Business tax and investment incentives

Corporation tax

Corporation tax rates and bands are as follows:

Financial Year to	31 March 2010	31 March 2009
Taxable profits
First £300,000	21%	21%
Next £1,200,000	29.75%	29.75%
Over £1,500,000	28%	28%

Extension of trading loss carry back

The period for which current trading losses can be carried back against previous profits to obtain a repayment of tax has been temporarily extended from the current one year entitlement, to a period of three years, with losses being carried back against later years first.

This temporary measure was initially introduced in the Pre-Budget Report for companies with accounting periods ending in the period 24 November 2008 to 23 November 2009; however this has now been extended to also apply for accounting periods ending in the period to 23 November 2010.

Similarly for unincorporated businesses, the extended loss relief rules will now apply for both the 2008-09 and 2009-10 tax years.

Losses must first be carried back against taxable income in the immediately preceding year to the maximum possible extent. After carry back to the preceding year, a maximum of £50,000 of the balance of unused losses is then available for carry back to the earlier two years, with relief claimed against the later year's profits first. The £50,000 cap applies separately to any unused losses for accounting periods ending in the 12 months to 23 November 2009, and the 12 months to 23 November 2010 respectively. For unincorporated businesses, the £50,000 limit will apply separately for each of the tax years 2008-09 and 2009-10.

Lloyd's corporate underwriters,
Claims Equalisation Reserves

The Government has confirmed its earlier commitment in the Pre-Budget report to introduce a tax relief in the form of a claims equalisation reserve for Lloyd's corporate members. The relief is intended so far as possible to mirror that available to general insurance companies. The new regime will apply retrospectively to profits which are treated as arising in 2008 (i.e. profits from the 2005 year of account).

Lloyd's has been in detailed discussions with HMRC for some time regarding the mechanics of the regime and more detail will be available shortly. However, these discussions have progressed well and HMRC has tentatively confirmed that the regime will apply to Scottish Limited Partnerships and Limited Liability Partnerships as well as Limited Company corporate members.  Lloyd's will compute the claims equalisation reserve for members, but those members with member level reinsurance contracts in place may have to carry out their own calculations based on information provided by Lloyd's.

Lloyd's is continuing to work with the Government on its review of the case for extending the relief for Lloyd's and general insurers post Solvency II, when Claims Equalisation Reserves will no longer be recognised for solvency purposes.

Taxation of dividends for Lloyd's corporate members

Corporate members of Lloyd's will no longer be subject to corporation tax on dividends and other distributions from UK companies. This brings them into line with general insurance companies. The change will apply to dividends and other distributions received on or after 1 July 2009.

Lloyd's corporate members will also benefit from the exemption for foreign dividends received on or after 1 July 2009 with the result that from July 2009 all dividends received by Lloyd's corporate members will be exempt from tax. It is understood that Lloyd's corporate members will also benefit from the proposed exclusion for financial service businesses from the debt cap which is intended to restrict tax relief for UK finance costs of large companies.

Groups of companies

For accounting periods commencing on or after 1 January 2008, group companies that issue particular types of new preference share capital to external investors will not lose their ability to surrender and claim group relief with other members of their group. These changes will make it more difficult to inadvertently break a group structure or trigger an anti-avoidance provision.

New legislation is to be introduced enabling losses or gains arising on disposals of chargeable assets to be matched against gains and losses elsewhere in the group without the need to have a deemed transfer of ownership of the asset. Instead gains and losses will be transferred from the company making the disposal to one or more other companies within the group under a joint election. The former restrictions on the type of asset and the circumstances under which the gain or loss arises will no longer apply. This will simplify and extend the existing provisions which allow groups to effectively tax capital gains on a group-wide basis.

Capital allowances

A temporary 40% first year allowance will be introduced for expenditure on qualifying plant and machinery that would normally be allocated to the main capital allowance pool. This will be available to businesses incurring such expenditure in the 12 month period beginning on 1 April 2009 for corporation tax and on 6 April 2009 for income tax. This will apply to expenditure in excess of the £50,000 Annual Investment Allowance, which would otherwise qualify for a 20% writing down allowance.

