Business tax and investment incentives

Corporation tax

Corporation tax rates and bands are as follows

Financial Year to	31 March 2011	31 March 2010
Taxable profits
First £300,000	21%	21%
Next £1,200,000	29.75%	29.75%
Over £1,500,000	28%	28%

Capital allowances

Annual investment allowance (AIA)

The annual investment allowance applies to give businesses 100% relief on the first £50,000 of qualifying capital expenditure in each financial year. Rules are in place to ensure that connected businesses share the allowance each year, in a way they determine for themselves. The AIA cannot be claimed against expenditure on cars.

From 1 April 2010 for companies (6 April 2010 for individuals), the AIA will be doubled from £50,000 to £100,000. Any unutilised AIA cannot be carried over into another period. Businesses with accounting periods spanning the change date will need to pro-rate the maximum AIA entitlement.

An anti avoidance rule will take effect from 24 March 2010, to prevent losses from a property business from being set against general income, where those losses are attributable to the AIA, and arose as a result of relevant tax avoidance arrangements.

Vehicles

A 100% first year allowance will be introduced for business expenditure on new and unused (not second hand) zero-emission vehicles. The vehicles will need to be of a design primarily suited to the conveyance of goods or burden. For corporation tax the expenditure must be incurred on or after 1 April 2010 and before 1 April 2015, and for income tax it must be incurred on or after 6 April 2010 and before 6 April 2015.

Cushion gas

All expenditure on cushion gas, incurred on or after 1 April 2010, will be treated as special rate expenditure qualifying for writing down allowances at 10% per year.

Loans to participators

Where a close company loans money to an individual who is a participator in the company (broadly, a shareholder), a corporation tax charge of 25% can arise, which is repaid to the company when the loan is repaid. A close company is a company under the control of five or fewer participators.

Legislation is to be introduced to make it clear that where such a loan is released or written off, the company may not take a deduction against profits in respect of any amount recognised as an expense in the company accounts as a result of the debt write off. The legislation shall take effect from 24 March 2010.

The new legislation does not change the taxation treatment for the individual participator on the write off of the loan.

Capital distributions to companies

Finance Act 2009 introduced a measure (generally referred to as the Foreign Income Exemption) which in most cases, exempted distributions received by UK companies, paid by companies located either in the UK or overseas, from the charge to corporation tax. The legislation as originally passed prevented distributions of a capital nature from qualifying for the exemption.

A change to the legislation is to be introduced which will make it clear that only certain specified distributions of a capital nature will be treated as capital, and hence other distributions will fall within the exemption. The legislation will have retrospective effect, to 1 July 2009, although companies can elect for the change not to apply retrospectively.

PAYE schemes

Legislation will be introduced in Finance Bill 2010 to allow HMRC to require a financial security from employers where amounts due under PAYE or NIC obligations are seriously at risk. This is likely to affect those employers who have a history of serious non-compliance in terms of paying late or not paying. The amount of security will be set by HMRC in light of the potential tax liability.

Employer-supported childcare

The conditions for exemption from the chargeable benefit for employer-supported childcare, provided in the form of childcare vouchers or directly contracted childcare, are to be relaxed. The amendments will have retrospective effect for the tax year 2005/06 and subsequent years. This relaxation is to be introduced in order to clarify the position of employers with employees at or near the national minimum wage.

Real estate investment trusts (REITs)

UK REITs will be allowed to issue stock dividends in lieu of cash dividends in meeting the requirement to distribute 90% of the profits from the property rental business of the REIT. The legislation will have effect for property income distributions made on or after Royal Assent.

Share schemes

Changes will be made in respect of approved Company Share Option Plans so that such options can no longer be granted for shares in companies under the control of listed companies on or after 24 March 2010. This is intended to counteract tax avoidance by listed companies who have sought to deliver additional rewards in the form of ‘geared growth' by the use of such shares which had the effect of circumventing the £30,000 limit on the value of shares. Options granted before that date will continue to be eligible for the relief. There will be a transitional period of six months to enable companies affected to amend their scheme rules to comply with the change.

An anti avoidance measure was also introduced in respect of approved Share Incentive Plans (‘SIPs') to prevent abuse of corporation tax relief available on payments to SIP trustees to buy shares from director-shareholders in circumstances where no real value is transferred to employees under the SIP. In particular the measures will counteract transactions where the company subsequently alters the share capital or rights in order to strip the value out of the shares once they are in the SIP. This will affect payments made or alterations to share capital or rights taking place on or after 24 March 2010.

