The press release issued by HM Treasury on 8 July 1997.
PART 1
THE WINDFALL TAX
Clause 1 Schedule 1: imposes the charge to the windfall tax, at 23 per cent, on companies which, on Budget Day, were benefitting from a windfall from the flotation of an undertaking whose privatisation involved the imposition of economic regulation. The schedule defines the amount of a company’s windfall as the difference between its value, calculated by reference to its profits after tax in a period of up to four years following privatisation and the value placed on the company at the time of its flotation. (*REV 1)
Clause 2: defines the companies charged to windfall tax as companies, or demerged successors of companies, which received property, rights and liabilities of a public corporation by statutory transfer, were subsequently privatised by flotation and were regulated at the time of flotation (or had a subsidiary regulated) under certain privatising statutes. (*REV 1)
Clause 3 and Schedule 2: provide for the administration and collection of the windfall tax. (*REV 1)
Clause 4: adds the windfall tax to the categories of items which may be taken into account or left out of accounting drawing up profit and loss accounts for any period ending on or after Budget day for the purposes of the income tax relief for profit-related
pay. (*REV 1)
Clause 5: provides definitions of terms used in Part I of the Finance Bill, which is concerned with the windfall tax.
PART II
VALUE ADDED TAX AND EXCISE DUTIES
Value added tax
Clause 6: reduces the VAT rate for supplies of fuel and power for domestic, charity non-business and small business use from 8 per cent to 5 per cent, with effect from 1 September 1997. (*C&E 2)
Alcoholic liquor duties
Clause 7: increases the rate of excise duty charged on spirits with effect from 1 January 1998. (*C&E 7)
Clause 8: increases the rate of excise duty charged on beer, with effect from 1 January 1998. (*C&E 7)
Clause 9: increases the rate of excise duty charged on all wine and made-wine with effect from 1 January 1998. (*C&E 7)
Clause 10: increases the rates of excise duty charged on standard, strong and sparkling cider, with effect from 1 January 1998. (*C&E7)
Hydrocarbon oil duties
Clause 11: increases the rates of excise duties on most hydrocarbon oils, with effect from 6pm on 2 July 1997. (*C&E 3)
Tobacco products duty
Clause 12: increases the rates of excise duties on most tobacco products, but not hand rolling tobacco, with effect from 1 December 1997. (*C&E 5)
Vehicle excise and registration
Clause 13: raises the rate of vehicle excise duty for licences taken out after 15 November 1997. (*DETR 1)
Clause 14: amends the Vehicle Excise and Registration Act 1994 to enable the Secretary of State to charge vehicle fleet operators and motor manufacturers for the cost of setting up electronic links with the Driver and Vehicle Licensing Agency, and for the cost of processing licensing applications made via electronic links. (*DETR 1)
PART III
INCOME TAX AND CORPORATION TAX
Reliefs for interest and private medical insurance
Clause 15: sets the rate of mortgage interest relief, on loans for home purchase, at 10 per cent from 1998-99 (reduced from 15 per cent in 1997-98). The clause will have effect from 6 April 1998. (*REV 10)
Clause 16: sets the limit on loans qualifying for mortgage interest relief at 30,000 Pounds for 1998-99. The clause will have effect from 6 April 1998. (*REV 10)
Clause 17: provides for the withdrawal of tax relief on premiums paid on annual contracts for private medical insurance (PMI) for the over 60s. Subject to two exceptions, payments on policies taken out, or renewed, on or after 2 July will not qualify for relief. The two exceptions apply to certain contracts made before 1 August 1997, where arrangements for the contract had been made before 2 July 1997, but where the contract itself was not finally in place before that date. Existing annual contracts, and those which fall within the scope of the exceptions, will benefit from relief until the end of the contract although premiums must be paid on or before 5 April 1999 in order to qualify for tax relief. (*REV 5)
Corporation tax
Clause 18: reduces the main and small companies’ rates of corporation tax for the financial year 1997 (the year beginning 1 April 1997). The main rate is reduced from 33 per cent to 31 per cent. The small companies’ rate is reduced from 23 per cent to 21 per cent. The clause also allows tax to be repaid, assessments to be discharged or other adjustments to be made to give effect to the reductions. (*REV 2)
Distributions, tax credits etc on and after 2nd July 1997
Clause 19: removes the entitlement of a pension fund to any payment of a tax credit in respect of dividends and other company distributions made after 1 July 1997.
