Corporation and Business Tax

 

Rates

 

The main rate of corporation tax will reduce from the current rate of 28% to 26% on 1 April 2011.  A further reduction of 1% is proposed so that the main rate will be 25% on 1 April 2012.

 

Further reductions of 1% per annum have been announced so that the main rate will be 23% by 1 April 2014.

 

The threshold for the main rate remains at £1,500,000.

 

There are separate rules governing “ring fence profits”, which primarily relate to companies in the oil industry.

 

For details of rates and thresholds applicable in 2011/12, please click here to see tables.

 

 

Small companies rate

 

As previously announced, the Small Companies Rate will reduce from the current rate of 21% to 20% on 1 April 2011.  The threshold for the small companies’ rate remains at £300,000.

 

The marginal rate of corporation tax applying to profits between £300,000 and £1,500,000 will be 27.5% on 1 April 2011.

 

There are separate rules governing “ring fence profits”, which primarily relate to companies in the oil industry.

 

For details of rates and thresholds applicable in 2011/12, please click here to see tables.

 

 

Associates

 

The associated company rules affect the rate of corporation tax applied to a company’s profits.

 

Currently, the law states that a company can be associated with other companies solely by virtue of rights held by one person being attributed to another associated person.

 

HMRC’s longstanding Extra Statutory Concession (ESC C9) limits such attribution between certain relatives, unless there is substantial commercial interdependence.  This concession is to be legislated to extend the treatment currently afforded by ESC C9 to apply to all relatives and partners, including spouses, civil partners and minor children.

 

This will apply for accounting periods ending on or after 1 April 2011.

 

 

Annual Investment Allowance

 

The Annual Investment Allowance provides for expenditure by a business on certain plant and machinery capital equipment to be written off in full as a tax deductible expense.

 

The current maximum of £100,000 will be reduced with effect from 1 April 2012 (where businesses are chargeable to corporation tax) and 6 April 2012 (where businesses are chargeable to income tax).

 

The qualifying taxpayers are:

 

• Any individuals carrying on a qualifying activity (which includes trades, profession, vocations, ordinary property businesses and individuals having an employment or office);
• Any partnership consisting only of individuals; and
• Any company, subject to the fact that groups will only be entitled to a single allowance per group.

 

The AIA will be pro-rated if the chargeable period is more or less than a year; similarly, proportionate allowances are available where the accounting period spans the financial year end.

 

Where a business spends more than £25,000 in any chargeable period any additional expenditure will be dealt with within the normal capital allowances regime.

 

This measure was announced in the June 2010 Budget and will be included in the Finance Bill 2011.

 

 

Writing Down Allowance

 

The Writing Down Allowance allows businesses to write off the cost of capital assets, such as plant and machinery, against their taxable income.  They take the place of commercial depreciation, which is not allowed for tax.

 

The WDA on the main rate pool of plant and machinery expenditure will be reduced from 20% to 18% and the WDA on the special rate pool of plant and machinery expenditure will be reduced from 10% to 8% with effect from 1 April 2012 (where businesses are chargeable to corporation tax) and 6 April 2012 (where businesses are chargeable to income tax).

 

The WDA will be pro-rated if the chargeable period is more or less than a year; similarly, a hybrid rate of allowances is available where the accounting period spans the financial year end.

 

This measure was announced in the June 2010 Budget and will be included in the Finance Bill 2011.

 

 

Anti-avoidance

 

Anti-avoidance legislation exists to provide protection against abuse of the capital allowance rules that apply to plant and machinery.

 

The current legislation applies to transactions where the sole or main benefit arising from the transaction is obtaining an allowance.  It is proposed to make this legislation more effective by replacing the current ‘sole or main benefit’ test with a new rule that is in line with anti-avoidance tests in other tax legislation.

 

A consultation document will be published in May 2011, with a view to introducing legislation in the Finance Bill 2012.

 

 

Fixtures

 

There is to be consultation on the introduction of changes to the capital allowances fixtures rules that businesses must pool their expenditure on fixtures in a building within a short period of acquiring the building, in order to qualify for capital allowances.

 

A consultation document will be published at the end of May 2011.

 

 

Short life assets

 

Short life asset elections provide for expenditure by businesses on certain items of plant and machinery to be separately identified for capital allowance purposes.  The purpose of the election is to allow a balancing allowance to be given on the disposal of the asset for which an election has been made if it is sold or scrapped before a cut-off point.

