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).
Comment
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.
Comment
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.
Comment
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.
Comment
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.
Comment
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.
Comment
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.
Comment
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.
Comment
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.
Comment
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.
Comment
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.
Comment
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.
Comment
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.
Comment
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.
Comment
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.
Comment
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.
Comment
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.
