Finance Bill 2004

The measures proposed in the Chancellor's Budget Statement have now been included in this year's Finance Bill. They include:

• the framework legislation for the new Construction Industry scheme that will come into effect from April 2006
  
  
• the changes to primary legislation to introduce the new tax and NICs exemptions for employer-provided childcare and childcare vouchers, effective April 2005 (see Newsletter of 19 March 2004)
  
  
• a technical change to the exemption to loaned computer equipment that makes it clear that, where the cash equivalent value of the benefit exceeds £;500, there is no liability for income tax as general employment income (ITEPA s.62). There is only a tax liability under the Chapter 10 'residual liability to charge' provisions of the Benefits Code.
  
  
• the changes to primary legislation to introduce the new tax regime for employer-provided vans, effective in stages from April 2005 onwards (see separate item)
  
  
• the exemption from any tax liability for emergency vehicles that do not have private use other than for on-call commuting (see separate item)
  
  
• in the provisions for Enterprise Management Incentives,
  
  
  • the removal of the condition requiring the holding company to posses not less than 75% of the issued share capital, and not less than 75% of the voting power in, a subsidiary in order to meet the "qualifying subsidiary" condition, and
    
    
  • the introduction of a new "property managing subsidiaries requirement" that excludes a subsidiary if it is not a "qualifying 90% subsidiary"
    
    

• the new provisions to reform the tax regimes for pension schemes.

Summaries of the new provisions, as set out in the Finance Bill, for employer-provided vans and emergency vehicles, are provided separately below.

Source: www.inlandrevenue.gov.uk/finance_bill2004/index.htm
...back to 9 April 2004

Budget 2004 - Summary of Payroll-related Announcements

References to the relevant Treasury notices and Revenue news releases and budget notes are provided at the end of each news item. The documents are available to download at

• www.hm-treasury.gov.uk/...
• www.inlandrevenue.gov.uk/budget2004/index.htm

Additional information, published subsequently in the Inland Revenue Notes for Software Developers, Series 10 - Number 17, has been added where relevant. The full Notes are available at www.inlandrevenue.gov.uk/comp/notes-10-17-v1-1.pdf.

Tax bands and allowances
There are no increases to the rates of income tax.

The tax bands are increased in line with inflation (2.8%).

The new bands apply to earnings from 6 April 2004 but will be brought into effect from the first payday on or after 18 May 2004.

New Taxable Pay Tables SR + B to D and equivalent Calculator Tables, dated May 2004, will be sent to all employers with the forthcoming Budget Pack. There are no general increases to tax codes from 18 May 2004 onwards and any individual changes will be implemented by means of P6(T) coding notices. Full details of the changes will be set out on form P7X, also to be included in the Budget Pack.

The income tax allowances had already been announced at the time of the Pre-budget statement but were confirmed as follows:

*The rate of tax relief on the married couple's allowance continues at 10%.
(Source: www.inlandrevenue.gov.uk/budget2004/pn02.pdf )

Income Tax (Earnings and Pensions) Act 2003
A number of minor corrections are to be made to the text of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA), which came into force from April 2003. The corrections that are relevant to payroll are:

Exemption for the Benefit of Subsidised Workplace Meals - Section 317 of ITEPA exempts the provision of free or subsidised meals from any liability to income tax if one of two sets of conditions applies. The first is that "they are provided in a canteen where meals are provided for the employer's employees generally or generally to those at a particular location". This wording contains a loophole that would allow the exemption to apply even if the meals subsidy were not offered to all employees. The text of the exemption does not state that the "free or subsidised meals" themselves must be provided to employees generally, only that they must be provided in a canteen where "meals" are provided - i.e. not specifically the "free or subsidised meals". The amendment will remove that unintended effect.

Employments where Earnings Charged on Remittance - Section 389 of ITEPA exempts employees from tax on contributions made on their behalf by their employer to a non-approved retirement benefits scheme. The exemption applies only if the employee's income was of the sort previously taxable under Case III of Schedule E. The current law erroneously excludes the rare situations in which, although there were earnings, no earnings were chargeable under any of the three Cases of Schedule E (which is the case, for example, for certain non-residents). The proposed revision will ensure that the exemption continues to operate properly from April 2003.
(Source: www.inlandrevenue.gov.uk/budget2004/revbn36.pdf )

Car benefit charge
The benefit charge for a company car is calculated initially as a percentage of the car's list price. The percentage charge depends on each car's rated CO2 emission level. The level of emissions that qualify for the minimum charge has been set at 140 grams per kilometre for the 2006/07 tax year.

