Emergency Budget 2010 - Business Taxation

Corporation Tax and Allowances

In cutting the budget deficit the Chancellor also wants to stimulate the private sector and to encourage multinationals to establish their headquarter companies in the UK. Chief among the inducements to set up or continue investing in a "UK Plc" were the following:

• the main corporation tax rate decreased from 28% to 27% on 1 April 2011 and by an additional 1% percent per year until 2014 when the rate will be 24%;
  
  
• the small company corporation tax rate decreased by 1% to 20% on 1 April 2011;
  
  
• a review of the laws relating to the taxation of foreign profits and IP rules (possibly introducing a "patent box regime" with lower rates of corporation tax on income from patents);
  
  
• consideration of new research and development reliefs; and
  
  
• extension of the Enterprise Finance Guarantee scheme and special financial incentives available for new UK companies set up outside London and the South East.
  

Attractive as these incentives are, it is important to remember that nothing was given away for free in this budget and the above will be paid for by the below changes:

• Capital allowances will be reduced by 2% to 18% (main rate pool) and to 8% (special rate pool for example long life and integral assets);
  
  
• The annual investment allowance will be reduced from the current £100,000 to £25,000 per annum. 
  

These rules will have effect from April 2012.

Also it must be remembered that the UK has sophisticated anti-avoidance rules that can deny the deductibility of some interest payments and the second Finance Act of 2010 will introduce further revisions to these rules.

The rules in relation to consortium relief (the transfer of losses from a consortium company to a consortium member and to companies in the same group as a consortium member) have been extended to permit the consortium's unused losses to be transferred via a linked company established within the European Economic Area to UK members within the linked company's group. However, the test for the maximum amount of losses which may be transferred (which takes the lowest result of 3 limbs) has been potentially narrowed by the addition of an extra limb (the proportion of voting rights and control the claiming company has in the consortium).

EMI and VCT reliefs

Changes introduced in the March budget to ensure that the European Commission will classify VCT and EMI as ‘approved state aids’ will be enacted in the new Finance Bill.  The changes will:

• narrow the extent to which foreign companies can exploit EMI options by stipulating a permanent establishment in the UK instead of the current rule that at least 50% of a company's qualifying activities must be in the UK;
  
  
• prevent "enterprises in difficulty" from being eligible for investment under the VCT scheme. There is no official definition of an "enterprise in difficulty" but guideline indicators include loss of half the registered capital or companies in situations where domestic insolvency proceedings could be brought;
  
  
• stipulate that VCT shares must be admitted to trading on an EU "Regulated Market" instead of requiring the shares of the VCT to be listed on the Official List;
  
  
• require VCTs to hold at least 70% (instead of 30%) of their qualifying holdings in "eligible shares", the definition of which will be extended to include shares carrying certain preferential rights to dividends.
  

Real Estate Investment Trusts (REITs)

REITs, which are required to distribute 90% of their profits to investors who are then taxed on the proceeds as though they were income from property, are now permitted to issue stock dividends to investors in lieu of cash dividends. Investors will still be taxed on the dividends as though they were income from property.

VAT

Widely expected but still probably the most unpopular budget change, VAT rates will rise to 20% on 4 January 2011. Supplies which are currently zero-rated, exempt or subject to VAT at 5% (for example basic foodstuffs and children's clothing) will not be affected by this rise. The usual anti-forestalling provisions will be put in place to prevent VAT invoices being issued prior to 4 January 2011 in relation to goods or services which will be provided after this date. If such forestalling does occur then a supplementary VAT charge of 2.5% will arise on 4 January 2011. However, suppliers whose normal commercial practice involves the issue of such advance invoices, for example hire purchase arrangements, should not be caught by these provisions.

VAT charged on the grant of a lease for a premium where that lease extends beyond 4 January 2011 will not be subject to the supplementary charge. In addition VAT paid in advance for the leasing of land or any other asset will not be caught by the anti-forestalling provisions providing the pre-4 January 2011 VAT invoice is for a period of not more than a year and is in accordance with normal commercial practice.

Lennartz Rules

Currently, under the Lennartz accounting rules, when a business purchases immovable property, boats or aircraft then, subject to certain qualifications, all the VAT paid on the purchase is immediately recoverable. VAT is then repaid to HMRC in relation to the degree in which the asset is used for private use. Changes introduced in the budget mean that now VAT will not be recoverable in respect of the private use of a business asset, for example if the asset was a pub with manager's flat upstairs VAT would not be recoverable in respect of the manager's flat.

General anti-avoidance rule (GAAR)

The Chancellor mentioned in passing the possibility of bringing in a GAAR. This was considered by the previous government but eventually abandoned amid widespread protests due to concerns over administrative unworkability. Instead, the DOTAS scheme was brought in, whereby HMRC can monitor certain widely marketed tax saving schemes.

It is possible that, particularly in these times of severe budget constraints, HMRC has grown weary of being notified of how much tax individuals are saving through schemes and acting in relation to individual schemes if necessary and instead would prefer a broadbrush anti-avoidance tack. It is not certain how a GAAR would be structured if brought in, possibly by granting HMRC the power to ignore any transactions entered into solely for the purpose of avoiding a charge to tax. Watch this space. 

24/06/10

Elizabeth Small