The Budget 2010 Introduction »
Business Tax
Corporation tax rates
The main rate of corporation tax which applies to companies with profits of more than £1.5 million has already been set at 28% for the year commencing 1 April 2010. The same rate is to apply for the year commencing 1 April 2011.
The small companies corporation tax rate which applies to companies with up to £300,000 of profits is currently 21%. An increase to 22% is planned to take effect from 1 April 2011.
The effective marginal corporation tax rate for profits between £300,000 and £1.5 million is 29.75%.
Associated companies for corporation tax rates
The upper and lower limits for corporate tax rates are divided equally between a company and its ‘associated’ companies. A company is associated with another company if one of them has control of the other or if both are under the control of the same company or person(s).
The shares of direct relatives, business partners and some trustees can be attributed to the person for the control test. So even if a husband owns no shares in a company, he may be deemed to own the company via his spouse’s shareholding.
In October 2009 HMRC issued a consultation proposal to amend the circumstances in which rights held by linked persons are attributed between them to establish control. Those circumstances are where there are ‘relevant tax planning arrangements’.
Broadly the proposal suggested that the rules will only apply to those cases involving ‘fragmentation’ of the business activities. This includes circumstances where related business activities have not been aggregated into the business of a single company.
When considering whether there has been any fragmentation, HMRC will have regard to the degree of financial, economic or organisational links which exist, or have existed, or might be expected to exist between the relevant activities/companies involved.
It has been announced in the Budget that the change to the associated company rules will be included in the Finance Bill 2011.
Writing off loans to participators
Close companies, generally meaning family and owner managed companies, are subject to special rules in relation to loans or advances made to participators and their associates. Participators primarily means shareholders. Where such loans are written off or released an equivalent amount is treated as a deemed net dividend for income tax purposes.
This aspect remains unchanged but the position of the company for corporation tax is to be altered.
Under the corporation tax rules governing corporate debt (the ‘loan relationships’ rules) the company may be entitled to a deduction against its tax liability. A loan released or written off will normally give rise to an expense recognised in the company’s accounts.
The release or write off of loans to participators will not obtain a corporation tax deduction when made on or after Budget day.
Comment
HMRC is seeking to clarify the law so that there is no tax advantage to a shareholder/ director receiving a loan from a company which then claims a corporation tax deduction compared to the shareholder/director receiving a dividend (for which there is no corporation tax deduction for the company).
Capital allowances on plant and machinery
Most businesses are able to claim an Annual Investment Allowance (AIA) on the first £50,000 spent on most plant and machinery. This provides immediate 100% tax relief on qualifying expenditure.
The allowance is to increase to £100,000 from 1 April 2010 for a business within the charge to corporation tax and from 6 April 2010 for a business within the charge to income tax.
As the chargeable accounting periods of many businesses will span the operative date of change, a pro rata calculation of their maximum entitlement will be required.
Example
For a company with a calendar year accounting period the maximum AIA for the year ended 31 December 2010 will be £87,500 being 3/12 x £50,000 plus 9/12 x £100,000.
A restriction will be set so that only £50,000 of that available amount can be used for expenditure incurred before 1 April 2010 (for corporation tax) or 6 April 2010 (for income tax).
Comment
The availability of additional capital allowances will be attractive to plant intensive businesses where the current AIA is insufficient. It will also be welcome to related business situations such as a group of companies where one AIA has to be shared between all companies.
Loss restriction
Loss relief for the capital allowance element of a property business loss can in limited circumstances be allowed against an individual’s general income. Anti-avoidance legislation is to be introduced to disallow the property loss relief against general income where there are relevant tax avoidance arrangements and the loss (or part thereof) is considered attributable to the AIA.
This is to apply for losses arising on or after 24 March 2010.
Zero-emission goods vehicles
A proposal to introduce a new 100% first year allowance (FYA) for capital expenditure on new and unused zero-emission goods vehicles has been announced for inclusion in a Finance Bill in the next Parliament. The new allowance is to be available on qualifying vehicle purchases but will not apply to such assets acquired for leasing.
The allowance is to apply to expenditure incurred from 1 April 2010 until 31 March 2015 inclusive for companies and from 6 April 2010 until 5 April 2015 inclusive for unincorporated businesses.
Review of green technology lists
Businesses purchasing designated plant and machinery which is energy saving, reduces water use or improves the quality of water are eligible for 100% capital allowances. The qualifying technologies are reviewed annually. This year one existing technology (Compact heat exchangers) is to be removed from the list. There is also to be a tightening of the water efficiency criteria for taps and showers and some further revisions to the sub-technology lists when they are reissued later in 2010.
Comment
The current lists are available on the internet at www.eca.gov.uk.
Consortium Relief
The government intends to amend those aspects of corporation tax group relief rules that cover Consortium Relief. This will allow European Union and European Economic Area resident companies engaged in UK consortia to pass on relief for the losses of those consortia to their UK-resident subsidiaries. At the same time it plans to strengthen rules designed to ensure that access to Consortium Relief is given only in proper proportion to the member company’s involvement in the consortium.
Controlled Foreign Companies
The government remains committed to reforming the UK tax treatment of Controlled Foreign Companies (CFCs). A discussion document was published in January 2010 which set out proposals for modernising the current rules.
The aim is to publish more detailed proposals and draft legislation for consultation later in 2010 and to legislate in Finance Bill 2011.
Taxation of foreign branches
The government is bringing forward a review of foreign branch taxation to be conducted alongside the reform of the CFC rules with any legislative changes also intended for Finance Bill 2011.
Anti-avoidance and transactions in securities
Legislation is to be introduced in Finance Bill 2010 to replace the existing transactions in securities legislation with clearer legislation targeted more effectively at arrangements involving tax avoidance.
The scope of the new legislation is to be limited to transactions with a tax avoidance purpose but will now additionally apply to certain arrangements involving close companies. The effect of the legislation continues to be to counteract the income tax advantage.
There is to be a new exemption covering fundamental changes in ownership of close companies.
The measure will generally have effect for transactions where the tax advantage is obtained on or after 24 March 2010.
False self-employment in construction
The Budget Report has confirmed that the government wants to develop a legislative approach which will deem workers within the construction industry to be in receipt of employment income unless certain criteria are met. The government consulted on this issue in 2009 and responses to the government’s proposals have recently been published.
As a result of the consultation the government has decided:
- more work will be done to refine and develop the deeming test outlined in the consultation
- the test developed as a result of this further work with stakeholders will take effect when the industry is in a stronger position.
Comment
The delay in the implementation of the government’s strategy recognises the effect that the economic downturn has had on the construction industry.
Comment
This is a welcome proposed change in the law. If for example a husband and wife each own a company and there is little connection between the businesses run by each company, the two companies will no longer automatically be treated as associated.