6 The Budget tax and national insurance measures

Objectives

- keep the overall tax burden as low as possible, through firm control over public spending;

- reduce marginal tax rates on income and business profits, to sharpen incentives to work and create wealth through enterprise and investment;

- maintain a broad tax base, which helps to keep tax rates low and avoids distorting decisions;

- shift the balance from taxes on income to taxes on spending;

- simplify the administration of the tax system and minimise the burdens which compliance places on the taxpayer;

- apply it fairly and evenly, closing loopholes so that commercial decisions are not distorted by attempts to avoid tax;

- use the tax system to enable markets to work better, for example by making decision makers aware of the external costs of their decisions;

- raise revenue in ways which do least harm to the economy and take account of the competitive position of UK business.

6.03 This Budget furthers the Government's overall objectives for the tax system by:

- continuing to keep the overall tax burden low, through firm control over public spending, and only making tax cuts which it believes are sustainable;

- cutting the basic rate of income tax and the small companies' corporation tax rate;

- cutting inheritance tax to allow more wealth to pass between generations;

- maintaining and strengthening a broad tax base, by phasing out tax relief for profit related pay, which has done the pump-priming job for which it was intended; and taking a range of direct and indirect tax measures, especially in respect of VAT, to close loopholes and to ensure that the tax system is applied evenly and fairly;

- including a number of measures to simplify the administration of the tax system;

- including a package of measures designed to improve the environment;

- seeking to raise the revenues necessary to provide public services in ways which are least distortionary and take account of the current strong position of UK business.

Personal taxation

Income

6.05 The Budget also proposes:

- increasing the main personal allowances by £280, £200 more than indexation (1);

- increasing the personal allowance for the elderly by £310, also £200 more than indexation (2);

- increasing the married couple's allowance, the additional personal allowance, the widow's bereavement allowance and relief for maintenance payments (3), the income limit for age related allowances (4), and the basic rate limit (6) in line with statutory indexation (based on the 2.1 per cent increase in the RPI in the year to September 1996);

- increasing the blind person's allowance to £1,280, and legislating for future statutory indexation (*).

6.06 The rate applicable to trusts will remain unchanged at 34 per cent (-).

6.07 These measures will:

- cut tax for all income tax payers, including over 3 million pensioners;

- reduce marginal rates for 16.6 million people;

- by widening the 20 pence band, ensure that over a quarter of all taxpayers continue to pay tax at a marginal rate of no more than 20 per cent; and

- take 410,000 out of income tax altogether, relative to indexation.

Number of income tax payers (millions)
Year	Lower rate(1)	Basic rate	Higher rate	Total
1991-92	-	24.1	1.6	25.7
1992-93	4.2	19.4	1.7	25.4
1993-94	5.4	17.9	1.7	25.0
1994-95	5.2	18.2	2.0	25.3
1995-96(2)	5.6	17.9	2.2	25.7
1996-97(2)	7.1	16.4	2.1	25.6
1997-98(2) (3)	7.2	16.2	2.2	25.6

(1) From 1993-94 onwards a number of taxpayers with taxable income in excess of the lower rate limit pay tax only at the lower rate. This is because it is their dividend income and (from 1996-97) their savings income which take their taxable income above the lower rate limit, and such income is chargeable to tax at the lower rate and not the basic rate.
(2) Provisional.
(3) After taking account of Budget measures.

6.08 The income tax measures mentioned above cost £2.2 billion against an indexedbase in 1997-98, rising to £3.3 billion in 1998-99 and £3.4 billion in 1999-2000.

6.09 The cut in the basic rate of income tax furthers the Government's objective of reducing marginal tax rates on income. The 23 per cent rate will be the lowest basic or standard rate of tax for nearly 60 years. Chart 6.1 illustrates the changes in income taxes from 1978-79 to 1997-98.