The emission levels that qualify for the minimum charge for the four years counting from the current tax year, are as follows:

The freezing of the emission level figure at 140 for a second year is intended to provide company car drivers and fleet managers with future certainty about rates, as well as giving the Government opportunity to evaluate the behavioural impact of the current method of taxing company cars.
(Source: www.hm-treasury.gov.uk/media//92901/bud04_ch7_218.pdf )

Fuel benefit charge
The fuel benefit charge for 2003/04 is calculated, for the first time, by applying the same percentage as that used for the car benefit charge to a fixed annual value. This is £;14,400 for 2003/04 and has been fixed again at that level for 2004/05.

Although that appears to freeze the fuel benefit charge, it does not in fact do so. As the percentage charge for the same company car will increase by 2 percentage points for 2004/05, the fuel benefit charge will also increase, by between 6% (for cars with the highest percentage charges) and 13% (for those with the lower percentage charges).

Although this is a stealth tax, the latest Notes for Payroll Software Developers says that "the Government is freezing the multiplier for 2004-05 to allow the new system to settle".
(Source: www.hm-treasury.gov.uk/media//92901/bud04_ch7_218.pdf )

Company vans
The current tax charge on the provision of company vans for private use (including taking the van home at night) is a scale charge of £;500, or £;350 for vans that are four or more years old. The Government's decision, following consultation on changes to the way in which the provision of company vans are taxed, is to base the new tax charge on the type of availability for private use rather than simply on private use. Therefore,

• if a van is available only for business use, there will continue to be no tax charge
• if a van is provided mainly for business purposes and an employee takes the van home but makes no other private use of it, a nil charge will apply (effective 6 April 2005)
• if a van has unrestricted private use,
  • the current £;500 and £;350 scale charges will continue to apply according to the age of van, until 5 April 2007
  • a new scale charge of £;3000, plus a further £;500 fuel scale charge, will apply from 6 April 2007

The change is expected to remove any liability for the van scale charge for 85% of all employees who currently pay tax on the charge. However, the overall effect would appear to be revenue neutral.

The calculation of the charge for a shared van is to be simplified and changed to a "just and reasonable" basis. The interim tax status of double cab pick-ups, as announced in the 2002 Budget, has been confirmed as the permanent arrangement. As a result, double cab pick-ups that can carry a payload of 1000 kg, or 1045 kg including a hard top, will continue to be treated as vans and, in 2007, the new scale charge will apply to them. Pick-ups that can only carry lower payloads will continue to be treated as cars and subject to the current car and fuel benefit charges.
(Source: www.hm-treasury.gov.uk/media//92901/bud04_ch7_218.pdf
and www.inlandrevenue.gov.uk/budget2004/revbn42.pdf )

Emergency vehicles
Vehicles are treated by the Inland Revenue as "emergency vehicles" rather than company vehicles if they are fitted with flashing blue lights and audible warning devices such as sirens. They include vehicles used for fire brigade, ambulance or police purposes. By definition, a car is a vehicle that is not, among other things, "a vehicle of a type not commonly used as a private vehicle and unsuitable to be so used". Emergency vehicles are treated by the Inland Revenue as being unsuitable for private use. Therefore, there is no car benefit charge where such a vehicle is provided but, if it is used privately, there is a tax charge under the residual liability to charge provisions of the Benefits Code. The annual charge is 20% of the market value of the vehicle when it was first provided as a benefit. Note that the exemption that covers work-related supplies and services with insignificant private use does not apply as motor vehicles are excluded from that exemption.

