losses.(f)

ENVIRONMENTAL TAXES AND SPENDING MEASURES

Climate change levy

The Pre-Budget Report announced changes to the design of the climate change levy. Further refinements are included in Budget 2000.(l)

Transport and the environment

Company car taxation

Budget 2000 confirms that from April 2002, the tax charge for company cars will be linked to exhaust emissions. A 3 per cent supplement to this charge will apply to diesel cars. The Government will consult on waiving the supplement for very low emission diesels and on giving discounts to cars using fuels and technologies that are particularly environmentally friendly.(*)

Car fuel scale charge

The scales used to charge VAT on fuel used for private motoring in business cars will be increased from 6 April 2000 to reflect changes in fuel prices. (52)

Fuel duties

Road fuel, gas oil and fuel oil duties will rise from 21 March 2000 in line with inflation as shown in Table A.9 (See Appendix A1).(50) The rate of duty for road fuel gases will be frozen.(52)

Table A.9: Changes to duties on road fuels and other hydrocarbon oils

¹ Tax refers to duty plus VAT, except for gas oil and fuel oil, which are shown exclusive of VAT.

The Government intends to introduce a differential of 1 pence per litre for ultra-low sulphur petrol relative to unleaded petrol from 1 October 2001. (51)

Penalties will be introduced to prevent misuse of rebated oils and the definitions of vehicles able to use rebated oil will be tightened from 1 May 2000.

The water content of water/diesel emulsions will be exempt from road fuel duties from Royal Assent.(-)

Vehicle Excise Duties

The 12 month standard and rate of Vehicle Excise Duty (VED) for cars, taxis and vans will rise in line with inflation by £5 to £160 (and the reduced rate for smaller cars will rise by £5 to £105) for licences taken out after 1 March 2001.(59)

From 1 March 2001, the reduced VED rate for smaller-engined cars will be extended from 1,100cc to 1,200cc. Owners of qualifying cars who take out licences at the standard rate up to 28 February 2001 will automatically receive a rebate of up to £55 in March 2001.(58)

From 1 March 2001, all cars registered for the first time will be placed into one of four VED bands based on their rates of carbon dioxide emissions. Within each band, there will also be a discount rate for cars using cleaner fuels and technology and a small supplement for diesel cars.(57)

Table A.10: Bands and rates for the graduated VED system for new cars

The rate for new vans and other new vehicles for which CO₂ emissions data are not currently available will be £160.

A VED rate of £2,950 will apply to 44-tonne lorries on 6 axles meeting Euro II emissions standards, permitted for general use on UK roads from a target date of 1 January 2001. As a result, the VED rate for 40-tonne lorries on 5 axles will be cut by £1,800 to £3,950 for licences taken out after 21 March 2000.(56)

VED rates will also be cut by £500 for licences taken out after 21 March 2000 for the UK-standard 38-tonne lorry on 5 axles, for the 36-tonne lorry on 5 axles and for the lorry typically used for collecting 'unaccompanied' freight from UK ports.

VED rates for lorries currently paying £155 or £160 rise by £5 in line with the standard rate for cars. VED rates for all other lorries will be frozen for the third year running.(56)

A package of enforcement measures is being taken forward to tackle hauliers operating illegally, including legislation to allow the impounding of their lorries and measures to tighten regulations and penalties governing the use and misuse of rebated red diesel.

Land use

Landfill Tax

From Royal Assent, landfill tax will be payable by either the holder of the waste management licence or the operator of a landfill site. This measure ensures that the person carrying out the landfilling activity is responsible for the tax.

The temporary disposal rules will be extended to allow the storage or sorting of material suitable for landfill site restoration to take place without incurring tax.(*)

Aggregates levy

An aggregates levy will be introduced from 1 April 2002. This will apply to virgin sand, gravel and crushed rock which is subject to commercial exploitation in the UK - including that dredged from the seabed within UK territorial waters. It will be charged at £1.60 per tonne.(55)

Revenues from the levy will be returned to the business community through a 0.1 percentage point cut in employer national insurance contributions and a new sustainability fund to deliver local environment improvements.

The levy will not apply to recycled aggregate, or to certain secondary aggregates such as those derived from reworking old spoil heaps. To protect competitiveness, exports will be relieved and imported aggregates will be subject to the levy when they are first sold or used in the UK.

