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 UK Budget 2002 - Related Government Press Releases
REV / C&E1

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April 17 2002


(See the full text of the Chancellor's speech here!)


A package of reforms to the business tax system will provide
longer-term stability for business and a competitive business
environment, promoting investment and innovation.

Paymaster General, Dawn Primarolo, said:

"This Government is pressing ahead with a pro-enterprise, pro-
competition and pro-business agenda. We have delivered on economic
stability and higher employment, now it is time to move forward with
measures to boost productivity and close the gap with our
competitors. Only on the basis of a dynamic, enterprising and
productive economy can we generate the resources we need to put our
public services on a secure long-term footing."

Promoting productivity, growth and jobs

The package confirms the recently announced measures:

- A new R&D tax credit available to all companies not already
qualifying for the SME R&D tax credit. As announced, this will
operate as a simple volume tax credit payable to the company carrying
out the R&D. Budget 2002 further announces that the credit will be
payable at a 25% headline rate. This will provide an additional #400
million a year support for investment in new technology by UK
industry. The new credit will build on the existing R&D tax credits
for SMEs in increasing innovation and improving the productivity of
the UK economy.

- An exemption regime for capital gains and losses on substantial
shareholdings will reduce the tax on UK business by #150 million a
year and ensure that important business decisions on restructuring
and reinvestment can be made for commercial, rather than tax,

- A relief for intellectual property, goodwill and other intangible
assets to encourage business to take advantage of new opportunities
in the knowledge-based economy. It will be worth about #200 million a
year to UK businesses, rising to a maximum of #350 million a year in
the longer term.

In addition the Government is announcing:

- A stamp duty exemption for transfers of goodwill to reduce the
tax bill on transfers of business putting goodwill on the same
footing as intellectual property;

- A package of measures to tackle the avoidance of stamp duty on
commercial property transactions, and a reform to stamp duty on land
and buildings in the UK. This will ensure that in future stamp duty
applies fairly to all relevant transactions, and pave the way for the
introduction of electronic conveyancing. (see press notice REV 4 for
further details);

- a package of corporation tax cuts - reducing the starting rate
from 10 pence to zero and the small companies' rate from 20 per cent
to 19 per cent (see press notice REV/C&E 2 for further details);

- A modernised and simplified regime for loan relationships,
derivative contracts and foreign exchange gains and losses from 1
October 2002 to provide certainty and stability for business;

Modernising the business tax system

- Changes to the North Sea tax regime to put in place a stable
regime for the future to ensure a regime that raises a fair share of
revenue on their profits while promoting long term investment:

- companies producing oil and gas from the UK or UK Continental
Shelf will pay a supplementary charge of 10 per cent in addition to
the current 30 per cent corporation tax;

- to encourage investment, a 100 per cent first year allowance for
capital expenditure will be available to North Sea companies; and

- the Government intends, subject to consultation on the
appropriate timing, to abolish North Sea Royalty.

- a measure to modernise the taxation of foreign companies
operating in the UK through branches. Capital will be attributed to a
UK branch for tax purposes, based on the capital it would need to
trade if the branch were an independent, free-standing company. This
will bring the UK closer into line with established international
practice, ensuring a level playing field between foreign companies
(mainly banks) and their UK based competitors. The Government will be
consulting on the technical detail of the legislation;

- A consultation on further changes to the corporate tax system
building on the reforms announced in this Budget and taking forward
the Government's programme of modernisation of the corporate tax
system to ensure that the UK remains the best possible place for

- Reforms to the rules governing changes of accounting basis were
announced on 1 August 2001. Draft clauses have been consulted on and
revised clauses will be published in the Finance Bill;

- Measures to protect the tax base and to root out tax avoidance
whilst facilitating business efficiency and promoting
competitiveness, including:

- restriction of the tax reliefs for expenditure on the production
of "British qualifying films", subject to discussion with the
industry on the details of the implementation. This will refocus the
reliefs on the original intention of stimulating the production of
films in the UK and to promote growth, employment, investment and
opportunities in the British film industry. These changes will apply
from 17 April 2002.

- a reserve power to bring within the charge to tax under the
controlled foreign companies (CFC) legislation all CFCs that are
located in overseas jurisdictions where harmful tax practices are
prevalent. The reserve power will enable the UK to protect itself
from the continuation of such practices in those jurisdictions.

Reducing regulation and compliance costs

A further package of measures will help reduce the tax and compliance
burden on business - another essential step towards a more modern,
flexible and efficient tax system, helping business thrive. Alongside
improvements to capital gains tax - confirmed in the November 2001
Pre-Budget Report - these measures will help ensure that the UK is
one of the most attractive locations for business investment. These
measures include:

- Further reform of the rules on deducting tax at source from
corporate interest and royalty payments to reduce the number of
occasions when tax has to be withheld at source;

- Simplification of the rules for life insurance companies
investing in venture capital partnerships, will reduce compliance
costs and encourage investments. This measure will take forward
recommendations made by Paul Myners in his review on institutional

- A package of measures simplifying the capital gains tax system,
designed to help employees and business and typically reduce the tax
compliance cost.

