Corporate and Business Tax
Tax motivated incorporation
The government has moved to discourage small businesses from incorporating for tax reasons by increasing the tax they will pay on profits up to £300,000, from 19% to 20% with effect from 1 April 2007. The small companies' corporation tax rate will further increase to 21% in 2008 and to 22% in 2009.
In contrast the corporation tax paid by large companies with profits of £1.5 million or more will be cut from 30% to 28% from 1 April 2008. However companies with ring fenced North Sea oil and gas activities retain the current corporation tax rates of 19% and 30%.
The effective marginal corporation tax rate for profits between £300,000 and £1.5 million is 32.5% from 1 April 2007.
Comment
These corporation tax changes for small companies mean the tax due on profits made within a company will exceed the income tax payable on the same amount of profits made by a sole trader or partner, as the basic rate of income tax will drop to 20% from 6 April 2008. However, an individual will also have to pay Class 4 national insurance on his self-employed profits. The overall effect of the measures will be to reduce considerably the tax advantages of incorporation. |
Capital allowances
The system of capital allowances is to be significantly revised from 2008/09. The proposals are:
- Industrial Buildings Allowances (IBAs) and Agricultural Buildings Allowances (ABAs) will be phased out, with final withdrawal of both regimes by 2011
- most balancing allowances and balancing charges for IBAs and ABAs cease to apply for changes in ownership on or after 21 March 2007
- writing down allowances for plant and machinery will be cut from 25% to 20%
- writing down allowances for certain fixtures in a building will be cut from 25% to 10%
- writing down allowances for long life assets will be increased from 6% to 10%.
In addition the following changes will be subject to consultation:
- a new investment allowance for the first £50,000 spent on plant and machinery
- where businesses have a loss after claiming 100% capital allowances on green technologies they will be able to reclaim a tax credit from HMRC.
The current 50% first year allowance for plant and machinery which can be claimed by small businesses, which was due to expire in April 2007, will be extended to April 2008. The capital allowances that can be claimed on business cars have not altered but proposed changes to the rules are being consulted on further.
Comment
These changes to capital allowances remove many complicated calculations that must be performed on the sale of a building. The annual investment allowance may encourage smaller businesses to invest but in practice it will not affect the purchasing decisions of larger companies. |
Tax relief for business cars
In March 2006 the government issued a discussion document about business expenditure on cars. As a result of consultation, revised proposals have been issued.
The proposals are that:
- the existing 100% first year allowances for cars with CO2 emissions up to 120g/km be retained
- the general plant and machinery capital allowances pool will be used for cars with CO2 emissions between 121 and 165g/km
- a new car pool would be introduced with a lower writing down allowance than the general plant and machinery pool for other cars.
As a consequence there would no longer need to be a specific distinction between cars costing more or less than £12,000.
Business premises renovation allowance
In 2005 legislation was enacted to provide a 100% capital allowance to businesses or individuals who renovate business premises which have been empty for at least one year. This tax relief is to be brought into effect from 11 April 2007 with the following limitations:
- it will only apply to premises in Northern Ireland and in designated disadvantaged areas in the rest of the UK
- it will not apply to premises used by certain business sectors such as coal, steel, shipbuilding and fisheries.
Landlords energy saving allowance
In 2004 the landlords energy saving allowance was introduced to provide tax relief for the cost of insulation installed in let residential properties, up to maximum of £1,500 per building. The following changes are proposed:
- the types of insulation materials that qualify will be extended to include floor insulation
- the expenditure cap will apply per property rather than per building to allow each flat in a block to benefit in the same way as a single house
- the scheme will apply to costs incurred until 2015, extended from 2009
- the tax relief will be extended to corporate landlords, subject to state aid approval.
Research and development tax relief
Research and development (R&D) tax relief gives enhanced tax relief to companies who undertake qualifying R&D projects. The company must spend at least £10,000 on qualifying items in one year. The proposed changes, subject to state aid approval, are:
- large companies will be able to claim 130% relief, increased from 125%
- small and medium sized companies will be able to claim 175% relief, increased from 150%
- the definition of a medium sized company will be changed to increase the number of permitted employees from 250 to 500.
