UK: Budget Summary: Business Taxes

• Rates and thresholds

• Research and development tax credits

Prior to the Budget, the Inland Revenue circulated a technical note illustrating the Government’s proposals for a tax credit for research and development expenditure. Legislation to this effect will be included in the Finance Bill this year. Note that details may change as the Finance Bill passes through its committee stages.

The scheme is designed to encourage investment in research and development by small and medium sized companies, and only those companies will qualify for the relief.

The definition of small and medium sized companies will generally follow that of the Companies Act, but an eligible company must also

• have fewer than 250 employees (either on its own or in the group of which it is the parent), in the current or preceding year; and
• normally have no more than 25% of its share capital held by companies which would not qualify as small or medium sized companies.

The scheme works by allowing an additional deduction of 50% of the cost of qualifying research and development expenditure, against trading profits.

Where the company is not yet profit making, it has the option to claim a rebate from the Inland Revenue in the year in which the research and development costs are incurred. The amount of the rebate will be equivalent to 80% of the total of the expenditure and the 50% supplement at the current small companies rate, ie 150% x 80% x 20% = 24% of expenditure. The rebate is also available to companies that have not yet started trading. The amount of the rebate is limited to the company’s PAYE and NIC for the period.

In addition to the above, there are a number of other points which are worth noting.

• The company must spend a minimum of £25,000 a year on research and development.
• Relief under the new scheme is restricted to revenue expenditure. Capital expenditure does not qualify.
• The company must be undertaking the research and development on its own account to qualify under the scheme.

These restrictions apply only to the new relief, i.e. the additional 50%. They do not apply to the existing 100% relief, which will continue.

• Corporate venturing

In the last Budget, the Chancellor announced his intention to provide tax incentives to foster a culture of corporate venturing.

Legislation to introduce this included in this year’s Finance Bill.

The scheme will allow relief at 20% of the cash amount subscribed for new, fully paid up ordinary shares in unquoted, small, higher risk trading companies. In addition, tax will be deferred on any chargeable gains on shares acquired under the scheme which are reinvested in a new such shareholding; and relief will be given against income for any capital losses on disposal of the shares (net of any reinvestment relief returned after the disposal).

There are a number of conditions, which are broadly outlined below.

The issuing company must, broadly

• have gross assets (of the company or group, where applicable) under £15m before the issue and under £16m following the issue
• not be under the control of another company
• have at least 30% of its ordinary share capital held by individuals who are not directors or employees of the investing company
• be a trading company, not involved or, a member of a group involved in, certain excluded activities.

The subscribing company, broadly, must

• hold the shares in question for at least three years.
• hold no more than 30% of the ordinary share capital, voting power, or combined loan capital and issued share capital of the issuing company
• not directly or indirectly control the issuing company
• not be carrying on a financial trade nor be a member of a group which substantially carries on such a trade

Additionally,

• The shares, once subscribed, should be chargeable assets in the hands of the investing company; and
• there are certain conditions regarding arrangements to transfer, repurchase and guarantee the issued shares which must also be met.

Companies can obtain advance clearance from the Inland Revenue that they meet the qualifying conditions for the relief.

• Corporate tax groups

From 1 April 2000, a group or consortium for group relief purposes will be able to be established through a company resident anywhere in the world. A UK branch of an overseas company will also be able to claim losses from other group companies against its UK profits chargeable to corporation tax. It will also be able to surrender its losses as group relief where those losses are not relievable in the overseas country.

A loss incurred by the overseas branch of a UK company will also be available for group relief to the extent that it is not relievable in the overseas country.

• Company gains

From 1 April 2000, companies will be able to transfer assets on a no gain/no loss basis even where the group includes non UK resident companies, as long as the assets remain within the scope of UK corporation tax on chargeable gains.

Transfers of assets on a no gain/no loss basis will also be permitted between two UK group companies which have a common non-UK resident parent company, and between a UK company and an overseas company in the same world-wide group carrying on a trade in the UK through a branch or agency, again provided the assets remain in the UK tax net.

The Government is to consult on a rollover relief to remove the immediate tax charge on gains arising on the disposal of shareholdings exceeding 30% in trading companies or trading groups. Gains would possibly be rolled over into other substantial shareholdings or into assets which presently qualify for business asset rollover relief.

From 1 April 2000, groups of companies will also be able to match chargeable gains and losses on disposals outside the group by making an election rather than having to ensure that the gain and loss actually arise in the same company.

