The Budget 2010 commentaries - business
"The commentaries below are written in general terms. Details can also be found in our downloadable Budget Report brochure. You are strongly recommended to seek specific advice before taking any action based on the information given, both in the commentaries and in the publication."
Corporation Tax Rates
The main rate of corporation tax applicable to taxable profits above £1.5m for the financial year commencing 1 April 2011 is to be maintained at 28% for profits other than ring fence (North Sea oil extraction) profits. Ring fence profits at this level will remain subject to corporation tax at 30%.
The small companies’ rate of corporation tax remains at 21% for the financial year commencing on 1 April 2010 (19% for ring fence profits). The lower and upper limits for marginal relief calculation remain unchanged at £300,000 and £1,500,000 respectively. The fraction used for calculating marginal relief will remain at 7/400 (11/400 for ring fence profits).
Comment
The Government has preferred to focus on targeted incentivisation measures for companies and businesses rather than a simpler reduction in the rates of corporation tax payable. However, no change in the small and main rates of corporation tax is welcome in the current economic climate.
Capital distributions
A new regime was introduced for the corporation tax treatment of dividends received by companies from 1 July 2009 onwards. The regime provides for exemption from corporation tax for dividend income, provided the dividend comes within one of a series of exempt categories. Different rules apply for small companies (those with less than 50 employees and either turnover or balance sheet total not exceeding €10m) and those which are not small. As originally drafted, the legislation applied to distributions which were not of a capital nature. Prior to the new regime, HMRC had treated UK distributions as of an income nature except for certain specific exceptions.
The new regime thus created some uncertainty as to what was meant by excluding ‘distribution(s) of a capital nature’. Budget 2010 has confirmed the 24 February 2010 announcement that legislation will be changed to restore the original understanding for corporation tax that distributions will be regarded as income in nature, unless specifically treated as capital for corporation tax purposes. It is understood the amending legislation will have retrospective effect for the new dividend exemption regime, back to 1 July 2009. There will also be an opportunity to elect for the amendment not to apply.
Comment
This is a welcome clarification and will remove an area of uncertainty that existed with the new regime. Companies should be reviewing options for managing their capital and reserves particularly in view of the new company law position as set out in Companies Act 2006.
Venture capital schemes
The Government intends to legislate changes to the EIS and VCT rules in a Finance Bill to be introduced as soon as possible in the next Parliament. The changes will generally have effect on and after the date the legislation receives Royal Assent.
There are four specific changes, which are required to maintain state aid approval from the EC for the schemes:
- a new requirement that to qualify under either scheme, a company must not be ‘in difficulty’;
- the current requirement that to qualify under either scheme a company must carry on its qualifying trade wholly or mainly in the UK, is to be replaced with a requirement that the company issuing the shares must have a ‘permanent establishment’ in the UK;
- the current requirement for a VCT’s shares to be included in the Official UK list, is to be replaced with one that their shares must be admitted for trading on an EU regulated market. The EC publishes a list of all regulated markets in the Official Journal of the EU, which is also available on their website; and
- the current requirement that a VCT must hold at least 30% of its qualifying holdings by value in qualifying ordinary shares, is to be increased to 70%, but the definition of qualifying ordinary shares will also be changed to allow VCTs to include shares which may carry certain preferential rights to dividends.
Comment
These proposals were included in the 2009 PBR. The changes were first announced when the schemes obtained formal state aid approval from the EC in April 2009.
The most significant announcement is for companies to be able to raise funds under the EIS and from VCTs where the majority of their trading activities are not carried on in the UK, which is not the case at present. The only requirement in this respect will be that the company issuing the shares has a permanent establishment in the UK, based on the OECD Model Tax Convention. A ‘permanent establishment’ is essentially a fixed place of business and could include for example a branch, office or factory. This change should lead to a far greater number of companies qualifying for investment under the venture capital schemes.
The announcement to disallow investment in companies ‘in difficulty’ (defined by reference to the EC Guidelines on ‘State Aid for Restructuring Firms in Difficulty’) is a response to individuals investing in companies to generate a capital loss that can be set off against income.
HMRC commented at the time of the 2009 PBR that the size criteria for a company to benefit under the venture capital schemes were to be aligned more closely with the EU definition of SMEs. The consultation period for this change closed on 12 March 2010 and it has been announced that the EU SME criteria will not be pursued for these purposes. This announcement is welcome and shows the benefit of the consultation process. HM Treasury and HMRC want to continue the dialogue with interested parties and in particular review the current limits applying to investee companies.
Zero-emission goods vehicles: 100% first-year allowances
It has been announced that businesses purchasing new and unused (not second hand) zero-emission goods vehicles will be able to take advantage of 100% FYAs.
The measure will have effect for a period of five years for expenditure incurred on or after 1 April 2010 (for corporation tax) or 6 April 2010 (for income tax).
To qualify the vehicle must not under any circumstances produce CO2 emissions when driven and the vehicle must be of a design primarily suited to the conveyance of goods or burden.
In order to comply with state aid rules there are certain restrictions to the availability of FYAs including a cap that limits the amount of expenditure that will qualify for the new FYAs to €85m per undertaking over the five year life of the measure.
This measure is intended to be legislated in the next Parliament, so appears not to be within the Finance Bill 2010.
