UK: The Budget 2013 Commentaries - Business Taxes

Last Updated: 21 March 2013
Article by Smith & Williamson

The commentaries below are written in general terms. Details can also be found in our downloadable Budget Report brochure, which will be available shortly. You are strongly recommended to seek specific advice before taking any action based on the information given, both in the commentaries and in the publication.

Corporation tax rates

The main rate of corporation tax has been reduced steadily over the last few years.  For the period 1 April 2012 to 31 March 2013 the rate is 24%, falling to 23% for the period 1 April 2013 to 31 March 2014 and 21% for the period 1 April 2014 to 31 March 2015.  From 1 April 2015 the main rate will fall to 20%, at which point it will be the same as the small profit rate.

1 April 2013 will see the phased introduction of the 10% rate of tax on patent box profits (which will initially apply to 60% of qualifying profits but will be fully effective from 1 April 2017). 


The reduction in main corporation tax rates are a significant factor in the competitiveness of the UK tax system.

Capital allowances

A number announcements on capital allowances have been made.

  • The increase in the annual investment allowance (AIA) from £25,000 to £250,000 for two years from 1 January 2013 with complex transitional rules.
  • 100% first year allowances (FYAs) for expenditure on low emission vehicles extended to 31 March 2018.  The emission threshold to qualify for the allowance falls from 110gms/km to 95 gms/km from April 2013, and will reduce to 75 gms/km from April 2015 and a commitment to review thresholds and allowances from Budget 2016.
  • The emission threshold for business cars to qualify for the main rate of capital allowances (currently 18%) will fall from 160gms/km to 130 gms/km from April 2013.  The threshold will be reviewed n Budget 2016 with any change taking effect from April 2018.
  • 100% FYAs for business expenditure on gas refuelling equipment will be extended to 31 March 2015 in Finance Bill 2013 and a further three years in Finance Bill 2015.
  • Consultation will take place on aligning mineral extraction allowances for plant and equipment with other plant and machinery allowances, where the eligible assets are used in businesses where profits are not taxed in the UK.
  • The lists of equipment qualifying for enhanced capital allowances (ECA) for energy and environmentally beneficial equipment will be revised from a date to be announced through an order made in summer 2013.  The lists will include a new sub-technology carbon dioxide (CO2) heat pumps for water heating and a new grey water re-use technology.  A number of existing sub technology categories will be removed (automatic boiler blowdown control equipment; condensate pumping equipment; switched reluctance drives and automatic air purgers; shower flow regulator within the category of efficient showers technology) and some refinements will be made to a number of other categories of equipment.
  • ECAs for plant or machinery that receives feed in tariffs or renewable heat incentive payments took effect in the UK from April 2012 (and April 2014 with respect to combined heat and power plants).  This change did not encompass Northern Ireland, so legislation will be introduced to effect the change there from April 2013 (April 2014 for combined heat and power plants).
  • Currently expenditure on railway assets and ships is excluded from the FYA regime.  Expenditure on such assets will now qualify if incurred on or after 1 April 2013.


These changes continue the Government's drive to incentivise energy and environmentally beneficial business capital expenditure and expenditure for smaller businesses, while making the system fairer across business sectors and bringing the regime in Northern Ireland into line with the rest of the UK.  As always, care will be needed to ensure transitional rules are properly applied and the expected allowances are in fact obtained.  While the increase in annual investment allowance is welcome, the complexity of the transitional rules do not seem to align with a policy of tax simplification.

Research & development (R&D) above the line tax credit

Draft legislation was issued in December 2012 for the 'above the line' tax credit for the large company R&D tax relief regime.  The repayable 'above the line credit' was set at a rate of 49% for oil & gas ring fence businesses and 9.1% for other businesses.  The higher rate for ring fence businesses takes account of the expenditure supplement available to those businesses where a claim is made for R&D tax relief under the existing regime.  While no further announcement has been made on the rate of credit for ring fence businesses, the 2013 Budget announced an increase in rate for other businesses from 9.1% to 10%.

For the period from 1 April 2013 to 31 March 2016 the company will be able to choose whether it claims the 'above the line credit', or makes a claim for R&D tax relief under the current provisions.  However if it makes a claim under the new provisions, it will not be able to make claims for future periods under the old provisions.  For expenditure incurred on or after 1 April 2016 the only form of large company R&D tax relief available will be relief under the 'above the line credit' regime.