- Consultation on the offshore funds tax regime.

Press Notices

REV 3 Stamp Duty on UK land and buildings

REV/C&E 2 Supporting Small Businesses and Entrepreneurs


Promoting productivity, growth and jobs

- A new R&D tax credit, to complement the SME tax credit introduced
in Budget 2000, took effect from 1 April 2002. The new credit is
given at a headline rate of 25 per cent. This will reduce the after
tax cost of the full amount of qualifying R&D by 7.5 per cent for a
company paying corporation tax at the standard rate.

- A new exemption for gains and losses on substantial
shareholdings, to provide business with the flexibility it requires
to restructure rapidly in response to emerging global opportunities.
The exemption, which took effect from 1 April 2002 applies where:

- an independent trading company or a company which is a member of
a trading group disposes of a substantial shareholding in another
company which is itself a trading company or the holding company of a
trading group; and

- the investing company has held 10 per cent or more of the
ordinary shares of the company invested in for a period of at least
twelve months in the two years before the share sale.

- A new regime for intangible assets will provide relief to
companies for the costs of intellectual property, goodwill and other
intangible assets. The new regime took effect from 1 April 2002 and:

- covers the cost of acquiring intellectual property, goodwill and
other intangible assets providing relief where none had previously
been available;

- ensures that relief for future acquisitions will be given on a
consistent basis following, as far as possible, the amortisation
reflected in companies' accounts.

- The rules on stock valuation on the transfer of a business will
be modernised with effect from Royal Assent to achieve a better fit
with both the new intangibles and other existing tax rules.

- Transfers of goodwill will be exempt from stamp duty, reducing
the tax bill when businesses with goodwill are bought and sold. This
exemption will put goodwill on the same footing as intellectual
property (exempted from stamp duty in 2000);

- A new regime for loan relationships, derivative contracts and
foreign exchange gains and losses will take effect for accounting
periods beginning on or after 1 October 2002, or earlier where
special rules apply.

It will:

- extend the scope of the financial instruments regime to give
certainty of tax treatment to most derivative contracts, including
those which had not been developed when the original rules were

- enable companies to get relief for bad debts in a wider range of
circumstances; and

- merge the legislation on foreign exchange gains and losses into
the loan relationships and derivative contracts system.

- The legislation includes targeted anti-avoidance measures,
effective from 26 July 2001, 19 December 2001 and 26 March 2002 to
counter avoidance schemes involving:

- premiums and discounts on currency contracts;

- convertible, exchangeable and asset-linked securities; and

- relevant discounted securities.

- Some relaxations have been made to the rules announced originally
to ensure that normal commercial financing transactions are not

- The reform of the loan relationships regime includes measures
which, in line with the changes proposed in the Enterprise Bill, will
facilitate the rescue of companies experiencing financial

Modernising the business tax system

- In last year's Budget the Chancellor made it clear that, in
considering the next steps for North Sea taxation, the Government's
approach would be guided not by short-term factors but by the need
for a regime that raises a fair share of revenue and promotes
long-term investment in the North Sea. In line with this commitment,
the Government has now decided on the reforms it wishes to bring

- It is widely recognised that the present North Sea fiscal regime
does not strike the right balance between promoting investment and
taking an adequate share of revenue derived from a national resource.
The Government has therefore decided to introduce from today a
supplementary charge on profits from the production of oil and gas in
the UK and on the UK Continental Shelf (UKCS). The charge will apply
at 10 per cent, in addition to the standard corporation tax rate of
30 per cent, and will only affect companies producing oil or gas in
the UK or on the UKCS. In virtually all respects, the supplementary
charge will be calculated on the same basis as normal corporation
tax, although there will be no deduction for financing costs against
the 10 per cent charge.

- The Government wants to encourage long-term investment in the
North Sea. From today, therefore, most capital investment in the
North Sea will qualify for an immediate 100 per cent allowance
against general corporation tax and the supplementary charge, rather
than the 25 per cent allowance currently available.

- The Government intends, subject to consultation on the
appropriate timing, to abolish North Sea Royalty, which applies only
to older fields. Some - but not all - of the fields that pay Royalty
are nearing the end of production. The Government therefore wants to
consider the future of Royalty in relation to future investment in
older fields and field decommissioning.