Comment
The new rules to allow 100% FYAs will be welcomed by businesses intending to purchase new zero-emission goods vehicles after the effective date on the basis that a full tax deduction is accelerated and obtained in the year of acquisition. However, it is not clear how many businesses this measure will assist and may only be of limited benefit in the near future, but as technology improves and more zero-emission goods vehicles become available may become more popular.
Enhanced capital allowances for energy-saving and water efficient technologies
Changes to the categories of qualifying expenditure for 100% first-year allowances (FYAs) on energy saving and water efficient plant or machinery have been announced.
The energy efficient scheme list will be revised to include two new sub-technologies (permanent magnet synchronous motors and biomass fired warm air heaters).
One existing technology (compact heat exchangers) and one sub-technology (liquid pressure amplification) will be removed.
The criteria for taps and showers in the water efficient scheme will be tightened.
Minor housekeeping changes will also be made to the existing criteria of both schemes.
Comment
While it is useful to have extra categories of energy efficient expenditure which qualify for 100% writing down allowances, this regime remains relatively complex to apply and it would have been helpful if the regime was simplified. As the list changes on a regular basis, claimants are advised to keep a contemporaneous record of the contents when a claim is made, ideally in the form of a screen print from the time.
Consortium Relief
Included in the Budget report was a note that consortium relief rules will be extended to permit the relief to flow through link companies located in EU and EEA countries. This follows from a decision in a July 2009 Tax Tribunal case involving claims for consortium relief through a Dutch resident link company, where it was held the UK rules were contrary to the EU principle of freedom of establishment. The change has been accompanied by an intention to ensure consortium relief is only given to the extent it is properly due.
Comment
This change was only to be expected as it was clear the UK tax legislation was at odds with European law. No date for the change has been proposed, so if not included in this Finance Bill, it may well be implemented after the forthcoming election.
Capital allowances: annual investment allowance
Legislation will be introduced in Finance Bill 2010 to double the maximum amount of the annual investment allowance (AIA) from the current limit of £50,000 to a new limit of £100,000. The increase will have effect for expenditure incurred on or after 1 April 2010 for businesses within the charge to corporation tax, and on or after 6 April 2010 for businesses within the charge to income tax.
The AIA is available to:
- any individual carrying on a qualifying activity (this includes trades, professions, vocations, ordinary property businesses and individuals having an employment or office);
- any partnership consisting of individuals; and
- any company (subject to certain limitations).
Since 1 April 2008 (for corporation tax) or 6 April 2008 (for income tax) most businesses, regardless of size, have been able to claim the AIA on up to £50,000 of their expenditure each year on plant and machinery (subject to certain exclusions, the main exception being expenditure on cars). This AIA is being increased to £100,000. Where businesses spend more than the annual limit, any expenditure is dealt with in the normal capital allowances regime, entering either the main rate or special rate pool, where it will attract writing-down allowances at the 20% or 10% rate respectively.
Anti-avoidance will also be introduced alongside this change to disallow property loss relief against general income for income tax purposes to the extent that the loss is attributable to the AIA. s120, ITA 2007 allows an individual to claim property losses against general income in the specific scenario where the loss has a capital allowances connection. This restriction will apply to losses arising as a result of relevant tax avoidance arrangements entered into on or after 24 March 2010 in relation to s120, ITA 2007. Relevant tax avoidance arrangements mean arrangements where the main purpose or one of the main purposes is to obtain a reduction in tax liability by means of property loss relief against general income.
Comment
Smaller entities may benefit from these provisions by potentially being able to claim the AIA on all qualifying capital spending in the year of acquisition. Larger entities with more substantial qualifying capital costs will obtain relief more slowly and may be more affected by the withdrawal of the temporary 40% first year allowances available in the 2009/10 tax year rather than the increase in the AIA.
Sale of lessor companies: option to elect
Provisions were introduced in FA 2006 to counter avoidance involving the sale of companies carrying on a plant and machinery leasing business. The provisions operated by requiring a tax charge on the vendor based on the tax timing difference at the point of sale. Tax relief for the value of this charge could then be obtained by the purchaser in its own group. However the nature of these anti-avoidance measures made commercial non-tax motivated transactions difficult to complete and meant that where a leasing business was owned by a consortium the charge imposed by FA 2006 could be avoided.
Changes were made in FA 2009 to relieve some of the adverse effects of the 2006 anti-avoidance measures by permitting a longer period over which relief could be surrendered, but these did not deal with situations where buyers would not use allowances within that extended time or avoidance by consortium companies.
Legislation will be included in Finance Bill 2010 to allow a lessor company to elect to ring fence the future profits of the leasing business with tax collected on the profits as they arise.
The legislation also addresses the application of the charge in FA 2006 to consortium companies by broadening the definition of a company owned by a consortium for group relief from one which is a 90% subsidiary of a company owned by the consortium to one which is a 75% subsidiary.
The legislation makes clear that a lessor company that had entered into an unconditional contract to acquire plant or machinery before 9 December 2009 can still claim capital allowances. In addition there are provisions that ensure where a lessor company is sold to a lessee group that is within the tonnage tax regime the deferred profits of the leasing business will still be brought into tax.
Comment
These proposals were included in the 2009 PBR and were designed to facilitate commercial transactions that the 2006 measures had counteracted. In addition, the Government has acted to remove the weakness in the 2006 legislation with respect to leasing companies owned by consortia.