• personal allowance for people under 65 (1);
• income limit for age related allowances (3);
• basic rate limit (5);
• capital gains tax annual exempt amount ( - );
• threshold for inheritance tax (6).

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5.06 Changes will be made in the tax treatment of premiums paid for employee indemnity insurance such as directors' and officers' liability insurance. Where employers pay, the payment will not be taxable as a benefit in kind; where employees pay, they will get tax relief. The same treatment will apply to payments made to meet work related liabilities, such as legal costs, which are not covered by insurance; and to payments made up to six years after the end of the year in which the employment ends. This will take effect from 6 April 1995 (7).

5.07 The rules for registered profit related pay schemes will be amended to reflect changes in accountancy practice on extraordinary items ( - ).

Benefits in kind

5.09 Accessories for the disabled, fitted in company cars, will not be taxed as a benefit in kind from 6 April 1995 (*).

Self assessment

• all income from property, including furnished lettings, will be brought together and taxed using rules similar to those for trading income;
• the rules for taxing non-residents will be simplified;
• employers will be required to give employees certain information, mainly about benefits and expenses, which they need to complete their tax returns; and
• anti-avoidance provisions will be introduced to prevent exploitation of the rules for the transition from the `preceding year' to the `current year' basis of assessment (*).

Simplification and deregulation

5.12 Other simplification and deregulation changes are:

• the rules for taxation of trusts and other settlements which tax the settlor on the income of a settlement in certain circumstances will be simplified from 6 April 1995 (*);
• tax will be deducted at the basic rate from interest credited to bank accounts belonging to discretionary and accumulation trusts from 6 April 1996 (*);
• two changes will be made to simplify the offshore funds legislation from 29 November 1994 (*);
• measures will be introduced to allow certain tax returns to be submitted electronically (-);
• in Scotland, Inland Revenue will be able to pursue debts of up to £50,000 through the Sheriff courts rather than the Court of Session (-);
• the tax rules relating to foreign income dividends and certain forms of deemed income received by personal representatives of deceased persons' estates, and to payments made out of that income to residuary beneficiaries, will be clarified from 6 April 1995 (*).

Savings

5.14 Personal Equity Plans (PEPs) will be extended to corporate bonds and preference shares (11).

5.15 The annual amount which may be invested in a friendly society tax exempt life assurance fund will be increased from £200 to £270 with effect from Royal Assent (*).

5.16 The maximum level of earnings for which pension provision may be made with tax relief (the "earnings cap") will be increased in line with statutory indexation to £78,600 (*).

5.17 Other savings measures are:

• investors in personal pension schemes will be given more flexibility to choose when to buy an annuity (*);
• and to buy annuities from insurance companies established in other European Union countries ( - );
• the ordinary Save As You Earn (SAYE) scheme will be abolished. Contracts starting on or after 1 December 1994 will not get tax relief (*).
• The Sharesave scheme will continue, and the Treasury will take on responsibility for the model scheme from the Department for National Savings ( - );
• financial institutions in other European Union countries will be able to offer PEPs, TESSAs and Sharesave SAYE schemes in the UK (*);
• gains made by higher rate taxpayers on certain life assurance policies and life annuity contracts written by insurers established in other European countries will in future only be charged on the difference between the higher and basic rates of tax (*).

Investment in small businesses

5.19 Relief from capital gains tax which is available where gains are reinvested in an unquoted trading company will, from 29 November 1994, be extended to cover companies which are engaged in farming or developing property, or which hold more than half their assets in land and buildings (13).

5.20 The reliefs available under the Enterprise Investment Scheme will be extended to allow CGT to be deferred on capital gains where they are reinvested in a company which qualifies under the scheme. Changes will also be made to simplify the scheme and make it more attractive for companies and investors to use. These include allowing relief when more than half a company's assets are in land and buildings (14).

Business taxation

5.22 Employers will be allowed to make quarterly rather than monthly payments of PAYE and national insurance contributions from 6 April 1995 when their total PAYE and NIC bill is below £600 a month, an increase from the current threshold of £450 (16, 55).

5.23 The industrial buildings allowance provisions will be amended to extend capital allowances to design, build, finance and operate (DBFO) roads; and new rules will give capital allowances balancing charges to them and to toll roads covered by the private finance initiative (17).

5.24 Other business taxation changes are:

• the relief which allows group companies to set gains from the sale of business assets against the cost of assets acquired by other companies in the same group will be put on a statutory basis ( - );
• the stamp duty relief for sales of property within a group of companies will be extended to new leases, and the test for group membership for the purposes of this relief will be revised from 90 per cent ownership of issued share capital to 75 per cent ownership of ordinary share capital, from Royal Assent (*);
• changes will be made to facilitate the use of cash as collateral for stock loans and to address anomalies in the interaction between the legislation on sale and repurchase of securities in the Finance Act 1994 and other legislation (*);
• a tax regime will be established for open ended investment companies, a new form of collective investment vehicle which will be constituted as a company with continuously variable share capital. It is expected that the necessary secondary legislation will be brought into effect by mid-1995 (*);
• the distribution rules applying to thinly capitalised companies will be modified (*);
• the tax treatment of short rotation coppice (in which fast growing trees are regularly harvested for fuel) will be clarified to ensure that it is taxed as farming and thus excluded from the exemption for commercial woodlands (*).

