The Budget 2011 commentaries - Business taxes

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 reduced to 26% 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% (plus a supplementary charge linked to the fair fuel stabiliser).  The Government also proposes to reduce the main rate of corporation tax by 1% each year so that the main rate for the year commencing 1 April 2014 is 23%.

The small companies’ rate of corporation tax will be reduced to 20% for the financial year commencing on 1 April 2011 (19% for ring fence profits). 

Comment:     The Government has enhanced its previously announced reduction in the main rate of corporation tax by doubling the cut proposed for 1 April 2011, and working towards a main rate of corporation tax of 23% by 1 April 2014. This is part of its strategy to make the UK the most competitive business tax jurisdiction in the G20. However, already announced reductions in the rate of capital allowances will run counter to this strategy, particularly for unincorporated businesses.

Capital allowances

From 1 April 2012 for companies and 6 April 2012 for unincorporated businesses, the writing down allowances for capital expenditure qualifying for capital allowances will be reduced from 20% to 18% for assets in the main rate pool, and from 10% to 8% for assets in the special rate pool. As with previous changes to the capital allowances rates, where a chargeable period straddles the date of change, a hybrid rate should be calculated and applied to the pool balance.

The annual investment allowance (AIA) will be reduced from £100,000 to £25,000 from the same dates.

Prior to this Budget, short-life assets had to be disposed of within four years of purchase to be able to be pooled separately, and for the benefit of the balance of the pool to be written off if the asset was scrapped within that time. The time limit before disposal has now been increased to 8 years.

The list of energy-saving technologies qualifying for enhanced capital allowances of 100% is scheduled to be updated during summer 2011, subject to agreement with the European Commission.  One new technology will be added: energy efficient hand dryers.

Comment:     As announced in the Budget in June 2010, the further reduction in the rate of writing down allowances decreases the present value of capital allowances when compared to the current rates. This will particularly affect businesses that have significant rolling capital expenditure programmes, such as those in retail, hospitality and manufacturing industries.

The reduction in AIA will impact businesses and groups of all sizes, particularly smaller businesses which previously may have had all their qualifying additions covered by the allowance, although the Government believes that 95% of business will be able to bring their capital additions within the reduced rate of AIA. Unincorporated businesses will be affected significantly if their expenditure exceeds the AIA, as the reduced rates of capital allowances will leave more income subject to higher rates of income tax.

The changes to the short-life asset regime could be useful if businesses want to take on the high administration burden this entails. However, whilst at the current pace of technological change, most businesses replace certain mechanical and electronic equipment fairly frequently, the Government’s drive for tax simplicity does not sit easily with extending this relief. It would have been much simpler to maintain the AIA at its current levels to avoid businesses having to maintain detailed records of expenditure within the short-life asset pool.

The Government has maintained its commitment to encourage the usage of green technology through enhanced capital allowances, but again, this is an administratively burdensome relief. Planned purchases of energy-saving machinery should be checked to ensure inclusion on the list, and evidence should be retained at the time of purchase.  Items previously marked for this relief may be removed from the list and with no record of previously qualifying items retained, this can lead to frustration in making claims where tax returns are filed many months after expenditure was incurred.

Simplification of corporate capital gains

There have been no changes to the draft legislation published in December 2010 to simplify corporate capital gains in respect of value shifting and capital losses.  The proposed changes on de-grouping charges have been refined to deal with share for share sale transactions and unintended consequences for REITs where a minority of investors leave the REIT.  We will need to see the amended legislation to understand these refinements fully.

The December 2010 proposals for simplification included the following measures:

• value shifting – simplifying the existing legislation and restricting its application to disposals of shares or securities which have been materially reduced in value.  A six year time limit is also introduced for the application of depreciatory transaction rules;
• de-grouping charges – changing the provisions so that the charge increases consideration for the disposal of shares, so that in cases where the substantial shareholding exemption applies, there will in fact be no de-grouping charge.  There will also be changes so that groups organised on a divisional basis will not be penalised where assets are transferred to a newly formed company prior to disposal.  The legislation will also be clarified to make clear that companies need to be members of the same group at all times between the transfer of the asset and on de-grouping in order to avoid a de-grouping charge;
• capital losses on a change of ownership – simplifying the avoidance rules for acquired losses and relaxing their application to take account of how businesses operate in a group environment when distressed businesses are acquired.

Comment:     In relation to the de-grouping provisions as drafted in December the favourable treatment for substantial shareholding disposals does not apply where the consideration received is in the form of shares.  Also, the favourable CGT treatment of disposals parcelled up from a divisionally organised group were not extended to the intangible asset regime.  This latter point does not seem to have been addressed in the proposed March 2011 refinements to the de-grouping changes.