Although pension funds will still be entitled to a tax credit on distributions, and will be able to set off the credit against any tax on the distribution to which the credit relates, new rules will prevent effective payment of the credit being obtained through set off against other tax liabilities. (*REV 2)
Clause 20: removes the entitlement of a company to claim to treat dividends and other distributions from a UK company as if they were part of its profits, and therefore to obtain payment of the associated tax credit, when losses or other reliefs are set against them.
No such claims can be made for accounting periods beginning on or after 2 July 1997, and claims in respect of periods straddling the 2 July will be restricted. The provisions under which such claims can be “unwound” in later accounting periods will cease to have effect. (*REV 2)
Clause 21: provides for amendments to be made to the treatment of non-qualifying distributions (that is, distributions that do not carry tax credits) received by the estate of a deceased person in the course of administration. From 2 July 1997 payments to beneficiaries of the estate, funded out of such distributions, will be treated as a payment made under deduction of non-repayable tax at the lower rate. This will ensure the beneficiaries are taxed on the payment from the estate in the same way as if they received the distribution direct. (*REV 2)
Clause 22: withdraws the entitlement to tax credit on dividends and other company distributions made on or after 2 July 1997 on assets in a premiums trust fund at Lloyd’s. It also provides for dividends and other distributions made on or after 2 July 1997 on
assets forming part of an ancillary trust fund of a corporate member or employed in its business to be included in the Case I profits.
Clause 23: introduces Schedule 3 which removes an insurance company’s entitlement to payment of tax credits relating to its pension business in respect of dividends and other company distributions made after 1 July. It also rationalises existing rules about including dividends and other distributions when calculating the profit or loss an insurance company makes from its life assurance business (or any part of its life assurance business) so that all such payments made after 1 July are included in all circumstances. (*REV 2)
Distributions, tax credits, etc: avoidance
Clause 24: provides that where shares in UK companies are held as trading assets, not as investments, any dividends on those shares will be treated for tax purposes as part of the holder’s trading profits. The clause extends the current tax treatment of share buy-backs and certain special dividends on UK shares to all dividends on UK shares held as trading assets. These include dividends on certain fixed rate preference shares, which were previously exempt in some circumstances. (*REV 7)
Clause 25: makes amendments to the Taxes Acts needed as the result of the removal by the previous clause of references to fixed rate preference shares. (*REV 7)
Clause 26: modifies the anti-avoidance rules designed to counteract dividend stripping (the buying of a share just before a dividend is due and selling it on as soon as the dividend is received). Since dividends on UK shares held as trading assets will now be taxed as part of the trading profits, these anti-avoidance measures are no longer needed for such dividends. The clause also extends the exemption from the anti-avoidance measures for the purchase and sale of overseas shares where dividends are taxed, under existing rules, as part of the buyer’s trading profits. (*REV 7)
Clause 27: provides for amendments to be made to the treatment of payments made to companies by trusts. From 2 July 1997 some payments will not be chargeable to corporation tax, nor will companies be able to claim repayment or set off of the income tax treated as deducted from such payments. This will prevent companies obtaining via trusts payments of tax credits to which they would not be entitled if they invested directly in UK equities. (*REV 2)
Clause 28: provides for a restriction on the payment or set off of tax credits attached to UK dividend income paid or after 2 July 1997 where arrangements exist for the recipient to pass on all or part of the resulting benefit to someone who could not benefit had he or she received the UK dividend income. Arrangements will only be covered by the restriction if at least one of the parties enters into them for an unallowed purpose. Broadly, that means a purpose other than a business or commercial purpose. The clause is thus intended to prevent tax avoidance by which a person obtains the benefit of tax credits to which he or she would not be entitled if invested direct in UK equities. (*REV 2)
Clause 29: provides that, subject to certain exceptions, where a qualifying distribution is made by a UK resident company on or after 2 July 1997 but before 6 April 1999 is received by an unauthorised unit trust, the distribution will be treated for tax purposes as a foreign income dividend in the hands of the trust. The treatment does not apply for unauthorised unit trusts which are court common investment funds or dedicated to investment by charities and other bodies which qualify for income tax exemption on the same basis as charities. The effect of the measure is that the unauthorised unit trusts to which it applies will have no entitlement to the tax credit associated with the distribution, and will not be treated as having paid any income tax on the amount of the distribution. The purpose of the provision is to prevent pension funds circumventing the provisions in Clause 19 by investing in UK equities through the medium of unauthorised unit trusts. (*REV 2)
Distributions, tax credits etc. in and after 1999-00
Clause 30: provides for changes to be made to the treatment of dividends and other company distributions with effect from 6 April 1999, the year of assessment 1999/2000.