 

The current 4 year cut off period over which expenditure on plant and machinery is given short life asset treatment will be extended to 8 years.

 

If the asset is not sold or scrapped within the 8 year cut off period, the remaining balance of expenditure will be transferred to the main capital allowances pool at the end of 8 years from the end of the period in which the expenditure was incurred, rather than 4 years at present.

 

The measure will have effect for expenditure incurred on or after 1 April 2011 (where businesses are chargeable to corporation tax) and on or after 6 April 2011 (where businesses are chargeable to income tax).

 

The current exceptions from short life asset treatment (e.g. cars) will continue.

 

 

Energy-saving technology

 

The Enhanced Capital Allowance regime provides for expenditure by a business on certain qualifying plant and machinery to be written off in full as a tax deductible expense. The plant and machinery has to be energy saving and/or water efficient.

 

It is proposed to update the list of qualifying technologies and products to include energy efficient hand dryers.  The criteria for automatic monitoring and targeting equipment will also be revised.

 

The effective date will be announced by a Treasury Order to be made prior to the summer 2011 Parliamentary recess.

 

Feed-in tariffs

 

The renewable heat incentive scheme, due to be introduced in summer 2011, will provide that where electricity and heat generation is undertaken by a business, the business may be able to claim capital allowances in respect of expenditure on the generating equipment.

 

It is proposed that legislation will be introduced to clarify the appropriate capital allowances treatment of such expenditure and ensure more consistent treatment between businesses, as currently there is some uncertainty over the rate at which allowances may be claimed, and that this may be dependent on the business circumstances and the site of the installation.

 

The RHI scheme will sit alongside the feed-in tariffs scheme, introduced in April 2010, which incentivises low carbon electricity generation.

 

A consultation document will be published in May 2011, with consideration given to including legislation in the Finance Bill 2012.

 

 

Enterprise Zones

 

It was announced that 21 new Enterprise Zones are to be created.  There are 10 already designated and another 10 will be designated in the summer.  The remaining zone will be in London.

 

Additionally, consideration will be given in a limited number of cases to the scope for introducing enhanced capital allowances to support enterprise zones in assisted areas where there is a strong focus on high value manufacturing.

 

 

R&D tax credits

 

Following the Dyson Report that was published in March 2010, the changes now announced go further than many Small and Medium Enterprises (SMEs) had hoped for.  .

 

Subject to further consultation the R&D scheme is to be simplified and improved with effect from 6 April 2012 by

• A 25% increase in benefit from 1 April 2011, and a further 25% increase from 1 April 2012 to give a total deduction of 225%.
• Abolishing of the rule limiting an SME’s repayable R&D tax credit to the amount of PAYE and NICs it pays in the period.
• Abolishing the £10,000 minimum annual R&D expenditure requirement for large companies and SME’s.
• Allowing relief through the large company scheme for subcontracted activity which forms part of a larger R&D project thereby allowing companies such as contract research organisations to benefit for the first time.

 

SMEs will however be prevented from claiming Vaccine Research Relief from 1 April 2012.

 

 

R&D tax credits for smaller entities

 

For SMEs the additional super-deduction for R&D expenditure is increased from 75% to 100% from 1 April 2011.  The effect of this will flow through for companies whose year end falls after 1 April 2011.  In order to stay within EU State Aid rules the vaccine research relief for SMEs will be reduced to 20% from 1 April 2011.

 

 

Transfer pricing

 

To provide certainty for multinational businesses, for accounting periods beginning after 31 March 2011 (for income tax for the tax year 2011/12 onwards) the July 2010 version of the OECD guidelines is to be referred to.

 

 

CFC reform - immediate

 

With a view to the UK becoming a more competitive holding company regime, ahead of the full CFC reforms in 2012, the following interim exemption measures will be introduced for accounting periods beginning after 31 December 2010:

 

·         CFCs whose chargeable profits under UK tax principles would be below £200,000;

·         CFCs with a main business of IP exploitation where the IP and the CFC have minimal connection with the UK;

·         For a period of three years, CFCs which as a result of a reorganisation or change to UK ownership come within the scope of the CFC regime.  This exemption would also apply to previously UK-headed groups that return to the UK); and

·         Certain intra group trading transactions where there is little connection with the UK (therefore, artificial diversion of UK profits unlikely).

 

 

CFC reform - planned

 

In order to make the UK CFC regime more competitive, a new CFC regime will be introduced in the Finance Bill 2012 moving towards a territorial basis of taxation.  A CFC tax charge will only apply to the proportion of overseas profits artificially diverted from the UK.