Comment
The increased R&D tax relief may make the tax relief more attractive to companies who had not previously claimed this relief but in practice it will still be difficult to ensure the project falls into the tight definition of R&D to qualify. |
Construction Industry Scheme
The new Construction Industry Scheme will be introduced on 6 April 2007. Subcontractors may be entitled to receive payments without deduction of tax if they have satisfied certain criteria. Otherwise a standard deduction rate of 20% will apply for registered subcontractors.
A higher deduction rate of 30% is introduced to allow unregistered subcontractors to start work. One of the purposes of the higher rate is to encourage subcontractors to register with HMRC for the scheme.
Companies qualifying for venture capital reliefs
From 6 April 2007 companies that raise additional funds under the Enterprise Investment Scheme (EIS), Venture Capital Trust (VCT), or the Corporate Venturing Scheme (CVS) will have the following restrictions imposed:
- the company or group must have fewer than 50 full-time employees
- it must have raised no more than £2 million under any of these schemes in the previous 12 months.
The definition of a qualifying subsidiary is relaxed to include direct 100% subsidiaries of 90% subsidiaries.
Currently, a VCT must have at least 70% of its investments in qualifying holdings. This means that a VCT may not be able to sell a holding without breaching this test. The rules are relaxed to allow a six month period to reinvest cash received from the disposal of a qualifying investment.
Also for EIS 90% of funds raised must be used in the trade within 12 months, an extension from the current six month period, for approved funds with a closing date on or after 7 October 2006.
Comment
The restrictions on the amount of funds that can be raised and the number of employees may reduce the size of company that can qualify for venture capital relief and as such may make investments under these schemes more risky. However the lengthening of the period during which funds can be held before being invested in a qualifying trade may allow managers to make more considered investment decisions. |
Loss relief restrictions for partners
Where a partner makes a tax loss that individual can normally off-set the loss against their other income or capital gains (sideways loss relief). Currently, the amount of sideways loss relief a non-active partner can claim in one tax year is restricted broadly to the amount of capital that the partner has contributed to the partnership. A non-active partner is one who spends less than 10 hours a week involved in the partnership business, or has limited liability.
New legislation will exclude capital contributions paid by non-active partners on or after 2 March 2007, where the main purpose for contributing the capital to the partnership is for the partner to have access to losses sustained after that date for which sideways loss relief could be claimed. In its place there will be an annual cap of £25,000 on the amount of trading losses for which a non-active partner can claim sideways loss relief.
These provisions will not apply to losses derived from 'relevant film related expenditure'.
Controlled foreign companies (CFCs)
The CFC tax rules potentially apply to tax UK companies with subsidiary companies operating in low tax jurisdictions. A proportion of the profits may be subject to UK tax if the profits are not paid by the subsidiary to the UK company. Following the recent European Court of Justice (ECJ) judgment in the Cadbury Schweppes case, changes have been made to the CFC rules, effective from 6 December 2006, to change the law to reflect the decision.
The changes will relax UK CFC rules by enabling UK companies to apply to HMRC to disregard those profits of their CFCs that arise from genuine economic activity in business establishments in other European Union Member States or certain other states in the European Economic Area.
The government will consult with business in 2007 on a wider package of reform.
Six year limitation period for direct tax claims
In October 2006, in the Deutsche Morgan Grenfell case, the House of Lords determined that a company had paid tax earlier than it need have done under a 'mistake of law'. The mistake could be held to have been discovered only when the ECJ gave its judgment in a similar case in March 2001.
The effect of this is to potentially allow similar claims for overpayment of tax back to 1973 and overrides the normal limitation period of bringing claims within six years of the event giving rise to the claim.
Legislation in 2004 has already removed the ability to make a claim on or after 8 September 2003 for events outside the six year limitation period. New provisions will be introduced in the Finance Bill which will remove the ability to continue with tax claims involving a mistake of law which were started before 8 September 2003 (except where the Courts have given final judgment before 6 December 2006).
Other anti-avoidance measures
A disclosure regime for tax schemes was introduced in 2004 that has enabled HMRC to respond to avoidance schemes more swiftly. The government has announced a number of measures to tackle artificial schemes brought to light under the disclosure rules.
HMRC will be given powers to investigate schemes where there are reasonable grounds to believe that a promoter has failed to comply with the statutory disclosure obligations.
Comment
Charities which have a small non primary purpose trade may already be exempt under legislation introduced in 2000. |
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