The clause reduces the amount of the tax credit accompanying any dividend or other distribution from a UK company made on or after 6 April 1999 from 20 per cent of the aggregate of the distribution and the tax credit to 10 per cent of that aggregate. It also
removes from the legislation substantially all remaining entitlements to have tax credits paid, bringing taxpayers generally into line with the treatment of pension providers – from 2 July 1997 – provided for by clause 19 of the Bill.
The reduction of the rate of tax credit is matched by a reduction in the rate of charge for individuals and others in clause 31 of the Bill. (*REV 2)
Clause 31: provides that the rates of charge to income tax on dividends and similar income will be reduced with effect from 6 April 1999, the year of assessment 1999-2000.
With effect from the 6 April 1999 the rate of income tax on such income will be reduced to 10 per cent, while the rate charged on those who are liable at the higher rate will be reduced to 32.5 per cent. The change in rates is part of the general change made to the rate of tax credit, which is reduced to 10 per cent from the same date by clause 30 of the Bill. (*REV 2)
Clause 32: provides for amendments to be made to the treatment of distributions received by discretionary and accumulation trustees. From 6 April 1999 distributions will be taxed at a new rate of 25 per cent instead of at the rate applicable to trusts (currently 34 per cent). This will compensate trustees for the reduction from 20 per cent to 10 per cent in the rate of tax credits. The clause also inserts a new section into the Taxes Acts to ensure that company share buybacks, and other similar distributions,
received by trustees are taxed at the new 25 per cent rate after 6 April 1999. (*REV 2)
Clause 33: provides for amendments to be made to the treatment of distributions received by the estate of a deceased person in the course of administration. From 6 April 1999 payments to beneficiaries of the estate, will be funded out of distribution income, will be treated as made under deduction of non-repayable tax at the Schedule F ordinary rate. The beneficiaries will be taxed on the payment from the estate in the same way as if they received the distribution income direct. (*REV 2)
Clause 34: introduces Schedule 4 to the Bill which makes consequential amendments to the Taxes Acts arising from the changes to the rate of tax credit and taxation of distributions made by clauses 30 to 33 of the Bill. The amendments all apply by reference to the 6 April 1999, the year of assessment 1999/2000, when those changes to the tax credit rate and taxation of distributions take effect. (*REV 2)
Clause 35: provides compensation payments to charities from 6 April 1999, for the loss of the tax credit from dividends. The payments will be made on a sliding scale for a period of five years. (* REV 2)
Clause 36: and Schedule 6 provide for the abolition of the foreign income dividend scheme, as part of the changes to the treatment of distributions taking effect for distributions made on or after 6 April 1999. Under the proposals no company will be able to elect for a dividend to be a foreign income dividend from that date, and any provisions under which a distribution is deemed to be a foreign income dividend also cease to have effect from the same date. (*REV 2)
Gilt-edged securities
Clause 37: enables anyone receiving gilt interest on or after 6 April 1998 to receive the interest without deduction of tax. As a result, the existing arrangements enabling gilt interest to be paid gross to certain categories of gilt holder will no longer be needed, so the clause ends these arrangements from that date. (*REV 12)
Clause 38: makes changes to the rules about deduction of tax from gilt interest that are needed as a consequence of the changes made by the previous clause.
Relief for losses etc
Clause 39: amends the provisions under which a company may claim to carry-back trading losses to set against the profits of an earlier period. The amended rules apply to trading losses incurred in accounting periods ending on or after 2 July 1997. Under the amended rules a loss may, in general, be carried back only to an accounting period falling wholly or partly within 12 months of the start of the period in which the loss was incurred. Losses made in periods which straddle 2 July will be apportioned, with the new and previous rules being applied appropriately.
The clause provides for the 12 month period to be extended to three years in two circumstances. Firstly, where the trading loss arose in the 12 months immediately before the company ceased to trade. Secondly, where the losses result from the special allowances given for the costs of decommissioning North Sea oil and gas installations.(*REV 2)
Clause 40: amends the provisions under which a company may claim to carry-back deficits arising on loan relationships and financial instruments, or resulting from foreign exchange movements, to set against the profits of an earlier period. The amended rules, which mirror those for trading losses introduced by clause 31, apply to deficits arising in accounting periods ending on or after 2 July 1997. Under the amended rules, any accounting period to which the deficit is carried back must fall wholly or partly within the 12 months before the beginning of the period in which the deficit arose.