Anti-avoidance and revenue protection measures

5.26 From 29 November 1994 companies within a group will only be able to claim rollover relief for business assets acquired from outside that group and not by transfer from other companies within the same group (19). Changes from the same date will also counter avoidance of the charge which applies when a company leaves a group holding an asset which it acquired from another company in the same group (*).

5.27 Changes will be made to prevent avoidance of tax by manipulating the valuation of stock when a trade is transferred between connected parties (20).

5.28 Where there is a change in the ownership of an investment company, measures will be introduced to prevent companies setting excess management expenses and charges from the period before the change against profits of a later period. This will apply to changes in ownership on or after 29 November 1994, unless the contract for sale was entered into before that date (21).

5.29 Any petroleum revenue tax (PRT) losses transferred to the purchaser of an interest in an oil or gas field will exclude losses attributable to reliefs brought into the field by the seller. Reliefs brought into a field will also be excluded from any unrelievable field loss which is set against the PRT liability of another field. The changes apply to claims for relief and transfers of an interest made on or after 29 November 1994 (22).

5.30 Measures will be introduced to prevent erosion of the tax base for life assurance companies through reinsurance arrangements, and to correct other anomalies (23).

5.31 Measures will also be introduced to:

• ensure that capital gains tax applies to disposals of certain securities linked to a share index, on or after 29 November 1994 (*);
• amend the capital allowances rules for industrial buildings and buildings in enterprise zones to clarify the amounts on which allowances can be claimed ( - );
• amend the provisions introduced in the March 1993 Budget for Lloyd's special reserve funds to ensure that they operate as originally intended ( - ).

Customs and Excise taxes

Value added tax

5.33 From 1 August 1995 businesses will be able to recover VAT on the purchase of cars bought wholly for business use, primarily leasing. Where VAT is recoverable, businesses will have to account for output tax on the eventual sale of the car by the business. Only half of the VAT applying to leasing charges will be recoverable where there is any private use (24).

5.34 The scheme under which VAT on certain second-hand goods is charged only on the dealer's margin will be extended to virtually all second-hand goods, antiques and collectors' items, whether sold by a dealer or at public auction. A simplified method of global accounting for some margin scheme transactions will be introduced, and an effective VAT rate of 2.5 per cent will be charged on imports of certain works of art, antiques and collectors' items which were previously exempted from VAT at import. These changes implement the European Community seventh VAT directive and will be phased in from 1 January 1995 (25).

5.35 The zero-rating of passenger transport will be confined to public passenger transport in the generally accepted sense, as envisaged when the relief was first introduced, from 1 April 1995 (26).

5.36 A number of changes will be made to reduce burdens on business:

• traders will be consulted on a move to annual VAT returns and payments for small businesses. Subject to views expressed, it is envisaged that those who voluntarily register for VAT will make annual returns by the end of 1995, with a possible extension to businesses with an annual turnover below £100,000 the following year. There will also be consultation on a simplified scheme for calculating VAT due from small businesses, which would link payments to turnover rather than to detailed accounts of all sales and purchases ( - );
• a number of deregulatory measures associated with the VAT liability of construction and land and property will be introduced. Most will take effect from 1 March 1995 (28);
• the penalties for late VAT registration, unauthorised issue of tax invoices, and failure to notify import of new means of transport or goods liable to excise duty and pay the VAT on time, will be reduced to bring them into line with other VAT penalties, from 1 January 1995 (29);
• the VAT bad debt relief provisions of the VAT Act 1994 will be clarified, and from Royal Assent Customs' right to deduct traders' debts from VAT credits arising during insolvency will be limited further (*);
• the long-standing practice of allowing payment of VAT due on goods removed from excise warehouses to be deferred will be put on a statutory basis from Royal Assent ( - ).

5.37 A number of changes will be made to reduce scope for avoidance of VAT:

• the rules will be changed to stop avoidance of VAT through lease and lease back of property from 30 November 1994 (30);
• the rules on incidental financial transactions will be changed to block a device used to avoid VAT on share issues from 1 December 1994 (31);
• to counter abuse, the de minimis rules which determine when small businesses making exempt supplies can treat themselves as fully taxable will be tightened from 1 December 1994 (32);
• traders appealing against a Customs requirement to provide security against payment of their VAT liability will have to be up to date with their VAT returns and payments, from Royal Assent (33);
• section 30(5) of the VAT Act 1994 will be repealed from Royal Assent to prevent it being used as a basis for tax avoidance. Alternative legislative cover will be provided to allow registered charities to continue to reclaim VAT on goods exported for charitable purposes ( - ).

Excise duties

5.39 Duties on tobacco products will be increased from 6 pm on 29 November 1994, in line with the Government's commitment to increase duty on average by at least 3 per cent a year in real terms (39).

