Corporate And Business Tax

Corporation Tax Rates

The rates of Corporation Tax for the year ending 31 March 2011 are:

• Full rate 28%
• Small companies’ rate 21%
• Profit limit for small companies’ rate – lower limit £300,000
• Profit limit for small companies’ marginal relief – upper limit £1,500,000
• Marginal relief fraction for small companies 7/400

Comment: It was announced in the November pre-budget report that the increase in the Small Companies Rate to 22% from 1 April 2009 was to be abandoned. The budget announcement maintains the current 21% rate for the year commencing 1 April 2010. It is disappointing, but not unexpected, that the Chancellor did not take the opportunity to reduce the tax burden on smaller companies.

Capital Allowances - Plant and machinery - temporary first year allowances

There will be a new temporary 40% first year allowance for expenditure on general plant and machinery for capital expenditure incurred in the 12 months commencing on 1 April 2009 (companies) and 6 April 2009 (individuals and partnerships). There are a number of exclusions, including cars.

Comment: This measure is clearly designed to encourage firms to bring forward investment in new plant. Since April 2008 businesses have been entitled to claim an Annual Investment Allowance (AIA) of up to £50,000 on expenditure on plant and machinery. The new 40% allowance will only be relevant to expenditure over and above the AIA threshold, and so may be of limited application to smaller businesses.

Loan Relationships - Connected Companies

There are various amendments to the Loan Relationship provisions. The first corrects an anomaly affecting inter-company trade debts between connected companies whereby the release of a debt could result in a tax charge in the debtor company, but no concomitant relief in the creditor. The second amends the "late interest" provisions to similarly provide symmetrical tax treatment for creditor and debtor companies.

Comment: This is a welcome tidying up of the loan relationship rules.

Enhanced Capital Allowances (ECA) for Energy-saving and Water Efficient (Environmentally Beneficial) Technologies

This ECA scheme enables businesses investing in designated technologies to write of 100% of the capital expenditure against the taxable profits of the period in which the investment is made. Each year the lists of qualifying technologies are reviewed by the Department of Energy and Climate Change (DECC) and the Department for Environment, Food and Rural Affairs (Defra). This year's review will add to the list one new technology (uninterruptible power supplies) and two new sub-technologies (air to water heat pumps and close control air conditioning systems) and a number of sub-technologies were removed.

Comment: The list of technologies qualifying for ECA is a relatively short one, and the provisions are of limited application for most businesses. Companies engaged in developing relevant technologies will be particularly interested in the changes.

Extension of Trading Loss Carry Back for Business

The Chancellor, in his Pre-budget statement in November 2008, announced an extension of the ability of businesses to carry back their trading losses to set against earlier years' profits for up to 3 years, generating repayments of corporation tax. The relief was limited to accounting periods ending between 24 November 2008 and 23 November 2009 - in practice one year only. Further, the maximum amount that could be carried back under these provisions was £50,000, worth in tax terms a maximum of £20,000. As widely predicted, the relief has been extended for a further 12 months, to cover accounting periods ending in the period between 24 November 2009 and 23 November 2010.

Comment: Whilst the extension is welcome, the limitation to losses of only £50,000 means that the relief is of relatively little value to all but the smallest businesses.

Lloyds corporates

Corporate members of Lloyds will not be taxed on dividend income from UK companies. This is to bring the taxation of these companies into line with the taxation of other insurance companies.

Comment: this is a relief that will allow Corporate Lloyds members to trade on an equal footing with other insurance companies. This will be welcome for companies in this position.

Group relief

The definition of a group for corporate tax purposes has been amended slightly such that certain preference shares do not qualify as shares for the purposes of working out whether a company is a member of a group.

Comment: This relief is primarily aimed at banks raising Tier 1 capital but could apply in other situations and group structures should be examined carefully.

Taxation of Foreign Profits

The date from which most foreign dividends will be exempt from corporation tax (as previously announced) has now been set at 1st July 2009. The worldwide debt cap proposals which will probably change again will come into force on 1st January 2010. The amendments to the UK's CFC regime which removes the superior and non-local holding company and the acceptable distribution policy exemptions will come into force on 1st July 2009 with a transitional exemption for non-local and superior holding companies being continued until 1st July 2011.

Comment: These changes were announced in the Pre Budget Report and the draft legislation published. The response from HMRC is generally viewed as disappointing and there is still doubt about the enforceability of the CFC regime in the EU.

Real Estate Investment Trusts ("REITs")

The law is to be clarified so that:

• a REIT can issue convertible preference shares
• accounting based definitions will be used for the 75% balance of business assets requirement
• a company which lets property to fellow group members will no longer be in the same group if it becomes a REIT
• property occupied by a REIT will be excluded from exemption

Company cars

The expensive cars capital allowances rules and the associated restrictions for car leasing expenses were announced in the Budget 2008 and came into effect in April 2009. Expenditure will now be allocated to one of two pools based on CO2 emissions. Those exceeding 160 g/km of CO2 will be allocated to the special rate pool and qualify for 10% writing down allowance (WDA) and those under will be allocated to the main rate pool and qualify for 20% WDA. Cars with an element of private use will still need to be kept in a single pool to enable the private use to be calculated. From April 2009 the amount of any car lease payment that will be disallowed with be a flat 15% for any vehicles over 160 g/km. Motor cycles are excluded from the definition of cars and will not be affected by these rules.

Comment: This is what was expected following last year’s Budget.

Plant & machinery Leasing

The definitions of sale and leaseback arrangements have been revised to cover the types of transactions that are in the market. The changes will come into force from today and effectively mean that a business entering into a sale and leaseback does not gain any more relief than it would have done if it had obtained loan finance.

Comment: This will affect leasing businesses.

Corporation tax targeted anti-avoidance

A number of targeted anti-avoidance measures have been announced to block schemes. Some of these measures have been the subject of long consultation, such as rules on the transfer of income streams and disguised interest, others have come about due to disclosures under the Disclosure of Tax Avoidance Schemes process. The disclosed schemes involved crystallisation of internally generated goodwill; the use of derivative contracts and foreign currency denominated assets to generate "one sided" tax adjustments; use of overseas branches to generate repayments of overseas tax and loopholes in the Sale of Lessor Companies rules.

Comment: The transfer of income and disguised interest rules replace and extend a number of specific anti-avoidance rules with general anti-avoidance that aims to tax transactions on the basis of substance over form and prevent income being recharacterised into a form that bears a lower rate of tax or no tax.