Budget June 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."
Initial thoughts from Tim Lyford, Head of Corporate Tax
“We now have a five year plan to reform the corporation tax system which helps to provides certainty for larger and small businesses. If the consultation on Intellectual Property, R&D and foreign profits meets business expectations it will be helpful. These announcements should undoubtedly help to stem the flow of any businesses thinking of leaving the UK. However the headline reduction in corporation tax is being paid for by a reduction in capital allowances.
AIA (annual investment allowance) is down from £100k to £25k from April 2012. So there is time for businesses to go on a spending spree before that kicks in."
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 27% 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 Government also proposes to reduce the main rate of corporation tax by 1% each year until the main rate for the year commencing 1 April 2014 is 24%.
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
In contrast to the previous Government, this Government has focused on a reduction in the rates of corporation tax as an incentive for investment by the private sector, rather than by using targeted tax relief measures. The reduction in rates of corporation tax does however appear to have been made possible by reductions in the rates of capital allowances and therefore is partly at the expense of unincorporated businesses.
Capital allowances
From 1 April 2012 for companies and 6 April 2012 for unincorporated businesses there will be lower rates of writing down allowance for capital expenditure on plant and machinery qualifying for the special and main rate pools. There will also be a reduction in the annual investment allowance from £100,000 to £25,000.
The rates of writing down allowance on qualifying capital expenditure will fall from 20% to 18% for expenditure qualifying for the main pool, and from 10% to 8% for expenditure qualifying for the special rate pool.
As with previous capital allowance rate changes where a chargeable period crosses the date of change, a hybrid rate will need to be calculated and applied to the pool balance.
As announced at the time of the March Budget, this Budget includes a measure to give 100% allowances for expenditure on new zero emission goods vehicles for expenditure incurred between 1 April 2010 and 31 March 2015 for companies and between 6 April 2010 and 5 April 2015 for unincorporated businesses. To comply with EU state aid rules this allowance will not be available to businesses in financial difficulty, or to businesses involved in fisheries, aquaculture or waste management, and will be limited to €85m of expenditure per undertaking over the five year period.
Comment
Despite the future lower main rate of corporation tax, the reduction in the rate of writing down allowance still reduces the net present value of capital allowances compared to the current position. This will particularly impact on those with significant rolling capital expenditure programmes, such as those in the retail, leisure and hotel sectors.
The level of annual investment allowance will have most impact on the smaller businesses for which it was a significant allowance in relative terms. On the assumption the income tax rates already announced (with a top rate of 50%) remain in effect for 2012/13, the impact of the lower rates of allowances and reduced annual investment allowance is likely to be mostly felt by unincorporated businesses.
As a consequence there will be an even greater incentive to ensure, where possible, that expenditure qualifying for 100% allowances is specified, for example enhanced capital allowances and certain low CO2 or zero emission vehicles.
Regional employer national insurance contribution holidays for new businesses
It is intended that a scheme to assist new businesses that commence after 22 June 2010, in targeted areas of the UK, by providing them with a temporary holiday from some of their employer’s NIC, will be introduced in September 2010. The details will not be fully available until September but the outline has been set out.
The target areas are all of Scotland, Wales and Northern Ireland, plus the North East, North West and South West of England, Yorkshire and the Humber, the East and West Midlands. The scheme will not apply to new businesses established in London, and the East and South East of England.
A business that starts a trade, profession or vocation on or after 22 June will be eligible provided they meet certain criteria (yet to be determined) and they undertake a sufficient degree of new economic activity. It seems that businesses in the coal sector and agriculture and fisheries are to be excluded.
The scheme is intended to last for three years from September 2010. The new business will be entitled to an employer’s NIC holiday for up to 52 weeks that fall within the three year period for each of the first ten new employees taken on in the first 12 months of the business. There will be a £5,000 cap (per employee) on the amount of employer’s NIC avoided in this way so the maximum will be £50,000.
Comment
A HMRC Technical Note is expected soon that will flesh out the details of the proposed scheme and at the moment the rules are fairly vague. Clearly any help that can be afforded for new businesses to become established will be welcome, wherever they are situated. However, in order to take maximum advantage the new business would need to start to employ ten staff within its first year of operation and pay each of them salaries/bonuses amounting to at the very least £43,000 in the first 52 weeks of their job. We wonder whether that level of growth is likely to be achieved.