G1. CORPORATION TAX
The Chancellor confirmed his intention to increase the limit of the 10% starting rate of corporation tax from 1 April 2003 from its current limit of £10,000. The limit will be fixed in Budget 2002.
Further consultation is proposed on specific ways of simplifying the corporation tax computation for small businesses through aligning profits for tax purposes more closely with profits reported in their accounts.
Encouraging news but this is still a tax that all companies fear. That is why pension contributions – both to approved and unapproved schemes – can be such an attractive proposition for the business owner as it provides a tax deduction.
G2. ENCOURAGEMENT TO ENTREPRENEURS
6 April 2002 has long been a key date for those who own assets qualifying for capital gains tax business assets taper relief. The most widely held asset which can qualify for such relief is shares in a limited company. Under the current rules, from 6 April 2002 the full 75% taper relief will apply for those shareholders who have held shares for four years – the commencement of this favourable regime having been in 1998 – that have qualified for business assets taper relief throughout that four year period according to the qualification rules that existed at the time.
Many owners of shares in a private company who are selling their business will have had this in mind in attempting to establish legitimate deferral strategies so as to defer the effective date of disposal for tax until after 5 April 2002. After all, a 10% effective rate of CGT for a higher rate taxpayer is certainly worth waiting for. For many this may well have caused them to simplify more intricate disposal plans that may have otherwise been considered in order to defer or avoid CGT. The lower the effective rate of tax then, generally speaking, the lower is the incentive to avoid it. This would undoubtedly have been in the mind of the Government when implementing these changes.
In his pre-Budget statement, the Chancellor announced legislation will be introduced in the Finance Bill 2002 to give effect to a further relaxation to business assets taper relief. Under the new legislation individuals disposing of qualifying business assets after 5 April 2002 can qualify for the maximum business assets taper relief sooner as the holding period (measured from as early as April 1998) to qualify for 75% taper relief will be reduced to two years, with 50% taper relief available after one year. This changes follows a previous relaxation of the conditions on qualifying assets to broaden the range of investors who qualify. Already, as a result of previous changes, all holders of shares in unquoted (which includes shares quoted on the AIM) companies, employees holding shares in quoted companies and non-employees with a minimum 5% holding in quoted companies qualify for the relief provided the company is a trading company. In this year's Finance Act, under a further relaxation, certain employees in non-trading companies are eligible for business assets taper relief on shares in the company for which they work.
These various relaxations mean that not only most owners/directors but also most employees (and a significant number of investors) can qualify for the accelerated business assets taper relief.
The Government are going to consider changes to the regime for CGT non-business assets in order to improve incentives for investment.