5.40 Tax on petrol will rise by 2.5 pence per litre, and duty on diesel will rise to bring it into line with that for unleaded petrol, from 6 pm on 29 November 1994, in line with the Government's commitment to increase duty on road fuels on average by at least 5 per cent a year in real terms (40, 41, 42). Duty on gas oil and fuel oil will rise by 0.5 pence per litre from the same time (43).

5.41 The changes in duty and their effect on the price of each product are set out below. Price effects include VAT except for gas oil and fuel oil.

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5.42 The rate of duty on road fuel gas will remain at its current level, but will be expressed per kilogram rather than per litre from 6 pm on 29 November 1994 (*).

5.43 The rules for giving duty relief to traders using mineral oil for industrial purposes other than as motor or heating fuel will be changed to reduce the administrative burden on traders from the summer of 1995 (*).

5.44 The definition of vehicles entitled to use rebated heavy oil (commonly known as red diesel) as fuel on public roads will be revised to preserve nearly all existing entitlements following changes to vehicle excise duty, from 1 July 1995 (*).

5.45 A number of changes will be made to simplify the structure of alcohol duties:

• the number of tax bands for wine and made-wine with strength between 1.2 and 5.5 per cent alcohol by volume (abv) will be reduced from five to two from 1 January 1995 (*);
• the systems for refunding duty on alcohol used in the manufacture of food and non-alcoholic drinks will be unified and simplified from Royal Assent (*);
• the regime for denatured alcohol, including methylated spirits, will be extended to cover all dutiable alcohols used in foods and non-alcoholic drinks from the summer of 1995 (*);
• the definition of beverages between 1.2 and 5.5 per cent abv which are liable to beer duty rate will be clarified from 30 November 1994 (*).

5.46 A statutory right to recover excise duty which has been overpaid will be introduced; and there will be provision for claims to be brought before the VAT and Duties Tribunal in the event of an appeal, from the summer of 1995 (*).

5.47 Gaming machine licence duty will be increased on average by about 19 per cent for licence applications made on or after 1 December 1994, and payment by instalments will be introduced from 1 November 1995 for annual licences (44). From the latter date, the duty will be extended to include amusement machines and will be renamed amusement machine licence duty. (45).

5.48 A number of changes will be made to air passenger duty:

• treatment of debts in insolvency will be aligned with other duties and taxes collected by Customs, from Royal Assent ( - ); and
• a mechanism will be provided for the assessment and collection of interest on arrears from 1 January 1995 (*).

Insurance premium tax

Intrastat

Vehicle excise duty

5.52 The system of concessionary and exempt classes of VED will be rationalised with effect from 1 July 1995. The number of concessionary classes will be reduced from 132 to nine. Exemption from VED will be extended to police vehicles (48).

5.53 The definition of a goods vehicle for tax purposes and the taxable weight of such vehicles will be clarified (49).

5.54 A number of other changes will be made:

• new powers will be introduced to enable a fee, to cover the costs of the Driver and Vehicle Licensing Agency (DVLA), to be charged on new vehicle registrations which are not notified to DVLA under the automated first registration scheme (50);
• DVLA will be allowed to sell anonymised data, for example to market research companies (50);
• powers will be introduced to enable wheelclamping to be used to combat VED evasion (50);
• new requirements to provide documentation will be placed on the vendor, to reinforce the proposed move to joint notification of changes in vehicle ownership ( - );
• vehicles with fewer than nine seats currently licensed as `Hackney' carriages, will be licensed as cars from 1 July 1995 (*).

Business rates

Transitional relief

5.56 Changes in rateable values resulting from revaluation will vary significantly between regions. A scheme of transitional relief will limit the maximum real increases in rates bills over the coming years to 10 per cent a year for large properties, 7 1/2 per cent for small properties, and 5 per cent for small mixed domestic/non-domestic properties (such as shops with flats above).

5.57 The transitional relief scheme will be financed in 1995-96 in part by limiting real reductions in rates bills to 5 per cent for large properties and 10 per cent for small ones. An Exchequer contribution will cover the balance (51).

Rate poundages

National insurance contributions

5.60 From April 1996 employers who take on someone who has been out of work for at least two years will be able to get a rebate on their employer NICs on that person for up to a year (53).

5.61 From April 1995 the lower earnings limit will be increased from £57 to £59 a week, in line with the single person's rate of retirement pension; the earnings thresholds for the employers' lower rate bands will each be increased by £5 to £105, £150 and £205; and the upper earnings limit will be increased from £430 to £440 a week ( - ). The new structure of contributions is:

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5.62 The weekly Class 2 rate for the self employed will be increased to £5.85, and the Class 3 voluntary contribution to £5.75. The lower and upper profits limits for Class 4 contributions will increase to £6,640 and £22,880 respectively ( - ).

5.63 To simplify the NICs system and provide a better service for business, Inland Revenue dispensations will count for NICs; and the Inland Revenue and the DSS will be drawing up a programme for closer working ( - ).

5.64 Treasury grant not exceeding 12.5 per cent of contributory benefit expenditure will be made available to the National Insurance Fund in 1995 - 96.

5.65 The Government Actuary will report on the likely effect of the changes on the National Insurance Fund. The working assumptions provided to the Government Actuary for use in preparing his report are set out in Annex A to Chapter 3.

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