Tax relief for waste disposal sites

From 21 March 2000, a waste disposal firm that takes over sites previously run by another waste disposal operator will be entitled to tax relief for their predecessor's site preparation expenditure. This changes the current rules which only allow the person incurring the expenditure to claim relief. (*)

Other indirect taxes

Excise duties

Tobacco duties

The duties on all tobacco products will be increased by 5 per cent in real terms, typically 24.8 pence on a packet of 20 cigarettes, on 21 March 2000 (see Appendix A1).(44)

From Royal Assent, the basis of ad valorem duty on cigarettes will be based on the higher of the marked price or the listed recommended price.

Table A.11: Changes to tobacco duties

¹ Tax refers to duty plus VAT.

Alcohol duties

From 1 April 2000, the duty on beer, wine and cider will increase in line with inflation. There will be no change in the duty on spirits (see Appendix A1).(40)

Table A.12: Changes to alcohol duties

¹ Tax refers to duty plus VAT.

Betting and gaming duties

From 5 August 2000, the duty bands for amusement machine licence duty will be restructured to align them more closely to prize levels and price per play. The effect will be to create five duty bands instead of three and introduce concessions for seaside arcades and non-profit making clubs.(45)

Duty restructuring will be accompanied by some minor administrative changes.(*)

The gaming duty bands will be adjusted on 1 April 2000 in line with inflation.(-)

There will be a period of consultation up to 30 June on the Government's plans to modernise the structure of general betting duty.

Air passenger duty

From 1 April 2001, the duty on economy flights within the European Economic Area (EEA) will be reduced from £10 to £5. In addition, all flights from the Scottish Highlands and Islands will be exempt from duty. The duty on economy flights to other destinations will remain at £20. The rate for club and first class fares for destinations in the EEA will remain at £10, but will rise from £20 to £40 for other destinations.(35, 36)

The current return leg exemption for flights within the UK will be abolished from 1 April 2001, in line with EU Treaty obligations.

Modernising indirect taxes

From Royal Assent, Customs will be given a new power to search articles accompanied by a person where there are reasonable grounds to believe that the person has with them goods on which payment of excise duty is outstanding and has not been deferred. This will align the power to search accompanied articles for excise goods with the power to search vehicles.(-)

Powers of Customs officials to search premises under a Writ of Assistance will be modified to ensure that they are compatible with the provisions of the Human Rights Act 1998 (HRA) which comes into force on 2 October 2000. The changes take effect from Royal assent.

A financial security requirement will be introduced from Royal Assent to cover any potential excise duty liability for goods in transit between EU member states.(-)

Table A.13: Budget 2000 Measures

*negligible.

Table A.14: Measures included in Pre-Budget Report

In the Pre-Budget Report the Chancellor announced that future decisions about changes in fuel and tobacco duties would be taken on a Budget by Budget basis. Accordingly, the current revenue forecast revalorises these duties in line with expected inflation for future years. The Budget 99 assumed that these duties would rise in line with previous commitments to increase fuel duties by 6 per cent in real terms and tobacco duties by 5 per cent in real terms each year. Compared to continuing the escalators, revalorising road fuels has a revenue cost of £1.2 billion in 2000-01, £2.6 billion in 2001-02 and £4.0 billion in 2002-03; for tobacco the comparable revenue costs are £0.2 billion, £0.8 billion and £1.3 billion.

Appendices

APPENDIX A1: EXPLAINING THE COSTINGS

This appendix explains how the Exchequer effects of the Budget measures are calculated. In the context of these calculations, the net Exchequer effects for measures may include amounts for taxes, national insurance contributions, social security benefits and other charges to the Exchequer and, for Customs and Excise, penalties.

The general approach

The net Exchequer effect of a Budget measure is generally calculated as the difference between that from applying the Pre-Budget and post-Budget tax regimes to the levels of total income and spending at factor cost expected after the Budget. The estimates do not therefore include any effect the changes themselves have on overall levels of income and spending. They do, however, take account of other effects on behaviour where they are likely to have a significant and quantifiable effect on the yield and any consequential changes in revenue from related sources. These include estimated changes in the composition or timing of income, spending or other tax determinants. For example, the estimated yield from increasing the excise duty on petrol includes the change in the yield of VAT on that duty and the change in the yield of VAT and other excise duties resulting from the new pattern of spending. Where the effect of one tax change is affected by implementation of others, the measures are generally costed in the order in which they appear in Tables A.13 and A.14.