The amount of repayment of the 'above the line credit' may be deferred for those companies with low staffing costs incurred on qualifying R&D activities.  The credit is to be repaid as follows:

  • Firstly against the company's corporation tax liability for the period;
  • If there is any balance remaining, then it is only potentially repayable if it does not exceed the amount of PAYE and NIC liabilities in respect of staffing costs on qualifying R&D expenditure.  If there is any balance available, then this can be offset against a corporation tax liability of the company for an accounting period other than the current one.  If the balance remaining that is potentially repayable is reduced to nil (because of low UK staff costs and thus PAYE/NIC), then the amount of the reduction is treated as an R&D expenditure credit of the next accounting period;
  • If there is any balance of credit remaining after the previous step, then this may be surrendered to a group company and used to settle any corporation tax liability of that group company that relates to the same proportion of a common accounting period;
  • If no group relief is claimed, or there is a balance remaining, the remaining balance is treated as a profit and the amount repayable is calculated as the amount net of the appropriate rate of tax (main rate if a non-ring fence company and the main rate and supplementary charge if a ring fence company).  This reduces the maximum refund to approximately 7.7% (assuming a credit rate of 10%);
  • This 'repayable amount' (net of tax) is then to be used in settling any other sum payable to HMRC (for example VAT, other PAYE & NI costs, etc); and
  • If there is any balance remaining after that, then this is repayable in cash to the company, as long as it is a going concern.


In the period between April 2013 and March 2016 it will be necessary to consider whether it is more appropriate to claim under the new provisions or continue with the current provisions.  The old provisions do not provide for a repayment of large company R&D tax relief.

Furthermore, in addition to the greater profile of R&D relief under the 'above the line' tax credit system to the business divisions responsible for the R&D activity, the increase in the rate of tax credit to 10% will be helpful in encouraging companies to opt for the new tax credit method.

Amendments to UK group relief

As announced in December 2012, new rules will be introduced to restrict situations in which companies resident in the European Economic Area (EEA) can surrender losses by way of group relief from their UK branches.  Broadly, with effect from 1 April 2013, the restrictions on the ability to surrender by way of group relief will be based on whether the losses are actually used elsewhere in any accounting period, as opposed to whether they could potentially be used elsewhere.  The other conditions which need to be met for cross-border utilisation of losses remain unchanged, and for companies outside the EEA no changes are proposed.


This change was expected from previous announcements and should provide further clarity on the ability to surrender losses by way of group relief.  Further information will be published on 28 March 2013 and the full impact of the new rules will have to be evaluated at that time.

Restrictions on corporation tax group loss relief

As announced in December 2012, the Government will expand the type of commercial arrangements that are exempt from anti-avoidance rules affecting group relief.  Previously it was possible for group relief to be denied where there were 'arrangements' in place that meant that, at some point in the future, one company could cease to be a member of the group.  Amendments to the group relief rules commencing for accounting periods ending on or after 1 April 2013 will mean that such arrangements should not impact on a company group's ability to claim group relief, provided these are commercial arrangements.


These amendments are welcome, as they simplify the group relief provisions and ensure that the anti-avoidance restrictions for group relief apply when intended.  However, as these amendments will apply in very limited circumstances, we do not expect their impact to be extensive.

Corporation tax reliefs for the creative sector

As previously announced, the Government will introduce tax reliefs for the production of video games, animation programmes and high-end television programmes in the UK.  These follow a period of consultation on the design of the reliefs, and are similar to the reliefs currently available to producers of films in the UK.  Legislation will be included in the Finance Bill 2013 and will take effect from 1 April 2013 for animation and high-end television production.  The relief for the video games sector will be implemented when state aid approval is received from the EU.


The introduction of these reliefs will be welcomed by the creative industries concerned, although it is disappointing that the relief for the video games sector will be delayed.  The Government has been worried by UK producers undertaking projects overseas in countries that offer tax breaks and by leading overseas producers feeling reluctant to come to the UK in the absence of these tax breaks.  The Government believed that the existing film tax reliefs helped generate over £1bn of investment in the UK in 2011/12, and hoped that the proposed rules would have a similar impact in the UK in these other creative sectors.

Controlled Foreign Companies

Amendments to the legislation will be made to counteract certain anti-avoidance arrangements as well as minor changes to ensure consistency with other parts of the tax legislation as set out below.

