Budget Analysis 2011 – Business Tax

a. Corporates

i. Corporation Tax Rates

The main corporation tax rate will be reduced from 28% to 26% for the Financial Year commencing 1 April 2011. This rate will be further reduced for the Financial Year commencing 1 April 2012 to 25%, with further 1% reductions for the following two years, with a target rate of 23%.

The small companies rate, which applies to most single companies with profits of £300,000 or less, will be reduced from 21% to 20% for the Financial Year commencing 1 April 2011.

The difference in rates between large and small companies is therefore much reduced, but it is still important to monitor the number of associated companies so as to maximise the level of profits taxed at the small companies rate. Draft legislation for ascertaining whether companies are associated has been published and will be included in Finance Act 2011, as a result of consultation last year.

ii. CFC Reform

The reform of CFC legislation is part of the overhaul of the corporation tax system, which is projected to take place in 2012. Interim improvements to the CFC rules will be introduced in Finance Bill 2011, so as to forestall any further erosion of the UK tax base and to encourage investment in the UK.

The objectives of the interim measures are:

  • To exempt commercially justified activities that do not erode the UK tax base;
  • To introduce improvements to help UK businesses that wish to undertake overseas acquisitions and reorganisations, and non-UK businesses that want to invest or locate in the UK.

Finance Bill 2011 will include changes to exempt certain intra group transactions and IP exploitation which have little connection with the UK; to exempt certain foreign subsidiaries for three years, where they come within CFC rules as a result of a reorganisation; to increase the effective de minimis to £200,000 a year and simplify the method of computing those profits.

iii. Taxation of Foreign Branches

Currently, UK resident companies pay UK corporation tax on all their profits wherever they arise, subject to a credit for foreign tax paid on branch profits. Legislation in Finance Bill 2011 will allow a company to make an irrevocable election for all its foreign branches to be exempt from UK corporation tax on their profits. As a consequence, relief would not be available for foreign branch losses against UK profits. There will be provisions to prevent chargeable profits being diverted to an exempt branch.

Foreign branch exemption will not extend to international air transport and shipping to the extent that those profits are not taxed in the overseas jurisdiction due to a specific treaty exemption.

These provisions are attractive for companies with branches in low tax jurisdictions with a low risk of making significant losses. The burden of UK corporation tax compliance may be reduced as foreign branch profits would not have to be re-expressed using UK corporation tax principles. However, a key attraction to using foreign branches rather than separate subsidiaries is the availability of loss relief. If, for example, a UK company often sets up business in new jurisdictions expecting to make losses in early years, it may not want to make an irrevocable election that covers all foreign branches. For an established business with profitable branches this election may be attractive.

iv. Research and Development

Subject to State aid approval, Finance Bill 2011 will increase the enhancement for expenditure on research and development for small and medium sized enterprises (SMEs) from 75% to 100% from 1 April 2011. The enhancement will be further increased from 1 April 2012 to 225%, again subject to State aid approval.

At the same time the rate of vaccine research relief for SMEs will be reduced to 20% from 1 April 2011, and removed from 1 April 2012.

In addition, there will be further consultation on a number of issues arising from the Dyson review. The main areas, for which legislation will be introduced in Finance Bill 2012, include the abolition of the rule limiting the payable R&D tax credit to the amount of PAYE and NIC the company pays; the abolition of the £10,000 minimum expenditure for all companies; and changes to the rules governing subcontractors under the large company scheme.

b. Employment

i. Company Cars

From 6 April 2013 the appropriate percentages for all vehicles with carbon emissions between 95g and 220g will be reduced by 1% for car benefit purposes. Zero emission cars will remain at 0% and ultra-low emission cars with emissions up to 75g will remain at 5%.

From 6 April 2011 the cash equivalent of the fuel benefit charge will increase from £18,000 to £18,800.

ii. Approved Mileage Payments

Currently, employers can pay to employees up to 40p a mile for the first 10,000 miles of business travel a year when they use their own car or van. This limit will be increased to 45p a mile with effect from 6 April 2011. The rate for mileage above 10,000 miles will remain at 25p a mile.

c. Capital Allowances

i. Short Life Assets

Currently, where a business incurs expenditure on plant and machinery which is expected to last less than 4 years, a short life asset election enables the business to identify that equipment separately for capital allowances purposes, so that when it is sold a balancing allowance can be accelerated. From April 2011 a short life asset election will be available for assets that are expected to be sold or scrapped within 8 years.

This will give greater opportunity for businesses to write off fully the cost of equipment over the period of ownership, rather than leaving a residue in the capital allowance pool. However, it is interesting to note that with a writing down allowance of 20%; only 17% of the original cost of the asset would remain in the general pool after 8 years, so the relief is not as generous as it might seem at first sight.

ii. Energy Saving Equipment

The enhanced capital allowances available for energy-saving equipment will be extended, subject to State aid approval, to include new technology-efficient hand dryers. The qualifying criteria for automatic metering and targeting equipment will be simplified.

The rules regarding the rate of capital allowances available on equipment related to feed-in tariffs and renewable heat incentives will be clarified to ensure more consistent treatment between businesses. This will be subject to consultation with a view to including legislation in Finance Bill 2012.

These changes serve to demonstrate the Government’s commitment to encouraging energy efficient and green technologies.

iii. Business Premises Renovation Allowance

The current business premises renovation allowance will be extended for a further five years from 2012.

d. Furnished Holiday Lettings

In line with previous announcements, the FHL provisions will not be abolished but are subject to reform. Legislation will be published to ratify the extension of the FHL regime to the European Economic Area (EEA).

From April 2011, loss relief may only be offset against income from the same FHL business. The capital reliefs including eligibility to entrepreneurs’ relief remain unchanged.

The proposed changes in the day count whereby a property has to be available for letting (increase form 140 days to 210 days) and actual letting (increase from 70 days to 105 days) will be delayed until 6 Ap
ril 2012.

From April 2012, where a business meets the actual let day threshold in one year they may elect to be treated as having met it in the following two years (“period of grace”) providing certain criteria is met.

Averaging rules will apply where there is more than one FHL.

It is pleasing that the government have reacted positively to concerns expressed over the changes to the day counts and decided to delay these changes giving businesses time to adjust. The period of grace gives businesses falling in and out of the day count further comfort although it is disappointing that this election can not be made before 6 April 2012 to ensure businesses not meeting the day count in 2012/13 can continue to enjoy the benefits of the regime.