• Double tax relief

Major changes have been announced to the UK’s system of double tax relief. The changes include allowing companies to carry back for one year, and to carry forward indefinitely, foreign tax credits on dividends and the profits of foreign branches which cannot be relieved immediately.

Double tax relief is also extended to UK branches and agencies of non-residents.

• Controlled Foreign Companies

Changes are being made to tighten up on the CFC regime. In particular, rules are being introduced to stop the use of so-called "designer rate tax" regimes. The new rules will treat subsidiaries in such regimes as a CFC regardless of the amount of tax paid. The regulations will name the overseas tax regimes which will be affected by the legislation.

• Shipping

The Chancellor has confirmed that, as previously announced, a tonnage tax for the shipping industry will be introduced, on the lines recommended by Lord Alexander of Weedon in his report into the industry published in August 1999.

Broadly, this means the introduction of a ring fenced tonnage tax for those in the shipping industry. Companies may elect for this basis to apply, and the elections would be in force for periods of ten years.

The participating company’s taxable profits will be derived by reference to the net tonnage of each of the ships it operates, whether owned directly or leased. Corporation tax will be payable as normal on the derived profit.

• Capital Allowance simplification

A number of measures have been introduced to modernise the capital allowances system by making the rules for businesses fairer and simpler. The main changes are:

• The requirement to notify expenditure on which plant and machinery allowances are to be claimed (generally within two years) will be repealed. This will apply to periods where the time limit for notification falls on or after 1 April 2000 (i.e. chargeable periods ending on or after 1 April 1998 for corporation tax).
• The requirement for a separate pool for expensive cars (costing less than £12,000) removed for present chargeable periods (or later if elected).
• Capital allowances available for plant and machinery used under oil production sharing contracts.
• Currently where plant and machinery is sold and leased back the lessor’s claim to capital allowances is restricted to the current open market value of the asset. In certain circumstances these restrictions have been relaxed so that allowances can be claimed on the lower of cost to and sale by the lessee.
• A clear code is to be introduced for granting capital allowances to non-residents and other persons with non-taxable activities.

• Tax treatment of expenditure on films

Legislation is to be introduced from 6 April 2000 to clarify uncertainties in the current tax relief regime.

• Withholding tax on international bond interest abolished

As part of a package of measures to promote the UK as a favourable investment location, the withholding tax international bond interest will be abolished from April 2001. Instead simple procedures will be put in place for information to be provided to the Inland Revenue at their request. The Government will be consulting on the detailed implementation of the measures.

• Rent factoring

Legislation will be put in place, effective for transactions entered on or after 21 March 2000, to prevent rent factoring schemes. Under such schemes, companies, in effect, exchange their entitlement to future rental streams for a current lump sum. All such lump sums will now normally be taxable as an income receipt under Schedule A rather than as a capital receipt. The legislation will not however affect the taxation of genuine investment in property and will not therefore apply to arrangements, inter alia, with an effective economic life of over 15 years.

• Charitable giving

The package of measures announced by the Chancellor in the pre-budget report in November 1999 included:

• the abolition of the £250 minimum for gift aid donations
• the abolition of the maximum limit for payroll giving
• a 10% supplement on payroll giving for 3 years from April 2000
• a number of VAT reliefs for charities and fund-raising events

The Chancellor has subsequently made a number of extensions to the package of measures beyond those already announced, including:

• extension of the relief for gifts of certain shares and securities to charities
• relief for charitable gifts by non residents against income chargeable to UK tax
• a broadening of the zero rate of VAT for certain donated goods and an extension to the VAT exemption on fund-raising events

• Capital allowances for energy saving investments

Under the terms of the "Affordable Warmth Programme" the Chancellor has introduced capital allowances on central heating systems installed and leased to homeowners by landlords and/or local authorities.

This scheme is designed to

• provide efficient heating, and lower fuel bills to low income families
• have a positive environmental effect through lower fuel use

• Ratchet loans

Companies will be able to obtain interest relief on certain loans where the interest is linked to profits (known as ratchet loans), instead of the interest being treated as a distribution.

• Quarterly instalments of corporation tax

The rate of interest to be charged on underpayments of corporation tax under the quarterly instalment arrangements is to be reduced to 1% over base rate from 2% over base rate.

The number of companies required to pay corporation tax in instalments will fall as the de minimis limit which currently excludes companies with an annual liability of £5,000 or less is to rise to £10,000.

For further information, speak to your usual KPMG tax contact.

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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