  • To restrict the potential double taxation relief on profits derived from conduit financing arrangements that involve CFCs in respect of accounting periods beginning on or after 1 January 2013.
  • To extend the CFC rules to profits derived from leased assets including hire purchase and similar contracts.
  • Minor changes to the CFC legislation to ensure consistent interpretation of generally accepted accounting practice and to ensure that the arbitrage rules apply as intended with effect from 1 January 2013.


Despite the recent enactment of the final rules, it has become necessary to make amendments to the legislation for potential anti-avoidance planning. The other changes are minor and are designed to make the CFC rules consistent with other parts of the tax legislation.

Amendments to world wide debt cap rules

As announced in December 2012, the Government proposes to revise the way in which the group treasury company election operates.  Under the current legislation, group treasury companies can make an election so that their financing expenses and income are excluded from the group's debt cap calculation.  The intention was to relieve the administrative burden on groups complying with the debt cap regime, but actually it was possible for groups to exclude substantial amounts of financing expenses and income that would otherwise have been included.  Amendments to the rules will be made, to ensure that the group treasury election is more targeted.


The debt cap rules only apply to large groups, and therefore this relatively small change to the group treasury election will only impact a small number of companies.

Manufactured payments

Amendments in Finance Act 2012 to counteract a disclosed avoidance scheme involving manufactured overseas dividends (MODs) led to consideration of reforming the manufactured payments legislation and a consultation was issued on 27 March 2012.  The consultation proposed:

  • simplification of the rules for relieving and taxing manufactured payments;
  • abolition of the rules requiring deduction of income tax from some manufactured payments.

The draft legislation for Finance Bill 2013 gives effect to these changes for both corporation tax and income tax, and will apply to any payment representing a dividend or interest that is made on or after 1 January 2014. 


These changes represent a substantial simplification to the tax rules on manufactured payments.

Exit Charges on changes to residence

The UK legislation on exit charges will be amended in respect of the tax liability arising when companies cease to be resident in the UK and become a resident of, and established in, another member state of the EEA.  This is to comply with the Treaty on the Functioning of the EU and recent jurisprudence from the Court of Justice of the EU.  For exit charges arising on or after 11 March 2012, companies can elect to defer the payment of the tax charge and will have two options for paying the tax.

Under the first option, a simplified approach is to be adopted so that the exit charge can be paid in six equal annual instalments with the first payment starting on the normal due date, being nine months after the end of the accounting period in which the cessation of UK residence takes place.

The second option requires the tax attributable to the exit charges to be allocated on an asset by asset basis.  The tax is then deferred until the asset is realised and an annual statement of realisations would need to be submitted to HMRC.  In the case of intangible assets, derivative contracts and profits on loan relationships, the exit charge can be paid over the economic life of the assets subject to a maximum of ten years.

Under both options, the deferred payments would be subject to interest charges.


HMRC has been forced to amend the requirement for the payment of tax within nine months of the accounting period in which the cessation of UK residence took place to comply with the CJEU decisions but consider that this measure should not have a major economic impact.

Corporation tax simplification: foreign currency assets and chargeable gains

As part of the programme to simplify the tax system, the Government proposes to change the tax treatment for companies disposing of certain assets in foreign currencies.  Currently all chargeable gains must be computed in sterling, even if a company operates in another functional currency.  This can result in foreign exchange gains or losses arising simply due to the changes in foreign exchange rates between the company's operational currency and sterling during the period of ownership of the asset.

Finance Bill 2013 will introduce legislation to change the computation of chargeable gains for disposals of ships, aircraft, shares and interest in shares in companies which:

  • have a functional currency other than sterling (or at some point during the period of ownership had a functional currency other than sterling); or
  • have made a designated currency election (under s9A CTA 2010).

Companies will compute their chargeable gains and losses using their functional currency at the date of disposal, with the gain or loss then being translated into sterling at the exchange rate at the date of disposal.


These changes are welcome, as they should simplify the computation of capital gains for companies who operate in currencies other than sterling.  They should also align economic and tax outcomes, as currently foreign exchange movements against sterling can give rise to gains or losses which are not based on the economic appreciation or depreciation of the underlying asset.  However these changes will be relatively limited in scope, applying only to companies who operate in a functional currency other than sterling and to disposals of limited classes of assets, i.e. ships, aircraft and shares.