To match the new exemption from a scale charge for vans where the only private use is their being taken home at night, emergency vehicles are also exempt from a tax charge where there is an operational requirement for them to be kept at the employee's home. This exemption, unlike that for vans, applies from 6 April 2004.
(Source: www.hm-treasury.gov.uk/media//92901/bud04_ch7_218.pdf
and www.inlandrevenue.gov.uk/budget2004/revbn43.pdf )

Loaned computers
A measure will be introduced, with effect from 6 April 2004, to extend the benefits tax exemption for computers lent to employees to cover cases where the benefit is treated as general earnings. No further information is currently available but this measure may be intended to extend the use of Home Computing Initiatives.
(Source: www.hm-treasury.gov.uk/media//92901/bud04_cha_190.pdf
and www.knowledgenetwork.gov.uk/oee/hci.nsf )

Working tax credit
(1) From 6 April 2004, first-time parents who were working at least 16 hours a week before going on maternity, paternity or adoption leave will be able to claim Working Tax Credit from the date of birth or placement of adoption of their first child.
(Source: www.hm-treasury.gov.uk/media//92901/bud04_cha_190.pdf )

(2) Payment of tax credits with the wage packet was, according to the Government, "intended to reinforce the principle that tax credits are a reward for work, reducing the stigma associated with claiming". The Government now accepts the case, in principle, that the benefits to business justify moving to direct payment of the Working Tax Credit, reducing the cost of payroll administration and addressing a key area of business concern. The Government intends to consult with employers on the detail of implementation.
(Source: www.hm-treasury.gov.uk/media//92901/bud04_ch3_281.pdf )

(3) Under current Working Tax Credit rules, families can only claim for the costs of childcare provided by registered childminders, nurseries and play schemes, although care provided by some out-of-hours clubs and by approved and registered carers in the employee's home are also allowed in some circumstances. From June 2004, parents using breakfast clubs run by schools and those paying for childcare provided by foster carers will also be eligible for the childcare element of the Working Tax Credit.

In addition to the new tax exemptions that are to be introduced in April 2005, the Government has also announced "a new light-touch voluntary scheme that will enable accreditation for financial support purposes of a broad range of childcare" and will enable working parents to access financial support. The Government will bring forward proposals for consultation in early summer 2004, for implementation by April 2005.
(Source: www.hm-treasury.gov.uk/media//92901/bud04_ch7_218.pdf )

Payroll Giving
During the Inland Revenue's three-year Giving Campaign, the Government has topped up donations given by employees under payroll giving schemes by 10%. Donations have increased from £;37 million in 1999/2000 to £;86 million in 2002/03.

That scheme ends in April 2004 but is being replaced by a Payroll Giving grant scheme. Employers with fewer than 500 employees who set up new Payroll Giving schemes from April 2004 will be able to apply for a one-off grant payment to assist with the cost of establishing their scheme. The grant will be available for two years.
(Source: www.hm-treasury.gov.uk/media//1AFE2/bud04_cha_190.pdf
and www.hm-treasury.gov.uk/media//2E709/bud04_ch5_257.pdf )

Employee share schemes
Employers are currently able to ask employees receiving share options to agree to pay the employer's (secondary) Class 1 NICs liability arising on gains made from those options. Employees who agree to pay their employer's NICs liability under these limited circumstances benefit from a reduction in their taxable income equivalent to the amount of the employer's liability they pay.

A further measure will be introduced to provide income tax relief to employees who bear the employers' NICs liability due on post-acquisition earnings from employment-related awards of restricted shares and convertible securities, following the enactment of the National Insurance Contributions and Statutory Payments Bill.
(Source: www.inlandrevenue.gov.uk/budget2004/revbn19.htm )

National Minimum Wage
The Government has accepted the recommendation of the Low Pay Commission (LPC) that statutory minimum wage rates should be increased in October 2004. The adult rate of the National Minimum Wage will rise to £;4.85 and the youth and development rate will rise to £;4.10. The increase is expected to benefit up to 1.9 million workers.

In addition, the Government has accepted the LPC's further recommendation that 16 and 17 year olds should be covered by a new National Minimum Wage of £;3.00 an hour, also from October 2004. However, the exemption from the minimum wage rates for apprentices under age 19 will be retained. The current Minimum Training Allowance for employed trainees in England is £;40 per week.
(Source: www.hm-treasury.gov.uk/media//92901/bud04_ch7_218.pdf
and www.hm-treasury.gov.uk/media//2DF05/bud04_ch4_251.pdf )

Pensions
(1) The pension schemes earnings cap is increased for 2004/05 from £;99,000 to £;102,000. It sets a ceiling on the contributions that can be paid to, and the benefits that can be paid by, tax approved pension schemes, including stakeholder pension schemes.