CHART HERE

6.10 The new allowances and bands of taxable income are:

Income tax allowances (£)	1996-97	1997-98	Increase
Personal allowance	3 765	4 045	280
Married couple's allowance(1), additional
personal allowance(1), widow's     bereavement allowance(1)	1 790	1 830	40
For people aged 65-74:
personal allowance	4 910	5 220	310
married couple's allowance(1)	3 115	3 185	70
For people aged 75 and over:
personal allowance	5 090	5 400	310
married couple's allowance(1)	3 155	3 225	70
Income limit for age related allowances	15 200	15 600	400
Blind person's allowance	1 250	1 280	30

(1) Tax relief for these allowances is restricted to 15 per cent.

Band of taxable income (£)	1996-97	1997-98	Increase
Lower rate 20 per cent	0 - 3 900	0 - 4 100	200
Basic rate 24 per cent	3 901 - 25 500
Lower rate 23 per cent		4 101 - 26 100
Higher rate 40 per cent	over -25 500	over -26 100	600

6.11 The current rent a room threshold of £3,250 a year below which no tax is paid on rent received from a lodger in the landlord's own home will be increased by £1,000 to £4,250 from 6 April 1997 (8).

6.12 The scales for assessing the benefit of free fuel provided by employers for private use in company cars will be increased by 13 per cent for petrol cars and 15 per cent for diesel cars, in line with changes in fuel prices, from 6 April 1997 (9). The scales are also used for employers' national insurance contributions (51) and VAT(31).

6.13 The rules on travel expenses will be changed to give relief for travelling expenses incurred by site based employees and to make fairer and less complex the treatment of triangular travel. This will come into effect from April 1998(10).

6.14 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 £84,000 (-).

Capital

CHART HERE

6.23 Two small amendments will be made to the Venture Capital Trust (VCT) legislation to give VCTs added flexibility to develop further. Similar amendments will be made to the Enterprise Investment Scheme and CGT reinvestment relief (*).

6.24 Inheritance tax agricultural relief will be extended to cover farmland dedicated to wildlife habitats (*).

6.25 An extra-statutory concession governing relief for employers' Class 1A national insurance contributions when computing profits for tax purposes will be legislated for (-).

Business rates

6.27 This Budget provides small businesses with substantial extra help with their 1997-98 rates bills. Properties whose rates bills are already falling in real terms will have those reductions accelerated. Rates bills for other properties will be frozen in cash terms. From 1998-99, real changes in rates bills will revert to the values previously announced (48).

6.28 The table below shows the cost of transitional schemes since the 1995 revaluation.

Cost of business rate transitional schemes: £ million
	1995-96	1996-97	1997-98	1998-99	1999-00
Cost of existing schemes	600	505	340	270	200
Additional costs of 1996 Budget measure			115	100	80

6.29 The rate poundage for 1997-98 will be increased by 2.1 per cent in line with the RPI for the year to September 1996.

Measures to secure the tax base

CHART HERE

6.33 This Budget has also introduced a range of other direct tax measures with the aim of further securing the tax base.

6.34 The tax treatment of machinery and plant with an expected working life of more than 25 years will be brought more into line with the commercial accounting practice. The rate at which capital allowances are given on such assets purchased new on or after Budget day will be reduced from 25 per cent to 6 per cent per annum. The change will not apply to such investment up to 2010 in ships or railways (15).

6.35 Legislation will be introduced to counter avoidance schemes which turn interest earnings of finance lessors into capital receipts and to align the recognition of finance lessors' income more closely with commercial accounting practices (16).

6.36 The 100 per cent corporation tax deduction for intangible costs of drilling most production oil wells will be withdrawn. These costs will now only be eligible for mineral extraction capital allowances at 25 per cent on a reducing balance basis. The change applies to expenditure incurred on or after Budget day, except for expenditure to which a company was committed before Budget day and which will be incurred within the next year (17).

6.37 Measures will be introduced to ensure that, from Budget day, capital gains will remain chargeable where the tax status of a security alters, and to legislate for an extra-statutory concession so that it works as intended (18).

6.38 A stamp duty reserve tax charge will be introduced from Budget day to counter abuse of the stamp duty exemption for bearer securities issued in foreign currency by UK companies (19).