Deficits for periods which straddle 2 July will be apportioned. The new rules will apply to that part of the deficit which relates to the period ending on or after 2 July 1997; the previous rules, which allowed a carry-back of up to three years, will apply to the
remainder. (*REV 2)
Clause 41 and Schedule 7: provide for amendments to be made to the group relief rules. These rules currently limit the relief where the claimant and surrendering companies have different but overlapping accounting periods by reference to the length of the period common to both. However, groups can circumvent the limit by making claims to, or surrenders from, more than one company, allowing group relief to be effectively carried back to earlier accounting periods.
The new rules will prevent the carry back of group relief in two ways. Firstly, the aggregate amount which can be claimed by a company for a particular accounting period from companies whose accounting periods correspond but do not wholly coincide with its accounting period will be restricted to the amount of its profits for the overlapping period. Secondly, the new legislation restricts the aggregate amount which can be surrendered by a company, when accounting periods do not coincide, to the amount of its losses or excess reliefs for that overlap period. This new regime will apply to all members of groups and consortia for periods after 2 July 1997. (*REV 7)
Capital allowances for small and medium sized businesses
Clause 42: provides for first year allowances to be given to small and medium-sized businesses for expenditure on machinery and plant in the 12 months ending 1 July 1998 at double the normal rate of writing-down allowance, that is 50 per cent in general or 12 per cent where, exceptionally, the long life asset rules apply. (*REV 3)
Capital allowances and finance leases
Clause 43: sets out which businesses qualify for the new first year allowance introduced by clause 42. These are broadly companies and businesses carried on by individuals, either as sole traders or in partnership, which are small or medium-sized under the criteria in the Companies Act. (*REV 3)
Clause 44: restricts the capital allowances available to lessors on machinery and plant leased out under a finance lease for the chargeable period in which the expenditure is incurred rateably from the date it is incurred eg if expenditure is incurred 3 months before the end of the period, the writing down allowance is restricted to 3/12 ths of the annual rate. It will apply to expenditure incurred on or after 2 July 1997 other than expenditure under a contract made before that date and incurred within 12 months after that date. (*REV 7)
Clause 45: restricts the capital allowances available to lessors on machinery and plant bought under a hire purchase agreement and leased out under a finance lease so as to prevent allowances from being given on expenditure before it has been incurred. It will
apply to expenditure incurred on or after 2 July 1997 other than expenditure under a contract made before that date and incurred within 12 months after that date.( *REV 7)
Clause 46: restricts the capital allowances available to lessors on machinery and plant which is sold and leased back under a finance lease to the notional written down value of the machinery and plant for the seller. It also prevents any allowances from being given to the lessor in such cases if the lessor has substantially divested himself of any risk that the lessee will not meet his obligations under the lease. It will have effect where the sale giving rise to the sale and leaseback takes place on or after 2 July 1997 other than a sale under a contract made before that date which takes place within 12 months after that date. (*REV 7)
Clause 47: defines the term “finance lease” used in clauses 44, 45 and 46 to have the same meaning as in UK accounting practice. It will apply to all cases affected by the changes introduced by those clauses. (*REV 7)
Films
Clause 48: provides for 100% write-off for production and acquisition expenditure on British qualifying films completed after Budget day and costing 15 million Pounds or less to make. The clause provides for the relief to be time limited to costs incurred during the three years from Budget day and to apply to production or acquisition costs of films completed after Budget day. The measure is intended to stimulate the production of British films and promote growth, employment, investment and opportunities in the film industry. (*REV 11).
PART IV
MISCELLANEOUS AND SUPPLEMENTAL
Stamp duty
Clause 49: introduces new rates of stamp duty for transfers of land, buildings and certain other property (except shares) where the price exceeds 250,000 Pounds. There is no change in the current exemption threshold of 60,000 Pounds, nor in the 1 per cent on transfers of over 60,000 Pounds and not exceeding 250,000 Pounds. The changes apply to instruments executed on or after 8 July, except for instruments in pursuance of contracts made on or before 2 July. There will be a new rate of 1 1/2 per cent where the price is more than 250,000 Pounds but does not exceed 500,000 Pounds and a new rate of 2 per cent where the price exceeds 500,000 Pounds. The new rates will be charged on the full price of the property, in the same way as the 1 per cent rate applies now. (*REV 9)
Provisional collection of taxes
Clause 50: amends the rules in the Provisional Collection of Taxes Act 1968 for giving immediate (but temporary) statutory effect to tax and duty changes on the passing of a resolution by the House of Commons. The amendments will allow any Budget resolution passed in February or March to remain effective until the following 5 August.
The clause also makes a consequential amendment to the advance corporation tax legislation.
*REV 1, *C&E 1, etc refers to the Budget Day Press Notices.
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