Review of loan relationships and derivative contracts

A consultation on modernising the loan relationships and derivative contracts legislation for companies will take place after Budget 2013. Its aim will be to provide simpler and fairer tax treatment, minimising the scope for abuse, reducing uncertainty and improving structural and legislative clarity as well as reducing administrative burdens.   It is intended the legislation will be included in Finance Bill 2014 and Finance Bill 2015.


There are many technical intricacies to the loan relationship and derivative legislation, particularly concerning the interaction with accounting rules.  With the changes announced this month to UK GAAP (FRS102 to replace existing UKGAAP from January 2015, subject to early adoption for accounting periods commencing on or after 31 December 2012), it looks like a good time to review the tax legislation in this area.

Offshore funds regulations amendments

Changes will be made to ensure that an offshore income gain to a UK investor cannot be avoided by a merger of the fund or its reorganisation.  This measure comes in to force from 20 March 2013.

Further regulations are to be published and consulted on to ensure investors in offshore reporting funds are taxed on their correct share of income from that fund.


The clarification concerning merger and reorganisation closes an avoidance loophole.  The further regulations and consultation are designed to address the effects of a technical point where an offshore fund's reported income differs to the amount reported to the investor.  Any measure that aligns income reporting for the fund and amounts reported to investors is to be welcomed.

Loan from close companies to their participators

Where close companies, ie companies controlled by five or fewer participators (which is not limited to shareholders) lend to those participators there is a charge to tax of 25% of the value of the loan, if that loan remains outstanding more than nine months after the company's year end .  This was historically referred to as "shadow ACT" to indicate that the loan was probably a way of avoiding tax arising on a dividend.   The tax is repayable if the loan is repaid but the charge represents a real bugbear to close companies.  Techniques have been used to prevent the charge arising and several of these will cease to be effective from Budget Day.  These cover the use of suitable intermediaries which prevent the charge arising; the transfer of value other than by loan where there is corresponding receipt by the participator;  the recycling of loans to ensure that the time limits are not breached.   Each of these will be counteracted with immediate effect.

In addition, there will be a wider review of the loans to participator regime with a consultation paper later in the year.


Each of these three techniques exploited a different aspect of the relevant legislation.  The first consists of using an LLP or partnership where the company itself is a member or partner.  The Budget material suggests that "some close companies have sought to argue" but in fact HMRC has historically accepted that the conditions required to catch such loans are not met, in terms, because not all members of the borrowing firm are individuals.   By the same token, where the arrangements include trustees, again the requirement for individuals only to be involved may not be met. 

The second consists, perhaps more simply, in making arrangements that do not themselves qualify as loans of money but where value ends up in the hands of the participator.  It is suggested that this could include undrawn profits in a suitable partnership. 

The third arrangement is the simplest of all: a further loan is made which repays the first in time to prevent the charge arising.   This is to be prevented by a new 30 day bed and breakfasting rule for amounts in excess of £5,000.  Even where the new rule is not breached a further rule where there are outstanding amounts of at least £15,000 and at the time of repayment there are arrangements, or an intention, to redraw the amount and an amount is actually redrawn.

OTS review of partnerships

The Office of Tax Simplification will be asked to consider ways to simplify the taxation of partnerships.


Simplification of the tax system is always welcome.  However, given there will also be a consultation on removing the automatic self-employed treatment of partnership/LLP members and a review of company structures using partnerships or LLPs to avoid tax, a period of uncertainty for many partnership structures now exists.

National insurance administration for the self-employed

Where self-employed individuals are liable to pay Class 4 National Insurance contributions (NIC) this is dealt with via the self-assessment system alongside their income tax liability. 

They are also liable to pay Class 2 NICs on a monthly or six monthly basis but via an entirely separate payment process.

Consultation is to take place on the options to simplify this process by using the self-assessment system to collect both Class 2 and Class 4 NIC.


Simplification would be welcome as it would ease the administrative burden on the self-employed.

On a wider point, this forms part of the chancellor's commitment in the 2011 Budget to merge the operation of income tax and NIC.  However, it remains unclear if the chancellor is minded to take this opportunity to fully merge the two taxes and provide a major simplification to the tax code or instead whether the intention is only to align and modernise the administration process.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.