Business announcements

Corporation tax rates

From 1 April 2011 the main rate of corporation tax reduces from 28 per cent to 27 per cent. The rate reduces by one percentage point each year thereafter to 24 per cent by 2014.

The rates for the current and future years are:

From	Rate
1 April 2010	28%
1 April 2011	27%
1 April 2012	26%
1 April 2013	25%
1 April 2014	24%

These rates are payable on all taxable profits above £1.5 million, other than ring fence profits in the oil industry where the rate remains at 30 per cent.

The small profits rate (SPR) for corporation tax is reduced from 21 per cent to 20 per cent from 1 April 2011, other than ring fence profits where the rate remains at 19 per cent. No announcement has been made about the SPR for future years. The SPR is payable on all taxable profits up to £300,000.

This move is in the opposite direction to the previous Government that had planned to increase the rate to 22 per cent in 2011-2012, although it had deferred the increase for two years. 

For taxable profits between £300,000 and £1.5 million, total profits are taxed at a rate between SPR and the main rate. This means that the slice of profits above £300,000 are taxed at a marginal rate above both SPR and the main rate. The current marginal rate is 29.75 per cent. From 1 April 2011 the marginal rate reduces to 28.75 per cent.

Capital allowances

The Chancellor announced some significant changes to the capital allowance regime in order to bring allowances closer to depreciation rates adopted by companies. The writing down allowance for new and unrelieved expenditure on plant and machinery in the main pool currently 20 per cent per annum will be reduced to 18 per cent per annum. For expenditure within the special rate pool the reduction will be from 10 per cent to 8 per cent per annum. These changes will be effective for businesses within the charge to corporation tax for chargeable periods ending on or after 1 April 2012 and for businesses chargeable to income tax for chargeable periods ending on or after 6 April 2012. A hybrid rate will apply for accounting periods spanning the change.

The annual investment allowance only recently increased from £50,000 to £100,000 will now be reduced to £25,000 per annum. This will be effective from April 2012 and details of transitional arrangements will be published with the draft legislation.

The 100 per cent first year allowance for zero-emission goods vehicles announced in the March 2010 Budget has been affirmed. This has effect for a period of 5 years for expenditure incurred on new and unused vehicles on or after 1 April 2010 for businesses within the corporation tax regime and 6 April 2010 for businesses subject to income tax.

Employer national insurance contributions

The secondary threshold, which is the point at which employers start to pay class 1 National Insurance Contributions, is to be increased by an extra £21 per week above indexation from April 2011.

A National Insurance Contributions (NIC) scheme is announced for new businesses which start up in certain areas of the UK over the next three years. This scheme will exempt new businesses in targeted regions from up to £5,000 of class 1 employer NICs due in the first 12 months of employment. This will apply for each of their first 10 employees hired in their first year of business.  The Government aim to have the scheme up and running by September 2010. 

Enterprise finance

The Enterprise Finance Guarantee (EFG) is intended to provide lending to viable small businesses that lack sufficient collateral or the financial record to access a normal commercial loan. The EFG facility is being increased by £200 million to support additional lending of up to £700 million for small businesses until 31 March 2011. In addition, a processing target of 20 business days wil be introduced for all major lenders participating in the EFG.

Growth capital fund

Following the Rowlands review fast growing small businesses with a lack of capital will be able to access and new Enterprise Capital Fund (ECF). This fund is part of the existing £237 million ECF. This will provide an extra £37.5 million in equity finance and will be part-funded by Government £25 million, and £12.5 million in private co-investment.

Capital distributions

There has been uncertainty over the treatment of certain distributions received by UK companies as to whether they were capital or income. The Finance Act 2009 exempted most foreign distributions received by UK companies from corporation tax unless they were capital in nature. However doubts remained about difficult borderline cases. The new legislation will simplify this area by treating all distributions as income unless they have been specifically excluded from income. The legislation will have retrospective effect to the date when the Finance Act 2009 rules took effect but individual companies can elect to opt out of the retrospective effect. This measure was previously announced in the March 2010 Budget.

Relief for interest "worldwide cap"

The worldwide interest cap rules were introduced last year to limit the total UK deduction for interest expense to the total interest paid worldwide. The Treasury announced that changes would be made to the rules following a consultation with business. This has resulted in a number of proposed changes in particular the treatment of securitisation companies, various other changes affecting the “gateway test” and distributions made by industrial and provident societies.  This measure was announced in the March 2010 Budget but a number of further refinements have now been introduced. The legislation applied from 1 January 2010 and, with one exception, the revisions announced today will apply from that date.