The non-indexed base column in Table A.13 shows the revenue effect of changes in allowances, thresholds and rates of duty (including the effect of any measures, such as the increases in the standard rate of landfill tax, previously announced but not yet implemented) from their pre-Budget levels. The indexed base columns strip out the effects of inflation by increasing the allowances, thresholds and rates of duty in line with prices in this and future Budgets.

Where the Government has a pre-announced policy, such as the increases in the standard rate of landfill tax previously announced but not yet implemented, this is also stripped out of the indexed numbers. Measures announced in this Budget are assumed to be indexed in the same way in future Budgets.

The indexed base has been calculated on the assumption that each year fuel, tobacco, and alcohol duties and allowances and thresholds, other than VAT, gaming duties and tax credits, rise in line with the projected increase in the RPI over 12 months to the September following the Budget, assuming implementation dates of March for fuel and tobacco and April for alcohol. Tax credits are assumed to rise in line with the Rossi index. The VAT thresholds and all other duties are assumed to rise in line with the RPI increase over the year to the previous December (1.76 per cent in the year to December 1999). Increases in VAT, gaming duty bands and landfill tax are assumed to be implemented in April, amusement machine licence duty in August and air passenger duty in November.

These costings are shown on a National Accounts basis. The National Accounts basis aims to recognise tax when the tax liability accrues irrespective of when the tax is received by the Exchequer. However, some taxes are scored on a receipt basis, principally due to the difficulty in assessing the period to which the tax liability relates. Examples of such taxes are corporation tax, self assessment income tax, inheritance tax and capital gains tax. This approach is consistent with other Government publications.

Notes on Individual Budget Measures

Anti-avoidance measures

The yields represent the estimated direct effect of the measures with the existing level of activity. Without these measures, there could be a significant future loss of revenue currently included in the baseline.

New all-employee share plan

The cost includes relief from income tax and national insurance contributions and is net of liabilities arising from the taxation of shares withdrawn from the plan prior to the typical five year holding period.

The cost is expected to increase to around £450 million by 2002-03 before falling to around £400 million by about 2006-07 due to charges on early withdrawal of shares from the plan.

Corporate venturing

The cost is expected to reach £100 million after five years.

Capital gains tax reform

The long term cost is expected to be about £400 million, after first rising to £600 million.

Abolition of withholding tax on international bonds and foreign dividends

In 2001-02 the cost arises from part of the tax liability deducted at source under current rules being met through self assessment for companies with payment in the following year. By 2003-04 there will be a yield of about £25 million.

Enterprise Management Incentives (EMIs)

The cost includes income tax and national insurance contributions and is net of capital gains tax liabilities arising from disposal of shares acquired under EMIs. The expected long term cost is £45 million due to future revenues from capital gains and the normal charges applying to discounts.

EIS/VCTs: reduction in minimum holding period and technical changes

The full effect of reducing the minimum holding period will not arise until 2003-04 when the cost will be £30 million. The technical improvements made to both schemes have negligible cost.

Permanent first year allowances for SMEs

The revenue effect covers both companies and unincorporated businesses. The cost declines slowly after 2002-03.

100 per cent first year allowances for information and communication technology equipment for small enterprises

The revenue effect covers both companies and unincorporated businesses. From 2004-05, there will be some increase in tax liability as the balance of unrelieved capital expenditure carried forward is reduced by higher allowances.

Extending group rules for corporation tax losses and company gains

The cost is expected to fall to a small full year figure from 2004-05.

Changes to double taxation relief

The annual yield is expected to be £100 million from 2004-05.

Life company apportionment rules

The annual yield is expected to increase steadily to reach £150 million after 5 years.

Insurance companies and Lloyds: reserves

The annual yield from this measure will increase gradually and is expected to reach £250 million after 10 years.

Rent factoring

The full effect will not arise until 2004-05 when the yield will be £150 million

Petroleum revenue tax: preventing misuse of safeguard relief

The long term yield is expected to be under £10 million a year, after first rising to £50 million.

Charities tax package

The full combined effect of the packages in the Pre-Budget Report and Budget 2000 will be a cost of some £400 million after 5 years.

Affordable Warmth Scheme - capital allowances

The cost will rise to £45 million in 2004-05 and 2005-06, declining gradually thereafter.

Tonnage tax

The cost will depend on the number of companies that opt into the new arrangements.

Stakeholder pensions

The cost includes: income tax relief on contributions to stakeholder pensions, extra costs from a combined tax regime for personal pensions and stakeholder pensions, national insurance contribution rebates to stakeholder pensions and tax relief associated with the employee's part of national insurance contribution rebates to stakeholder pensions. The annual cost is expected to reach £5 billion by about 2050. This full year cost includes higher NIC rebates to appropriate personal pensions (beginning in 2003-4 following the year of accrual) and the effect of higher rebates to stakeholder pensions and appropriate personal pensions following the change from SERPS to State Second Pension.