 

An additional new rule will seek to charge UK tax at 25% of the main corporation tax rate (i.e. 5.75% by 2014) on profits derived from overseas group financing arrangements, effectively a partial exemption for finance companies.

 

 

Foreign branches

 

In a move towards a territorial basis of taxation, an irrevocable election to exempt foreign branches from UK corporation tax will be introduced in the Finance Bill 2011.  This will be a welcome measure to the insurance, banking and oil and gas exploration industries.

 

This measure removes the current tax differential between foreign branches (taxed fully in the UK on an arising basis, with credit relief for foreign tax paid, capped at the UK tax payable) and foreign subsidiaries (whose dividends paid to a UK parent are likely to be exempt from UK tax).

 

Exempt profits will include any capital gains attributable to the foreign branch.

 

No relief will be available for foreign branch losses and anti-avoidance measures will be introduced to prevent the diversion of profits to exempt branches.

 

Companies not electing for the exemption will be unaffected

 

 

Abuse of tax treaties

 

Relief or exemption from UK tax will not be given under the UK’s double tax treaties where UK tax avoidance arrangements have been made in relation to the claim.  It is intended to introduce these anti-avoidance measures in the Finance Bill 2012.

 

 

Patent Box

 

As part of the agenda for growth, the Government is introducing a Patent Box from 1 April 2013.

 

The Patent Box would allow a reduced 10% rate of corporation tax on profits from patents.

 

The intention is to encourage companies to locate higher-value jobs and activity associated with the development, manufacture and exploitation of patents in the UK.

 

A further consultation document will be issued in May 2011 to take the process forward.

 

 

Government gilts

 

Currently the inflation uplift in gilt-edged securities linked to the Retail Prices Index (RPI) is exempt from the charge to corporation tax.  This exclusion does not currently apply to gilt-edged securities whose return might be based on a non-RPI index of prices.

 

The exclusion is to be extended to gilt-edged securities whose return is calculated by reference to any index of prices published by the Office for National Statistics, so paving the way to linking gilts to the CPI.

 

The legislation will have effect for securities issued on and after the day on which Finance Bill 2011 receives Royal Assent.

 

 

Leasing companies

 

Legislation will be introduced in Finance Bill 2011 with effect from 23 March 2011 to withdraw the option for a company with a leasing business to elect out of the ‘sale of lessor company’ charge that may arise on change of ownership.

 

The current ‘sale of lessor company’ charge legislation aimed to ensure that the full amount of profits of the leasing business are brought into charge over the lifetime of the leases.  As commercial profits from some leases may arise before they are taxed, a change of ownership of the company could result in taxable profits never being taxed.  It is considered that the election to opt out of the charge, such that profits of the company are ring fenced to ensure tax is paid on the deferred profits over the lifetime of the lease, may have been abused.

 

The measure is to ensure that

• the full value of the company’s interest in leased plant and machinery is taken into account in determining the scope of the sale of lessor companies legislation and
• the right plant and machinery assets are reflected in the calculation of the income amount.

 

The measure will have effect when

• there is a change in ownership of the lessor company or a change in a partner company’s interest in the leasing business on or after 23 March 2011; or
• there is a transfer of a business of leasing plant and machinery on or after 23 March 2011 where under the current law the assets would be treated as sold at market value.

 

 

Functional currency

 

Non-sterling balances in company accounts can give rise to large taxable profits and losses.  A change in the company’s functional currency can have the effect of creating allowable losses but no matching profit as it is only the taxable profit that is translated into sterling for tax purposes at an appropriate rate of tax.  Such schemes were stopped in December.

 

Investment companies with periods of account beginning after 31 March 2011 will be able to elect for a functional currency for tax purposes other than the functional currency of the accounts.  The election will only be available to companies whose main purpose is to make investments.

 

 

Mismatches

 

In December, the government announced it would prevent groups of companies generating tax losses through the asymmetrical tax treatment of loans and derivatives.  Following consultation, the draft legislation has been amended so that:

 

• Only UK-to-UK transactions will be affected.
• The tax saving will only be overruled if it is expected to exceed £2m.
• The anti-avoidance condition must include an objective element, which means that the scheme must be more likely to produce a tax advantage than a tax disadvantage.

 

These new rules will apply to group mismatch schemes to which a company is party on or after Royal Assent to Finance Bill 2011.