(2) The Government is proceeding with the proposals to replace the eight current regimes with a single lifetime allowance on the amount of tax-privileged pension saving. The simplified regime will be delayed by a year and will now take effect from April 2006.

As a result of the implementation delay, the value of the lifetime allowance at its introduction will be set at £;1.5 million, rising as follows: 2007 - £;1.6m, 2008 - £;1.65m, 2009 - £;1.75m, 2010 - £; 1.8m, and then reviewed every five years.

In addition to the lifetime allowance, the annual allowance will be set initially at £;215,000 and will increase to £;255,000 by 2010. It will also be further reviewed every five years.
(Source: www.hm-treasury.gov.uk/media//92901/bud04_ch7_218.pdf
and www.inlandrevenue.gov.uk/budget2004/revbn39.pdf )

Tax avoidance
Every year, the Inland Revenue is obliged to enact new legislation to close loopholes that are being used to promote tax avoidance schemes. The Government views such schemes as "a significant threat to the integrity of the tax system". Because such schemes depend on concealment and secrecy, new measures are to be introduced to require promoters who market schemes and arrangements to disclose details of them to the Inland Revenue.
(Source: www.hm-treasury.gov.uk/media//92901/bud04_ch7_218.pdf )

Enterprise management incentives
Enterprise management incentives (EMIs) are tax-advantaged share options, designed to help small, higher risk companies recruit and retain employees who have the skills to help them grow and succeed. Share options with a market value of up to £;100,000 may be granted to any number of employees of a company, subject to a total share value of £;3 million under EMI options to all employees.

To qualify, companies must be independent and, if they have any subsidiaries, they must all be qualifying subsidiaries. The current rules require that such a subsidiary must

• possess at least 75% of the share capital and the voting power of the subsidiary
• be entitled to receive at least 75% of the assets of the subsidiary, in the event of a winding up or in any other circumstances, if they were all distributed
• be entitled to at least 75% of profits of the subsidiary available for distribution to shareholders.

It was announced in the Budget that the 75% requirement will be removed, thereby increasing the number of companies that are able to use EMI options to recruit and retain skilled and committed employees. The change applies to EMI options granted to employees on or after 17 March 2004.
(Source: www.inlandrevenue.gov.uk/budget2004/revbn11.pdf )

Foreign earnings deduction
The foreign earnings deduction (FED) is a deduction from earnings from employment available to a seafarer working on a ship who has an eligible period of absence in the UK. It is defined in sections 378 to 385 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA). Workers on offshore installations are specifically excluded from the relief. The current definition of "offshore installation" is given by reference to the Mineral Workings (Offshore Installations) Act 1971, created for the purposes of Health and Safety, not for the Taxes Act.

As changes to health and safety can inadvertently cause changes to FED entitlement, the term "offshore installation" will be redefined within ITEPA. This will also clarify the meaning of the term in other contexts, such as the exemption from income tax on the provision of mainland transfers for offshore gas and oil workers.
(Source: www.inlandrevenue.gov.uk/budget2004/revbn14.pdf )
...back to 19 March 2004

Budget 2004 - Summary of Payroll-related Announcements

Income Tax
The starting and basic rate limits are increased in line with statutory indexation and there are no changes to the income tax rates.

Income Tax (Earnings and Pensions) Act 2003
A package of measures will be introduced to correct a number of anomalies, including the exemption for the benefit of subsidised workplace meals. The existing law exempting the benefit of subsidised canteen meals for employees contains a loophole which could allow the exemption to apply, even though a meals subsidy was not offered to all employees. This amendment removes that unintended effect so that the exemption will not apply unless subsidised canteen meals are available to employees generally.

Car benefit charge
Following three years of increases in the rates, the level of emissions qualifying for the minimum charge in 2006/07 will be frozen at 140 grams per kilometre. This will give the Government further time for the behavioural impact of the system to be evaluated while providing motorists and company fleet managers with future certainty about rates.

Fuel benefit charge
The figure on which company car fuel benefit is calculated will be frozen for 2004-05 at the 2003/04 level of £;14,400.