Quarterly deductions for small employers

The cost of this measure is shown as 'nil' under the National Accounts basis. The cost in receipts terms as employers defer paying tax by up to two months is estimated as £40 million in 2000-01 and £10 million in 2001-02.

Excise duties

The cost of changes in excise duty rates depends partly on the extent to which manufacturers and wholesalers anticipate expected increases by releasing their goods early so as to pay duty at pre-Budget rates. Costings for excise duties normally take into account the anticipated level of such forestalling on the timing of accrued liability. This effect can be significant, particularly for tobacco products.

The calculation of the expected effect of changes in duty rates on consumer demand for excise goods assumes that any change in duty is passed on in full to consumers. Details of the main own and cross price elasticities used to calculate the cost of Budget measures were published in Government Economic Service Working Paper no. 138 "Consumers' Demand and Excise Duty Receipts Equations for Alcohol, Tobacco, Petrol and Derv" in November 1999.

Air Passenger Duty

The costs of changes in air passenger duty do not allow for any change in the yield from other indirect taxes resulting from the new pattern of spending. This is due to uncertainty about whether spending abroad or in the UK would be affected.

The indexed base has been calculated on the assumption that each year air passenger duty increases in November in line with the increase in RPI. The £20 million full year cost of not revalorising the duty rates is included in the indexed costings.

The cost of exempting Scottish Highlands and Islands flights allows for the abolition of the domestic return leg exemption but not the other elements of the APD package.

APPENDIX A2: TAX CHANGES ANNOUNCED IN BUDGET 99 OR EARLIER

This Appendix sets out a number changes to tax, national insurance contributions, social security benefits and other charges to the Exchequer which were announced in Budget 99 or earlier, the effects of which are taken into account in the forecast.

Table A2.1: Measures announced in Budget 99 or earlier which take effect after this Budget

* Negligible

Inland Revenue taxes

The new starting rate of corporation tax takes effect from 1 April 2000 for profits up to £10,000, also benefiting companies with profits up to £50,000. (1)

Tax credits will be available for spending by small and medium sized enterprises on research and development from April 2000. Following consultation, the measure has been expanded to include more companies and payable credits per company limited to the total of PAYE and national insurance liabilities. These changes leave the net cost unaltered. (2)

A new tax relief will ensure that employees pay no tax or national insurance contributions on their employer's contributions to their Individual Learning Accounts provided the employers make available such help to their entire workforce on similar terms.(3)

Basic rate relief on vocational training will be abolished in September 2000. (4)

From 6 April 2000, the basic rate of income tax will be reduced from 23p to 22p.(5)

From April 2000, the level of earnings above which people will pay national insurance contributions will increase as a consequence of the introduction of the new primary threshold. The level of earnings above which employees will pay no national insurance contributions (the upper earnings limit) will also increase to maintain the earnings base upon which national insurance contributions are paid. (6, 7)

From April 2000, the class 2 NICs charge will be reduced from £6.55 to £2 per week. At the same time the starting point for paying class 4 NIC will be aligned with the income tax personal allowance and the contribution rate increased to 7 percent. The upper profits limit rises with the upper earnings limit described above.(8)

The married couple's allowance for a husband and wife both born after 5 April 1935 (and related allowances) will be removed from 6 April 2000. Couples in which at least one of the spouses was born before 6 April 1935 will remain entitled to claim the allowance. Widow's bereavement allowance will be removed in respect of deaths after 5 April 2000. Tax relief for maintenance payments will cease for payments made and falling due on or after 6 April 2000. Tax relief for maintenance payments will be retained where one or more of the parties was born before 6 April 1935.(9)

A new Children's Tax Credit will be introduced from 6 April 2001 for families with children. The credit will be up to £8.50 per week, tapered away from families where one or both partners is a higher rate taxpayer.(10)

Relief on mortgage interest payments for home loans will be removed from 6 April 2000. (11)

Budget 99 announced that legislation would be introduced in April 2000 to tackle avoidance of tax and national insurance contributions through the use of personal services companies. The full year yield of this measure is £350 million with cash receipts of £400 million in both 2000-01 and 2001-02 and £300 million in 2002-03. The larger apparent first year yield arises because the National Accounts basis uses an accruals method for receipts of PAYE and national insurance contributions but only recognises corporation tax as received. (12)