Qualifying expenditure incurred on cars on or after 1 or 6 April 2009 will now be allocated to one of the two general plant and machinery pools. Cars with CO2 emissions exceeding 160 g/km will be dealt with in the special rate pool and attract writing down allowances (WDA) at 10%. Cars with CO2 emissions of 160 g/km or less will be added to the main rate pool and attract WDA at 20%. Expenditure incurred before April 2009 will continue to be subject to the old 'expensive' car rules for a transitional period of around five years. Cars that have an element of non-business use will continue to be dealt with in single asset pools to enable the private use adjustment to be made, but the rate of WDA will be determined by the car's CO2 emissions.

Car leases

From April 2009, the rules restricting the amount of car lease rental payments that can be deducted for tax purposes will be changed to a flat rate disallowance of 15% of relevant payments. This will apply only in respect of cars with CO2 emissions exceeding 160 g/km. For leases that commenced prior to April 2009, the previous rules will continue to apply until the end of the lease.

Corporate debt - connected companies

A change is proposed to the rules on release of trade debts between connected companies. Where a trade or property business debt is released between connected companies, the creditor company is denied a deduction for the loss on the debt. From 22nd April 2009 the loan relationship rules will also apply to the connected debtor company so that the release will be treated as non-taxable.

In addition the rule that defers tax relief on late paid loan relationship interest between connected parties until the interest has been paid has been amended. In cases where the creditor is a ‘connected company', or a company that is a close company participator in the debtor company, or where either the debtor or creditor has a ‘major interest' in the other party, the late interest rule will only apply if the creditor company is resident in a ‘non-qualifying territory' (broadly, a tax haven). This applies for accounting periods beginning on or after 1 April 2009, but it will be possible to elect to continue with the paid treatment for the first accounting period concerned.

Rules similar to the late interest rule will apply where connected and close companies issue deeply discounted securities. Equivalent changes will be introduced so that those rules only apply to a creditor company resident in a ‘non-qualifying territory'.

Taxation of foreign profits

After a long period of consultation, the Government has confirmed the introduction of a package of reforms to the taxation of foreign profits, with the object of making the UK a ‘more attractive location' for multinational business. Foreign dividends received by UK groups will be largely exempt from corporation tax regardless of the level of shareholding. As originally announced the exemption did not apply to foreign dividends received by small companies with shareholdings of 10% or more but it has now been extended so that it applies to all companies for shareholdings of ten percent or more. This will bring the treatment of foreign dividends into line with UK dividends and other distributions which are generally already exempt. Both foreign and UK dividends will be exempt if if they fall into one of a number of exempt classes provided that anti-avoidance provisions do not apply. The exemption will apply to transactions undertaken on or after 1 July 2009.

For UK group companies other than members of groups consisting entirely of small and medium sized companies, the exemption will be accompanied by a cap on tax relief for interest and other finance expenses so that relief will not be available on finance expenses in excess of worldwide group consolidated gross external finance expenses. The debt cap will apply to finance expenses payable in accounting periods beginning on or after 1 January 2010. The debt cap will be subject to a number of exclusions for financial services businesses, finance expenses in respect of short term debt, group treasury companies and small amounts of net finance expenses, details of which are still to be finalised. In addition a ‘gateway test' will be included so that groups who meet it will not have to take any further action in respect of the debt cap.

Consequential changes are to be made to the Controlled Foreign Company (CFC) rules. The Acceptable Distribution Policy (ADP), which currently provides exemption from CFC rules broadly if not less than 90% of the CFC's chargeable profits are distributed to the UK within 18 months, is being repealed. In addition the exemption for superior holding companies and non-local holding companies is being repealed subject to a two year transitional period for existing holding companies. The exemption for local holding companies will be retained.

The Treasury Consents rules that require approval from HM Treasury before certain transactions are undertaken will be repealed and replaced by a post-transaction information-reporting requirement.

Foreign denominated losses

For accounting periods commencing on or after 29 December 2007, where a Company incurs a tax loss computed in a currency other than sterling, and those losses are offset against profits in a different accounting period, then the exchange rate for conversion of the losses into sterling will be the same rate as that used for conversion of the profits.