Company vans
The benefit an employee derives from private use of a company van will be revised from 6 April 2005. There will be a nil charge for vans where the van has to be taken home but otherwise no private use is allowed. Transitionally, the current rates (i.e. £;500, and £;350 for older vans) will remain until 2007 when there will be a single scale charge of £;3,000 and an additional charge of £;500 for fuel provided for private use. The change will take 85% of those who currently pay a charge out of the system.

Emergency vehicles
Emergency service workers in the fire, police and ambulance services are often required to take their vehicles home at night so they can respond quickly to emergencies. The current rules on employees' home to work travel mean that there is a tax and National Insurance charge when this happens. The new measure will ensure that no such charge arises where there is an operational requirement for emergency vehicles to be kept at home.

Loaned computers
A measure will be introduced, with effect from 6 April 2004, to extend the benefits tax exemption for computers lent to employees to cover cases where the benefit is treated as general earnings.

Working tax credit
(1) From 6 April 2004 first-time parents who were working at least 16 hours a week before going on maternity, paternity or adoption leave will be able to claim Working Tax Credit from the date of birth or placement of adoption of their first child.

(2) Payment of Working Tax Credit by employers will be phased out, after a period of consultation with employer groups and business about the transition to direct payment.

(3) Tax credit legislation will be amended so that from June 2004 childcare provided by foster carers will be eligible for tax credit support, and will guarantee that parents using breakfast clubs run by schools will be able to claim support for their costs in England, Wales and Northern Ireland.

Payroll Giving
The Giving Campaign, set up in 2001 as a three-year promotion to encourage payroll giving, will come to an end in 2004. In its place, the Government is launching a Payroll Giving grant scheme. Employers with fewer than 500 employees who set up new Payroll Giving schemes from April 2004 will be able to apply for a one-off grant payment to assist with the cost of establishing their scheme. The grant will be available for two years.

Employee share schemes
Employers are currently able to ask employees receiving share options to agree to pay the employer's (secondary) Class 1 NICs liability arising on gains made from those options. Employees who agree to pay their employer's NICs liability under these limited circumstances benefit from a reduction in their taxable income equivalent to the amount of the employer's liability they pay.

A further measure will be introduced to provide income tax relief to employees who bear the employers' NIC liability due on post-acquisition earnings from employment-related awards of restricted shares and convertible shares, following the enactment of the National Insurance Contributions and Statutory Payments Bill.

National Minimum Wage
The Government has confirmed that, from October 2004, the adult rate of the National Minimum Wage will rise to £;4.85 and the youth and development

rate will rise to £;4.10. In addition, the Government has accepted the Low Pay Commission's recommendation that 16 and 17 year olds should be covered by a new National Minimum Wage of £;3.00 an hour, also from October 2004.

Pensions
(1) The pension schemes earnings cap is increased from £;99,000 to £;102,000.

(2) The Government is proceeding with the proposals to replace the eight current regimes with a single lifetime allowance on the amount of tax-privileged pension saving. In response to concerns expressed in the consultation, the value of the lifetime allowance will be set at £;1.5 million on introduction rising as follows: 2007 - £;1.6m, 2008 - £;1.65m, 2009 - £;1.75m, 2010 - £; 1.8m, and then reviewed every five years.

Tax avoidance
Schemes designed to avoid tax represent a significant threat to the integrity of the tax system. These sophisticated and aggressive avoidance schemes thrive on concealment and secrecy. Therefore, promoters who market schemes and arrangements that meet certain criteria for direct taxes will be required to disclose details of these schemes to the Inland Revenue.

Enterprise management initiatives
Currently, the rules for EMI permit a qualifying company to have subsidiaries but only if it, or another of its subsidiaries, owns 75% of the company concerned. The 75% requirement will be removed, enabling more companies to use EMI options to recruit and retain employees who have the skills to help them grow and succeed.

Foreign earnings deduction
Foreign Earnings Deduction (FED) is a deduction from earnings from employment available to a seafarer working on a ship who has an eligible period of absence in the UK. Workers on offshore installations are specifically excluded from the relief. This measure will redefine "offshore installation" to ensure that FED remains available only to the parts of the shipping sector only for whom it is intended.
...back to 18 March 2004

Budget 2004

The Chancellor will make his Budget Report Speech to the House of Commons on Wednesday, 17 March 2004.
Source: www.hm-treasury.gov.uk/budget/budget_04/bud_bud04_index.cfm
...back to 30 January 2004