Consortium relief

The rules allowing companies to claim consortium relief have been extended so that losses can be surrendered from companies within the European Economic Area. At present the relief is limited to losses surrendered by UK companies only. However, at the same time a further test is being added to the existing three tests to establish the percentage of the losses which can be claimed. The fourth test is based on the percentage of voting rights and the extent of control the member holds in the consortium. The allowable loss is based on the lowest result from this and the other three existing tests. The changes will be effective for accounting periods commencing on or after the date the legislation is enacted.

Loan relationships

Anti-avoidance measures have been announced to prevent companies ‘derecognising’ a loan or derivative and thus creating a profit which escapes taxation under the loan relationship rules. The legislation has effect for credits and debits arising on or after Budget day.

Interest harmonisation rules

Companies that make late payments of corporation tax or receive refunds of tax will now be subject to the harmonised interest regime first introduced in the Finance Act 2009. This measure brings corporation tax (and petroleum revenue tax) into line with other taxes. The measure will be introduced in the forthcoming Finance Bill.

Research and development tax relief

The conditions for this tax relief are relaxed for small and medium-sized enterprises for accounting periods that end on or after 9 December 2009. The relaxation is that the company claiming the relief need not own the intellectual property. 

The relief is broadly 130 per cent for large companies and 175 per cent for small and medium-sized enterprises. This means that the tax relief exceeds the expenditure, so the company in effect receives a subsidy from the state.

Under the previous rules, this enhanced relief required the company claiming to own the intellectual rights. This condition is now withdrawn.

Enterprise management incentive

A change is made in the rules regarding the location of a company offering its employees shares under the Enterprise Management Incentive (EMI).

The previous rules required the company to operate wholly or mainly in the UK. The new requirement is that the company has a permanent establishment in the UK.

For a group of companies, it is sufficient that at least one company in the group conducts a qualifying trade from a permanent establishment in the UK.

This change will take effect for options granted from the day that the Finance (No 2) Act 2010 receives Royal Assent. This is likely to be in early autumn after the Parliamentary summer recess.

Venture capital schemes

Changes announced in the March 2010 Budget regarding venture capital schemes are re-introduced in the emergency Budget without change. 

This was a provision of the March Budget that was not enacted in Finance Act 2010 when Parliament was dissolved for the general election. Only those provisions agreed by the then Government and opposition were included in the subsequent Act.  This is one of the omitted provisions that has been re-introduced.

There are four changes that are made. Two apply only to Venture Capital Trusts (VCTs):

• The shares must be listed on an EU regulated market rather than on the UK official list
• The eligible share holding requirement is increased from 30 per cent to 70 per cent but the scope of eligible share is widened to include shares that carry preferential rights to dividends

Two changes apply to both VCTs and Enterprise Investment Schemes:

• A company is not eligible for this relief if it is an “enterprise in difficulty”. This is a new requirement
• A company is eligible if it has a permanent establishment in the UK. Previously the company had to conduct a qualifying trade wholly or mainly in the UK

These changes are necessary to comply with requirements of the European Commission.

IR35

The Government remains committed to a view of IR35 and small business tax. Expect news to be announced - maybe before the next Budget.

Film tax relief

An anomaly is to be removed in film tax relief where expenditure spans two or more accounting periods and there is some overseas expenditure.

It has been realised that the current drafting could restrict tax relief where expenditure is greater in a second or subsequent accounting period than in the first.

This anomaly will be removed in Finance (No 2) Act 2010. The change is retrospective in that it will be regarded as having always been in effect.

Authorised investment funds

An avoidance scheme is closed from 22 June 2010. 

The change prevents a corporate investor from using an Authorised Investment Fund (AIF) to create a credit for UK tax when no UK tax has been paid.

The AIF regulations usually ensure that a corporate investor pays the correct amount of corporation tax. The changes prevent these rules being exploited by artificial manipulation of the regulations.

Seafarers' earnings deduction

From 6 April 2011, seafarers’ earnings deduction (SED) may be claimed by seafarers from the European Union or the European Economic Area. The previous provision applied only to seafarers who were ordinarily resident in the UK.

SED allows earnings at sea to qualify for a 100 per cent deduction from income tax.