 

 

Derecognition

 

The Government is introducing legislation backdated to December 2010 targeted at stamping out tax avoidance where profits and losses on certain financial assets (known as loan relationships and/ or derivative contracts) are not accounted for equally.

 

As a result, it should no longer be possible to incur a tax loss without the parallel tax profit – so called “derecognition” in the precise circumstances covered within the legislation.

 

 

Accounting for leases

 

Changes to the International Accounting Standard governing lease accounting are expected during 2011 and changes to UK GAAP may follow in 2013, affecting businesses which are lessees or lessors of assets.

 

As a result, legislation will be introduced in Finance Bill 2011 to ensure continuity of tax treatment for lease transactions for businesses which begin to account for the transactions under a new standard.  The measure will require tax profits and losses to continue to be calculated as if the changes to lease accounting standards had not taken place.

 

The measure will have effect where a business accounts for lease transactions using a lease accounting standard that is newly issued or is changed on or after 1 January 2011, and will be effective for any period where early adoption is permitted by the standard.

 

 

Leasing double allowances

 

Anti avoidance legislation was announced on 9 March 2011 to counter a scheme under which the lessee of plant or machinery under a long funding lease seeks to obtain tax relief for more than the actual expenditure.

 

The legislation will apply to new arrangements and to existing arrangements where a payment under a guarantee has not been made prior to 9 March 2011.

 

The legislation will be introduced in the Finance Act 2011 and will have effect from 9 March 2011.

 

 

Financing costs

 

For accounting periods beginning on or after 1 January 2010 the tax treatment of financing costs and income of large groups became subject to the debt cap rules.  These can restrict tax relief for financing costs and provide tax exemption for finance income but have caused groups problems in trying to apply the rules.  This has led to some practical difficulties that need to be addressed.  These will be addressed by a joint working group involving interested tax professionals and HMRC with a view to introducing amending legislation in Finance Bill 2012.

 

 

Loan relationships

 

In certain circumstances companies can defer exchange gains and losses.  Budget 2011 includes a proposal to introduce technical changes with the intention of aligning the tax treatment with the commercial outcome.   These will be addressed by the Government informally with stakeholders in May 2011.

 

 

Life Insurance

 

A new life insurance tax regime, to align with the tax of companies generally, is to take effect from 1 January 2013.

 

Life insurance companies will be taxed on a trading profit basis as opposed to the “income minus expenses” calculation currently used.

 

HM Revenue & Customs now accept that stop-loss premiums are allowable in accordance with normal accountancy principles and will amend their guidance accordingly (Lloyd’s manual LLM4150).

 

Claims Equalisation Reserves are expected to disappear from January 2013 under the Solvency II Directive.  It is intended to retain the tax relief which general insurers and Lloyd’s insurers currently receive in respect of these reserves.

 

 

REITs

 

The Government has announced they will commence an informal consultation with interested parties on ways to make REITs more attractive investment vehicles.

 

The aim of the consultation is to introduce legislation in the 2012 Finance Bill to remove barriers and reduce the regulatory burden in certain areas both for existing and new REITs.

 

Investment Trusts

 

The Government, having concluded its consultation process, is updating the tax rules covering investment trusts so that it:

 

• Removes unnecessary restrictions on commercial activities.

 

• Provides increased certainty for investors.

 

• Reduces costs to business.

 

• Provides a more flexible framework.

 

The Government intends the UK to be a more competitive environment for investment trusts and that UK investors should choose investments for commercial rather than tax reasons.

 

There will also be changes made with company law rules to be consistent with tax changes.

 

 

Distributions

 

In July 2009 the tax treatment of distributions received by companies was the subject of major reform.  This has created some areas of uncertainty.   These will be addressed by a joint working group involving interested tax professionals and HMRC with a view to publishing comprehensive guidance or introducing amending legislation in Finance Bill 2012.

 

 

Film tax relief

 

The special film tax relief for expenditure on production of British films will be renotified to the European Commission in 2011 as State aid, to help secure the future of this relief beyond the current 2012 expiry.

 

 

Alternative finance

 

Regulations will be made in 2011 to introduce direct tax rules for Sharia-compliant variable loan arrangements and derivatives following a formal consultation process with industry.

 

 

Northern Ireland

 

The Government is working with the Northern Ireland Executive to rebalance the Northern Ireland economy and looking at mechanisms for devolving the rate of corporation tax to the Northern Ireland Executive.   A consultation paper is due to be published on 24 March 2011.