A measure will be included effective from the date of Royal Assent relaxing the trading requirements for companies offering Enterprise Management Incentive (‘EMI') options to employees. Whereas current legislation requires a single company granting options to carry on a ‘qualifying trade' wholly or mainly in the UK or for a parent company granting options to have at least one company in the group satisfying that requirement, the new measure will only require the company to have a permanent establishment in the UK or in the case of a group of companies, at least one company in the group carrying on a qualifying trade with a permanent establishment in the UK. This change is to ensure that EMI share options comply with EU State aid guidelines.

The Government also indicated an intention to take action to tackle tax avoidance through the use of trust and other vehicles to reward employees.

Online services

By the end of 2011, HMRC will:

• personalise www.businesslink.gov.uk for those starting up in business and enhance online services for all SMEs, providing better access to relevant tax guidance and flexible tax payment plans to help businesses manage their cash flow
• help start-ups and new employers by introducing a single interactive form to enable businesses to register for multiple taxes online and to authorise tax agents
• provide an online facility that reduces the need for businesses, or their agents, to provide the same information to HMRC multiple times and allows them a single online view of current tax liabilities or repayments due.

Small business rate relief

The Government is to introduce a temporary increase in the level of small business rate relief, so that eligible small businesses occupying properties with rateable values up to £6,000 will pay no business rates for one year from October 2010. In addition, small businesses benefiting from rate relief taper (rateable values up to £12,000) will receive significant reductions.

Bank payroll tax

Following the announcement in the 2009 Pre-Budget Report, legislation in Finance Bill 2010 will introduce the bank payroll tax. The tax applies, broadly, to banks and building societies on awards of bonuses over £25,000 made to, or in respect of, certain of its employees in the period from 9 December 2009 to 5 April 2010. It will be chargeable at a rate of 50% on the aggregate excess of bonuses of £25,000 or more awarded in the period. There will be no change in the tax treatment of bonuses received by individuals.

The principal changes to the draft legislation already published are:

• clarification of the scope of the legislation in connection with when relevant remuneration is taken to be 'awarded' during the chargeable period
• HMRC has aimed to refine the definition of entities that are subject to the tax to include only entities which carry on banking activities. It is understood that this excludes Lloyd's managing agents and other similar businesses
• introduction of a 60 day rule so that employees who visit the UK for no more than 60 days in 2009/10 are excluded
• inclusion of detailed provisions for the assessment and the collection of bank payroll tax. These include provisions for penalties and interest.

Corporation tax consultations and potential future legislative changes

The following announcements for future changes have been made, either in the Budget or in the course of ongoing consultations, with potential changes to legislation arising in the next Parliament after the consultation has concluded.

• Changes to the UK controlled foreign company (CFC) regime, which aim to better target artificial diversions of UK profit to offshore jurisdictions. This review will also consider the taxation of overseas branches. It is intended to be finalised for inclusion in the 2011 Budget.
• Changes to the capital gains rules for companies, to simplify legislation relating to capital losses; value shifting and depreciatory transactions; and degrouping charges on intergroup transfers of assets. Proposed measures of particular interest are:
  • Proposals that degrouping charges should be treated as an adjustment to the sale consideration;
  • Providing relief for degrouping charges where Substantial Shareholding Exemption (SSE) applies to the share sale, and;
  • Enabling trading activities to be brought into a new company prior to disposal to enable advantage to be taken of the SSE.
• Simplification of the associated company rules for the purposes of the small companies' rate of corporation tax. The Government believes that strict interpretation of the legislation can bring companies into association (potentially increasing the effective tax rate) due to the attribution of rights in determining who controls a company. The proposal is to reduce the impact of this to only link companies where it is appropriate to do so. The initial consultation period is now closed, and the government plans to introduce any changes in the Budget 2011.
• A discussion on the impact of Solvency II and the taxation of insurance companies. This considers potential future changes to tax legislation for insurance companies as a result, which may also affect the Lloyd's market. This may involve an extension of the relief on claims equalization reserves and the tax treatment of technical reserves.
• A consultation on the introduction of a ‘Patent box' which will apply a 10% corporation tax rate on income arising from patents granted after 2013.
• Changes to the consortium relief rules which may enable EEA resident consortia members to pass relief to their UK subsidiaries. A tightening of the rules to restrict available relief to the level of the participants' active involvement in the consortium is also proposed.

As any consultations and future legislative changes that may be suggested are by their very nature uncertain, great care should accordingly be taken in considering the impact any possible changes could have on your business.