Pre-Budget Report: Corporate And Business Tax

Tax Rates

The Small Companies’ Rate (SCR) will remain at 21% for the financial year commencing 1 April 2010 and will not be increased to 22% as previously proposed.

Comment: This announcement represents a further postponement of the proposed increase in the rate of corporation tax applicable to companies with chargeable profits below the SCR threshold.

"Patent Box"

In order to build on incentives to invest in innovative industries and ensure the UK is an attractive location for innovation, the Government will introduce a "Patent Box", a reduced rate of corporation tax of 10% applying to income from patents, from April 2013. There will be consultation with business in time for the Finance Bill 2011 on the detailed design of the Patent Box, which will apply to patents granted after the legislation is passed.

Comment: Groups of companies involved in exploiting R&D will often locate the resulting intellectual property in a low-tax jurisdiction, so that royalty flows are subject to tax at a reduced rate. This announcement is clearly intended to make the UK a more competitive tax regime for developing and exploiting worldwide patents.

Research and Development

There are also immediate changes proposed to the rules giving SMEs an enhanced tax deduction for expenditure on R&D. The enhancement is 75% of the qualifying expenditure.

Hitherto, one of the conditions for the relief is that the intellectual property created as a result of the R&D must vest in the claimant company, either solely or jointly with others. For accounting periods ending on or after 9th December 2009, that condition will be removed.

Comment: A welcome relaxation of the rules. This will be helpful to SMEs who are licensees, but who carry out R&D to enhance the value of the intellectual property to their business.

Capital Allowances: Electric vans

Legislation will be introduced to provide a 100% First Year Allowance for capital expenditure on new electric vans on or after 1 April 2010 (corporation tax) or 6 April 2010 (income tax).

Comment: Another component of the green tax agenda. Electrically powered cars already qualify for a 100% allowance but for some reason the provisions did not extend to goods vehicles.

Amendment to the Worldwide Debt Cap rules

The Finance Act 2009 introduced the Worldwide Debt Cap rules to limit tax relief for UK financing costs to the total worldwide finance cost of an international group. On 9th November 2009 the Financial Secretary to the Treasury announced that a number of changes were being proposed to these rules in order to close potential loopholes in the legislation, clarify definitions and ensure that the rules work more appropriately - particularly where there is a mismatch between UK GAAP accounts and group IFRS accounts. These amendments have been confirmed in the PBR and amending legislation will be included in the Finance Act 2010 with effect from accounting periods beginning after 1st January 2010.

Comment: These rules only apply to worldwide groups containing at least one company that is "large" (more than 250 employees and either turnover exceeding €50 million or balance sheet total exceeding €43 million). This large company need not be UK-resident, however, for the rules to apply in the UK part of the group.

Changes to accounting treatment of financial instruments

The taxation of financial instruments held by UK companies begins with the treatment of those instruments in the accounts of the companies in question. The International Accounting Standards Board is proposing a number of changes to the International Accounting Standard 39 (IAS39) dealing with financial instruments. Equivalent changes are not expected to be made to UK GAAP provisions. In order to ensure that there are no distortions in the way financial instruments are taxed depending on the accounting systems chosen (UK GAAP or IFRS), any changes to IAS 39 will be examined and, if necessary, changes made to UK tax legislation to counteract anything that could cause the same circumstances to lead to different tax results under UK GAAP and IFRS. The Finance Act 2010 will introduce powers to change the tax rules through secondary legislation in order to respond to these changes.