From April 2000, employers' Class 1A NICs will be extended to all benefits in kind that are currently chargeable to income tax, where a national insurance contributions charge is not already payable. (13)

The credit for children under 11 in the Working Families' Tax Credit and the Disabled Person's Tax Credit will be increased by £1.10 above indexation to make it equal to the credit for children aged 11-16 from 6 April 2000.(18)

The Chancellor announced in Budget 98 that scale charges for fuel provided for private motoring in company cars would increase by 20% above revalorisation from 6 April 1998 and in each of the following four years. (19)

Relief will be available directly for the cost of buying 3rd generation mobile phone licenses. (*)

A new 'fast-track' to the Disabled Person's Tax Credit will be introduced from October 2000 to help with the retention of employees who become sick or disabled while working and are able to work for reduced hours or rates of pay.(*)

Customs and Excise taxes

Landfill tax was introduced on 1 October 1996. In Budget 99, the Chancellor announced the introduction of a landfill tax escalator of an additional £1 per tonne on active waste each year to encourage waste managers to look for more environmentally friendly alternatives to landfill.

APPENDIX A3: TAX ALLOWANCES AND RELIEFS

This appendix provides estimates of the revenue cost of some of the main tax allowances and reliefs.

Tax reliefs can serve a number of purposes. In some cases they may be used to assist or encourage particular individuals, activities or products. They may thus be an alternative to public expenditure. In this case they are often termed "tax expenditures". There may, for instance, be a choice between giving tax relief as an allowance or deduction against tax, or by an offsetting cash payment.

Many allowances and reliefs can reasonably be regarded (or partly regarded) as an integral part of the tax structure - called "structural reliefs". Some do no more than recognise the expense incurred in obtaining income. Others reflect a more general concept of "taxable capacity": the personal allowances are a good example. To the extent that income tax is based on ability to pay, it does not seek to collect tax from those with the smallest incomes. But even with structural reliefs of the latter kind, the Government has some discretion about the level at which they are set.

Many other reliefs combine both structural and discretionary components. Capital allowances, for example, provide relief for depreciation at a commercial rate as well as an element of accelerated relief. It is the latter element which represents additional help provided to business by the Government and is a "tax expenditure".

The loss of revenue associated with tax reliefs and allowances cannot be directly observed, and estimates have to be made. This involves calculating the amount of tax that individuals or firms would have had to pay if there were no exemptions or deduction for certain categories of income or expenditure, and comparing it with the actual amount of tax due. The Government regularly publishes estimates of tax expenditures and reliefs for both Customs and Excise and Inland Revenue taxes. Largely because of the difficulties of estimation, the published tables are not comprehensive but do cover the major reliefs and allowances.

The estimates in Table A3.1 below show the total cost of each relief. The classification of reliefs as tax expenditures, structural reliefs and those elements combining both is broad brush and the distinction between the expenditures and structural reliefs is not always straightforward. In many cases the estimated costs are extremely tentative and based on simplifying assumptions. The figures make no allowance for the fact that changes in tax reliefs may cause people to change their behaviour or larger claims for social security benefits. This means that figures in Table A3.1 are not directly comparable with those of the main Budget measures.

Estimation of behavioural effects is notoriously difficult. The sizes of behavioural change will obviously depend on the measure examined and possible alternative behaviours. For example, removing the tax privileges of one form of saving may just lead people to switch to another tax privileged form of saving.

Table A3.1 also gives details of reliefs relating to VAT, which is collected by Customs and Excise. It shows the estimated yield forgone by not applying the standard rate of VAT (17¹/₂ per cent) to goods and services which are currently zero-rated, reduced-rated, exempt or outside the scope of VAT. Estimates of the scale of structural reliefs for local authorities and equivalent bodies are also shown. Again, the figures are estimates and must be treated with caution. In line with the treatment of Inland Revenue taxes, they make no allowance for changes in behaviour.

The estimated costs of reliefs and allowances given in Table A3.1 cannot be added up to give a meaningful total. The combined yield of withdrawing two related allowances would therefore be higher than the sum of individual costs. Similarly the sum of the costs of component parts of reliefs may differ from the total shown.

More details on individual allowances and reliefs can be found in the HM Treasury publication "Tax Ready Reckoner and Tax Reliefs", November 1999.

Table A3.1: Estimated costs of main tax expenditure and structural reliefs