- These changes put in place a sustainable regime for the long
term. They strike the right balance between the need to raise a fair
share of tax for the nation and the need to promote long-term

- Recent OECD work shows that the UK rules on attributing capital
to branches of overseas companies are out of line with international
practice. The proposed reform will address this weakness, by
attributed to a UK branch of a foreign company a share of the
company's capital (i.e. share capital and retained profits) for tax
purposes, based on the capital needed if the branch were an
independent, free-standing company. The new regime will apply to
accounting periods starting on or after 1 January 2003. There will be
consultation on the technical detail of legislation, based around
draft clauses to be published shortly

- This reform will bring the UK closer into line with established
international practice. It will help ensure that the treatment of
foreign company branches here in the UK is similar to that of both UK
companies and foreign companies with UK subsidiaries. This will
ensure a level playing field and enhance competition. The reform will
also mean that foreign company branches pay a fairer share of UK
corporation tax, reflecting the profits they make from their UK

- The consultation on further reforms of the corporate tax system

- consider the case for bringing the remaining taxable gains of
companies into an income regime as a natural extension of the changes
introduced in this Budget, including an approach for land and
buildings that might mirror that for intellectual property;

- examine the merits of rationalising the schedular system; and

- review the scope for greater alignment between the treatment of
investment and trading companies.

- The consultation document will be issued in the summer. Changes
of this sort would have to take account of a range of issues
including the special position of businesses such as life assurance.

- A package of VAT anti-avoidance measures which will help to
protect the tax base, remove distortions and ensure that businesses
pay their fair share of tax, including:

- blocking a scheme used to avoid VAT on second-hand goods,
particularly in respect of business cars;

- following consultation, legislating at the earliest opportunity
to block loopholes in the VAT treatment of face-value vouchers; and

- ensuring that the VAT recovered by the largest partially-exempt
businesses fairly reflects their level of taxable activity.

The changes to film tax relief will include a measure to restrict the
main tax relief, for British qualifying films with budgets not
exceeding #15 million, to production expenditure which has been paid
at the time the film is completed, or is unconditionally payable
within four months of the date the film is completed.

- The reserve CFC power to bring within the charge to tax made by
the CFC rules all CFCs that are located in overseas jurisdictions
where harmful tax practices are prevalent, would give the UK the
power to protect itself from the continuation of such practices in
those jurisdictions. The charge to tax made by the CFC rules is
limited, in effect, to CFCs which predominantly receive certain
limited types of (mainly passive) income, or which meet certain other
conditions. However, it is not appropriate for any CFCs to be outside
the charge to tax in the CFC rules when they are located in
jurisdictions where harmful tax practices are prevalent. And so the
measure introduces the reserve power for the Treasury to make
regulations specifying jurisdictions where all CFCs would fall within
the charge to tax of the CFC rules. The Chancellor is determined to
promote fair tax competition and to take effective action against
jurisdictions that do not remove their harmful tax practices. He
hopes that jurisdictions will remove those practices so that it will
not be necessary to make regulations designating any of them.

Reducing regulation and compliance costs

- Further changes to the system of deducting tax at source from
corporate interest and royalty payments will ensure that from October

- Companies will not have to deduct tax from interest, royalties,
annuities and annual payments paid to specified bodies that are
exempt from UK tax and who would otherwise simply have to reclaim
that tax at a later stage. The rules for deducting tax from payments
made by local authorities will be aligned with those that apply to

- UK companies will be able to make royalty payments to non-
residents without deducting tax where they have a reasonable belief
that the non-resident would be able to reclaim the tax under a double
taxation treaty; and

- UK financial dealers will be able to pay interest without
deduction of tax in the course of financial trading, so strengthening
their competitiveness in this major international industry.
Securities houses will be subject to the same regime as banks for
deducting tax at source on interest payments to individuals.

- A simplification of the calculation of capital gains arising to
life companies and friendly societies investing in certain venture
capital partnerships, avoiding the need for the valuation of unquoted
shares, normally a complex and burdensome task:

- the investment by the life company in the partnership will be
treated as a single asset, acquired when it became a partner;

- capital gains on disposals (including part-disposals) of that
asset will be calculated by reference to distributions from the
partnership to the company, rather than to the values and sale
proceeds of the underlying shares;

- A number of measures to simplify and modernise the VAT system,
including implementation of EU-wide standards on VAT invoicing, and
abolition of outdated VAT provisions concerning the recovery of debts
and the production of printed matter.