6.39 New measures will be introduced to counter contrived claims to double taxation relief (20).

6.40 Certain payments made under life insurance policies will be treated, with unlimited retrospection, as capital payments for the purposes of the special tax regime applicable to gains on policies of life insurance (*).

6.41 Changes will be made to clarify the rules preventing avoidance of income tax by UK residents from the transfer of assets abroad in relation to income arising on or after Budget day (*).

6.42 Employers who pay their employees in shares in their own company will, with effect from midnight on Budget day, be obliged to account for income tax under PAYE when the payment is made, unless the shares are provided under a scheme approved by the Inland Revenue. Such payments are currently treated as benefits in kind on which employees pay income tax after the end of the tax year. This measure does not apply to shares under options granted but not exercised before Budget day. Parallel measures will be applied to national insurance contributions (21).

6.43 Legislation will be introduced allowing the Department of Social Security to pass information to the Inland Revenue and Customs and Excise to assist those departments perform their duties, from Royal Assent (-).

VAT

6.45 The main VAT anti-avoidance and revenue protection measures are to:

- restrict the availability of the special schemes used by retailers to account for VAT to businesses which cannot account for VAT in the normal way, from a current date as Customs discuss the issue with individual retailers; and withdraw the standard method of calculating gross takings (under which traders can delay accounting for VAT on in-house credit sales), from 1 March 1997 (25);

- counter tax avoidance by VAT groups on the purchase of international supplies, from Budget day (*);

- restrict further the option to charge VAT on supplies of property, so that it applies only to property used mainly for VATable business purposes. The measures take effect from Royal Assent, but will not affect supplies made after that date under leases executed before Budget day (27);

- tax at a 17.5 per cent rate of insurance premium tax certain insurance sold with other goods or services (for example mechanical breakdown insurance, travel insurance, and insurance sold with TV and car hire), unless bought direct from the insurer when it will be taxed at 4 per cent (see paragraph 6.69 below). The change is being made because some providers have avoided VAT by inflating the charge for the (VAT-exempt) insurance element liable to insurance premium tax. It will take effect from 1 April 1997 (42);

- prevent manipulation of the bad debt relief provisions. The main provision, for recovering input tax on supplies where no payment has been made and the supplier has lodged a claim for bad debt relief, affects supplies made after midnight on Budget day. The time at which bad debt relief can be claimed will be changed from six months from the time of supply to six months from the time payment is due, from 17December 1996. Other provisions, which drop the requirement for a transfer of title to goods before entitlement to bad debt relief and repeal legislation relating to the "old scheme" for bad debt relief, take effect from Royal Assent (26).

- counter schemes using non-EC suppliers to supply VAT-free telecommunications services to customers in the UK, from a date to be agreed by all member states (28);

- ensure that the existing zero rates for the sale of donated goods cannot be used to allow organisations who make VAT-exempt supplies to obtain items of equipment free of VAT, with effect from Budget day (*);

- specify the conditions under which charitable providers of institutional or domiciliary care or treatment will be entitled to purchase a specified range of "relevant goods" at the zero rate. This will take effect from Budget day (*);

- strengthen the rules to prevent the artificial separation of businesses to get below the VAT registration threshold, from Royal Assent (*);

- ensure that businesses hiring out staff have to account for VAT on the salary costs of the staff, even where these are met direct by the client business, with effect from 1 April 1997. Customs will be consulting those affected with a view to allowing the present VAT treatment to continue for genuine secondments (*).

6.46 As announced on 18 July 1996 (31), a three year limit is being introduced for refunds of VAT and other indirect taxes and associated statutory interest, where appropriate. There will also be changes to the provision on "unjust enrichment" to seek to prevent windfall profits to refund recipients. The three year limit applies from 18 July 1996 for VAT, but will apply from Royal Assent for other indirect taxes. From the same dates, Customs' power to assess for underpayments of VAT and other indirect taxes is being reduced from six years' arrears to three (29).

[Prepared 26 November 1996]