Where a Company changes its functional currency, losses carried forward or backward into periods across the change in the functional currency will be converted into the new functional currency at the spot exchange rate at the date of change.

These measures have been introduced to ensure that the value of the losses for the period in which they are incurred and the period in which they are relieved against profits is consistent. Companies may elect to defer the effects of this measure until the first accounting period commencing after the Finance Act receives Royal Assent.

Hedging proceeds from future share issues

The Loan Relationships and Derivative Contracts Regulations 2004 will be amended to bring in special rules that apply when a company announces a rights issue of shares denominated in a currency other than its functional currency, and enters into a currency derivative contract to hedge the risk to the value of the future share issue proceeds from currency fluctuations. Where this is the case, any exchange gain or loss on the currency derivative contract will be permanently excluded from being brought into account for tax purposes unless, in the case of a gain, any part of that gain is subsequently distributed to shareholders.

Investment Trust Companies

New optional tax rules will allow Investment Trust Companies that invest in interest bearing assets to receive a tax deduction for any interest distributions made, effectively removing any corporation tax liability that would otherwise arise on distributed interest income.  Where an Investment Trust Company makes an interest distribution, this income will be treated in the hands of the shareholder as if it was a payment of yearly interest.

This new measure will take effect for any interest distributions made on or after 1 September 2009.

Real Estate Investment Trusts (REITs)

Legislation will be introduced to make the existing legislation governing REITS clearer and more consistent following discussions with the industry.

Corporate transparency

For accounting periods beginning on or after Royal Assent the senior accounting officers of large companies and large groups of companies will have reporting obligations aimed at ensuring that the accounting systems are adequate for the purposes of accurate tax reporting.

These obligations will be supported by penalties chargeable on the senior accounting officer personally and on the company.

Anti avoidance rules

A number of measures will be introduced to tackle anti avoidance across a broad spectrum of personal and corporate tax. These anti avoidance measures will include:

• Tackling schemes to avoid tax on disguised interest received and sale of rights to receive future income streams without disposing of any underlying asset
• Tackling avoidance of Corporation Tax involving intra group convertibles and the derecognition of income from derivative contracts
• Preventing exchange gains and losses on borrowings and currency derivatives from being matched under the forex matching rules if they arise from tax avoidance arrangements
• Preventing the exploitation of the double tax relief and manufactured overseas dividends rules
• Tackling double tax relief avoidance in relation to credit abuse and repayment of foreign tax
• Preventing tax relief for decommissioning costs under the North Sea Fiscal Regime before the decommissioning activity takes place
• Amending the ‘sale of lessor companies' rules to ensure they operate appropriately in complex transactions involving partnerships and consortia.
• Countering avoidance in respect of plant and machinery leasing involving sale and leaseback, lease and leaseback and long funding leases
• Ensuring that the tax treatment of real payments of manufactured interest follows the treatment of payments in company accounts prepared in accordance with Generally Accepted Accounting Practice
• Tackling the artificial restructure of companies so that they are eligible to join the Real Estate Investment Trust regime
• Establishing a New Disclosure Opportunity for offshore bank account holders
• Preventing tax avoidance by individuals using overseas life insurance policies
• Preventing exploitation of interest relief on loans by individuals to partnerships and close companies
• Countering abuse of reliefs for deductions and losses connected to employment
• Publishing a Spotlight giving notice of selected avoidance schemes that are thought to be ineffective in order to discourage potential users.

The Government has also announced plans for work in the following areas:

• further development of the Disclosure of Tax Avoidance Schemes (DOTAS) regime by extending the hallmarks used to identify avoidance and making the penalty regime tougher.
• further consideration of the issues and potential approaches to certain structured foreign exchange arrangements.

North Sea fiscal regime

A package of measures is being introduced to encourage the economic recovery of the UK's oil and gas reserves. These measures include:

• the introduction of incentives to encourage investment in small and technically challenging fields, which could assist in unlocking around 2 billion barrels of the UK's remaining oil and gas reserves;
• measures to assist asset trades and give companies the certainty and stability they need to underpin investment; and
• reforms to remove barriers to projects that re-use North Sea infrastructure for other activities, including gas storage, carbon capture and wind energy.