UK: UK Budget 23 March 2011 Summary Of Business Tax Changes

Last Updated: 13 May 2011
Article by John Finnick

Overview

Against a background of lower than expected recent and projected future growth in the economy, George Osborne delivered a fiscally neutral second Budget.

Key themes of the Budget were Britain being open for business, reward for enterprise, stability and growth.

The main surprises were a reduction in fuel duty for consumers (offset by an increase in taxes for producers) and an additional one per cent cut (above the cut already announced) in the main rate of corporation tax (offset by an increase in the levy for banks).

The UK has the dubious honour of having the world's longest and most complex tax code and, in an effort to cut back on complexity, there is to be a review of the possible amalgamation of the systems of income tax and National Insurance Contributions. More immediately, 43 unused, unwanted or unloved tax reliefs are to be abolished.

The controversial and much criticised IR 35 regime for personal services companies is to remain, albeit with promised better targeting and administration by HMRC.

A summary of the key business-related measures are as follows.

Corporate Taxation

Corporate Tax Rates

The main rate of corporation tax will fall by 2% (rather than the planned 1%) to 26% and the small profits rate by 1% to 20%, both with effect from 1 April 2011. Further annual 1% cuts in the main rate will apply in future, culminating in a main rate of corporation tax of 23% from April 2014.

Foreign branches of UK companies

As previously announced, there will be an optional exemption regime from UK corporation tax for the results of foreign branches of UK companies. Profits of foreign branches subject to an election will not be subject to UK corporation tax, and losses of the branch will not be relieved against profits of the company subject to UK corporation tax. The results of the branch will be determined under any applicable double tax treaty with a non discrimination article or under the OECD model tax convention, but there will be restrictions to prevent abuse. Some types of business will not be covered by this regime.

The election will be irrevocable and the regime will apply to accounting periods of companies commencing on or after the date of Royal Assent to the Finance Bill 2011.

Patent Box

It has been confirmed that the patent box regime for a 10% rate of corporation tax will be introduced in 2013. Legislation to introduce the regime is expected in the Finance Bill 2012.

Controlled Foreign Companies (CFCs)

Interim measures to reform the CFCs regime are introduced with effect from 1 January 2011. These are:

  • exemption for companies mainly engaged in activities with foreign counterparties
  • exemption for IP companies where the IP has no real connection with the UK
  • increase in the small profits exemption from £50,000 to £200,000
  • three-year period of exemption for companies when they first come into UK ownership.

The proposed partial exemption already announced for group finance companies is to be introduced under which their effective rate of tax will be 5.75% by the time that the main rate of corporation tax falls to 23% in 2014.

Further reform to the CFC regime, which will be the subject of consultation, is expected to be introduced in the Finance Bill 2012, but will be aimed at companies where there is an artificial diversion of profits from the UK.

Capital Gains Tax

The lifetime limit qualifying for entrepreneur's relief (on which the effective tax rate is 10%) is increased from £5m to £10m for disposals from 6 April 2011. If a person has exhausted their £5m limit (or lower limit for earlier periods) before 6 April 2011, any qualifying disposals from then may benefit from the additional £5m (or greater amount for earlier lower relief limits) of relief.

The annual capital gains exemption for individuals is increased to £10,600 for tax year 2011/12. From 2012/13 the annual exempt amounts for individuals and trusts will generally be automatically increased by the increase in the consumer price index, unless overridden by Parliament.

Value Added Tax

Registration and deregistration thresholds

With effect from 1 April 2011, the thresholds for VAT registration and deregistration are increased to £73,000 and £71,000 respectively.

Stamp Duty Land Tax (SDLT)

Bulk purchases of dwellings

Under new provisions applying from purchases on or after the date of Royal Assent to the Finance Act 2011, the rate of SDLT chargeable will be based on the arithmetic mean consideration payable for each dwelling (subject to a minimum rate of 1% for each dwelling) as if it were a single purchase, rather than the present position where the rate of SDLT is based on the aggregate consideration payable for all properties purchased (or treated) as part of a single deal.

Other Business Related Tax Issues

Venture Capital Schemes

The rate of income tax relief under the Enterprise Investment Scheme (EIS) is raised from 20% to 30% for qualifying shares issued from 6 April 2011. There are further proposals to increase from 2012 the amount that may be invested by individuals under both the EIS and Venture Capital Trust (VCT) scheme to £1m and the size of companies in which EIS qualifying investments may be made, to companies with fewer than 250 employees and £15 of gross assets before the investment. All of these changes to the EIS and VCT schemes need State Aids approval from the EU.

There will be restrictions to EIS and VCT reliefs for companies whose business relates to the receipt of feed-in tariffs unless power generation by them commences before 6 April 2012.

Capital allowances

A short life assets election will be possible for expenditure from April 2011 on assets with an expected life of no more than eight years, an extension from the current four-year period.

The previously announced reduction in the rate of allowances for general plant and machinery from 20% to 18% will take effect from April 2012.

Annual investment allowance

As previously announced, this will fall from £50,000 to £25,000 from April 2012.

Business premises renovation allowance

This allowance, which was due to expire in April 2012, is to be extended by a further five years from then.

Research and development tax credits

The rate of the additional credit for qualifying R+D expenditure from 1 April 2011 by a small or medium sized (SME) company will increase from 75% to 100% (making a total credit of 200% of relevant expenditure). From 1 April 2012 this will be increased from 100% to 125% (a total credit of 225% of qualifying expenditure). Both the 2011 and 2012 increases require State Aids approval from the EU.

Subject to further consultation, from 2012 there will be further changes to the R+D credit scheme to abolish the limitation related to total PAYE and NIC paid by a SME company and the £10,000 minimum expenditure condition for all companies.

Financial sector - specified investments

Legislation will be introduced, having effect from 24 February 2010, to correct unintended consequences of previous regulatory legislation. Broadly, the effect of the new provisions will be that debt securities unintentionally caught by the regulations will qualify as "loan capital", and thereby be exempt from stamp duty and also not prejudice a holder from qualifying under corporation tax securitisation regulations.

Landfill tax

The standard rate of landfill tax will be increased from £56 to £64 per tonne from 1 April 2012.

Aggregates levy

The increase in the rate of levy from £2.00 to £2.10 per tonne planned to apply from 1 April 2011 will not take place and will now apply from 1 April 2012.

Tax Avoidance

De-grouping charges

The provisions that exempt a gain from a corporation tax de-grouping charge when associated companies leave a group together are to be changed to prevent unintended avoidance.

General avoidance

There are to be several strategies to tackle tax avoidance. There is already a committee of tax experts looking at the possible benefits (or not) of introduction of a General Anti-Avoidance Rule (GAAR) into UK law. The committee is scheduled to make its initial report in the autumn. If introduced, a GAAR would be likely to be an additional tier in tax law above specific targeted legislation.

Avoidance using the tax treaty network of the UK for unintended purposes or benefits is to be the subject of consultation, with legislation planned in 2012.

There will in future be a rolling review of areas of potential tax avoidance that are considered to be high risk and high cost.

There will be further changes to the hallmarks (features of arrangements that require disclosure as tax avoidance schemes) in 2011/12 and disclosure is extended generally to inheritance tax schemes from 6 April 2011.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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