- A package of measures simplifying capital gains tax (CGT),
produced after extensive consultation, including the following
measures to help employees and business:

- employees may acquire shares on the same day via different share
option schemes. Exercising the options may give rise to an income tax
charge in some schemes but not in others, and where it does employees
sometimes sell shares in order to pay the tax. The CGT rules do not,
however, identify the shares sold as the shares that produced the
income tax liability. These rules are being changed so that
employees will be able to elect for a different rule that will
typically reduce any CGT liability on that sale; and

- incorporation relief rolls over the CGT charge when a business
and its assets are transferred to a company. Instead the charge
arises when the shares in the company are sold. Businessmen and women
will now be allowed to elect that the relief does not apply. This
will reduce the tax cost in some cases where the shares are sold
before the full benefit of business assets taper relief can be

- A consultation on the offshore funds tax regime. The Government
has decided to consult with fund managers and other interested
parties on how the current regime for taxing investment returns from
overseas collective investment schemes, or 'offshore funds' as they
are commonly known, might be improved. Since their introduction in
1984, the rules have changed little. However, over that period a
number of commercial, regulatory and tax developments have had a
significant impact upon the worldwide investment funds sector. In the
light of these changes the existing rules may no longer be the best
way of delivering the original objectives of the scheme. The
Government will therefore consult on:

- whether the regime should be retained, and if so what reforms can
or should be made to it; or

- whether the regime should be abolished, and if so what
arrangements can or should be put in its place.


R&D Tax Credit

- A consultation on extending R&D tax credits to all companies was
announced in Budget 2001, with the consultation document "Increasing
Innovation", which set out the choice between an incremental credit
(given to companies that increase R&D spending), and a volume credit
(given to all companies undertaking qualifying R&D).

- The November 2001 Pre-Budget Report confirmed that a volume tax
credit would be introduced and announced further consultation into
detailed design options, set out in the document "Designs for

- On 26 March 2002, the Chancellor confirmed that the credit would
be a "simple volume" design, which rewards companies for the full
amount of qualifying R&D they undertake. This Budget announces that
the rate of relief will be 25 per cent.

- A Regulatory Impact Assessment has been prepared and available on
the internet at

Exemption for substantial shareholdings

- A Regulatory Impact Assessment and a summary of comments on the
draft legislation published on 27 November 2001 are available on the
Inland Revenue website.

Loan relationships, derivative contracts and foreign exchange gains
and losses

- The legislation announced today has been the subject of extensive
consultation begun in 2000 and leading, shortly after the 2001 Pre-
Budget Report, to publication of a Technical Note entitled "Loan
Relationships, Derivative Contracts and Foreign Exchange Gains and
Losses", which contained draft legislation.

- A Regulatory Impact Assessment has been prepared and available on
the internet at

Controlled foreign companies (CFCs)

- The CFC rules are designed to stop UK companies reducing their
tax liabilities by diverting profits to foreign companies under their
control, which are situated in low tax jurisdictions. The rules work
by, broadly, charging UK parent companies of CFCs on an amount equal
to the profits that would otherwise avoid tax.

- There are a number of exemptions from the CFC rules to ensure
that the rules only deal with controlled foreign companies that are
used for the purpose of reducing UK tax.

Capital Gains Tax Simplification

- As part of his Enterprise for All announcement on 18 June 2001,
the Chancellor of the Exchequer opened a consultation to simplify
capital gains tax within the existing policy framework. The
Government is very grateful to the 24 organisations and individuals
who replied to the consultation and also to the members of the
Capital Gains Tax Review Group who explored options with the Inland
Revenue. A summary of replies to consultation is published on the
Inland Revenue's website.

- The Government remains committed to exploring opportunities for
further simplification of capital gains tax, specifically looking at
the scope for simplifying:

- the taxation of part disposals of shares and units acquired in
monthly purchase schemes; and

- foreign currency transactions, for example, it can be complex to
calculate gains where there are multiple deposits and withdrawals
from a foreign currency bank account.

Life companies and friendly societies investing in venture capital

- The Myners' report entitled "Institutional Investment in the UK:
a review" was published in March 2001. The Chancellor announced at
Budget 2001 that the Government would be taking forward all of the
report's recommendations. A link to the Myners report can be found on
the HM Treasury website.

Offshore funds

- The offshore funds regime was introduced in 1984. It governs the
taxation of all UK resident investors in overseas collective
investment schemes or 'offshore funds'.

- Its purpose is to counter the use of particular types of fund to
convert income flows into capital gains. Prior to its introduction, a
UK resident investor could accumulate income in a particular type of
offshore fund and, when the investment was realised, be subject only
to capital gains tax rather than having to pay income tax on the
accumulating income.

- The operation of the scheme has attracted increasing comment in
recent years, not least because of the nature of the compliance
obligations a fund has to meet annually if its investors are to
preserve capital gains tax treatment on the disposal of their
interests. One of the main aims of the consultation exercise is to
identify ways to make the scheme, or any successor to it, more


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(office hours only)


Further information and all published documents relating to Budget
2002 may be found on the Internet at the following addresses:

HM Treasury

Inland Revenue

HM Customs and Excise

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last modified: April 17, 2002