Corporate and Business Tax
Corporation tax rates
The main rate of corporation tax which applies to companies with profits of more than £1.5 million falls to 28% from 30% from 1 April 2008 and that rate will be maintained in 2009. The small companies corporation tax rate which applies to companies with up to £300,000 of profits will increase from 20% to 21% from 1 April 2008. The intention is to increase this rate to 22% in 2009.
The effective marginal corporation tax rate for profits between £300,000 and £1.5 million is 29.75% from 1 April 2008.
Simplification of the associated company rules
The profits limits referred to above may need to be shared between companies if the companies are ‘associated'. Companies are associated if they are under common shareholder control, for example where the same individual has more than 50% of the ordinary share capital of each of the companies. However an individual may be regarded as having control of two companies because shares owned by other persons are deemed to be owned by the individual. This is known as the ‘attribution concept'.
From 1 April 2008, shares held by business partners will not be attributed to a person unless a tax planning arrangement has been put in place in order to pay less corporation tax than would otherwise be due.
Major changes will be implemented to the capital allowances system from 2008/09. The details for plant and machinery are:
a new Annual Investment Allowance (AIA) for the first £50,000 spent on plant and machinery. This gives a 100% write-off against profits. The AIA complements and does not replace any of the existing 100% first year allowance schemes
writing down allowances for plant and machinery in the main ‘pool' will be cut from 25% to 20%
a new writing down allowance for ‘integral features' in a building will be 10%
writing down allowances for long life assets will be increased from 6% to 10%
the 10% allowances will be given by combining integral features and long life assets into a ‘special rate pool'
the special rate of 10% for integral features will include certain replacement expenditure where this might otherwise have qualified as a revenue deduction
where companies have a loss after claiming 100% first year allowances on green technologies they will be able to reclaim a tax credit from HMRC.
The new category of expenditure, integral features, includes some items that currently would qualify for normal plant allowances such as space or water heating systems but also includes items that do not generally currently qualify for plant allowances such as general lighting systems and cold water systems.
Although integral features only qualify for 10% rather than 20% writing down allowances, the AIA can be allocated first to integral features rather than other plant.
Small plant and machinery pools
Writing down allowances at the rates summarised above are computed on the ‘pool' of unrelieved expenditure. When calculating writing down allowances there is no de minimis rule so, for example, businesses with £1,000 of unrelieved expenditure and no new expenditure or disposal receipts would have to carry on calculating the annual writing down allowance for many years. Businesses will be able to claim a writing down allowance of up to £1,000 in the case of each pool, once the unrelieved expenditure in either the main rate pool or the special rate pool is £1,000 or less.
This measure has effect for chargeable periods beginning on or after 1 April 2008 for businesses within the charge to corporation tax and on or after 6 April 2008 for businesses within the charge to income tax.
100% capital allowances on green technologies
Two schemes exist that give 100% first year allowances for expenditure on certain energy-saving and water technologies. Following the annual review of the qualifying technologies, the schemes will be revised to include one new technology: waste water recovery and reuse systems. The Energy Technology Criteria List will be revised to include four additional sub-technologies: compressed air master controllers; compressed air flow controllers; heat pump dehumidifiers and white LED lighting.
The 100% first year allowance for expenditure incurred on natural gas and hydrogen refuelling equipment due to end on 31 March 2008 will be extended for an additional five years to 31 March 2013.
Taxation of business travel
With effect from 1 April 2009 for corporation tax purposes (6 April 2009 for income tax) the capital allowance treatment of all cars will be reformed.
- Expenditure on cars with CO2 emissions above 160gm/km will attract 10% writing down allowances.
- Expenditure on cars with CO2 emissions of 160gm/km or below will attract 20% writing down allowances.
- Subject to State Aid approval, cars leased to those in receipt of certain disability allowances will be placed in the 20% main pool, regardless of their CO2 performance.
The rules which disallow a proportion of car lease rental payments will be reformed in line with the new capital allowances rules. The new disallowance will be 15% of the relevant payments, applied to cars dealt with in the 10% special rate pool.
The 100% first year allowances for the cleanest cars will be extended from 31 March 2008 to 31 March 2013 and the qualifying CO2 emissions threshold will be reduced to 110gm/km.
The government intended that legislation would take effect from 6 April 2008 to address ‘income shifting'. The government has reconsidered its position following a period of consultation with business and now believes that a further period of consultation will ensure that legislation in this area provides clarity and certainty for businesses and their advisers.
The government now intends to introduce legislation through Finance Bill 2009 and will not enact legislation effective from 6 April 2008.
‘Income shifting' refers to a situation where one spouse or civil partner generates most of the profits of a business but the other receives a proportion of the profit and the couple save tax as a result. The delay in the starting date for any legislation is to be welcomed and hopefully the further consultation will produce a more reasonable result.
This is an HMRC example of a situation in which the original proposed legislation would have applied. Individual 1 and Individual 2 form a company, each owning 50 £1 ordinary shares. The business of the company is to provide the personal services of Individual 1. Individual 2 spends around five hours a week on back office duties for the business. In the first year they each receive a salary of £5,000 and dividends of £30,000. The salary received by Individual 2 is considered to be the market rate given the nature of the work done and time spent doing it. The company has no significant assets or liabilities.
If Individual 2 has no capital in the business and bears no risk the whole of the £30,000 would be treated as shifted income because Individual 2 is already receiving a market rate for the work done, has no capital in the business and bears no risk.
Of course, if Individual 2 does contribute more to the business than in the above example, then some or all of the income will not be treated as shifted income.
We await with interest the conclusion of the further consultation on these proposals.
Research and development tax relief
Research and development (R&D) tax relief gives enhanced tax relief to companies who undertake qualifying R&D projects. The company must spend at least £10,000 on qualifying expenditure in one year. The proposed changes, subject to State Aid approval, are:
- large companies will be able to claim 130% relief, increased from 125%
- small and medium sized companies will be able to claim 175% relief, increased from 150%.
The government has introduced a rolling programme of tax simplification. Following discussions with business and tax professionals, the government announced the initial outcomes on the three tax simplification reviews launched in the 2007 Pre-Budget Report:
- VAT rules and administration: consulting on ideas to simplify the operation of the partial exemption regime and capital goods scheme
- anti-avoidance legislation: repealing outdated anti-avoidance provisions on bond washing and employment securities
- corporation tax rules for related companies: simplifying the associated companies rules (see above) and announcing a review looking at how to simplify corporation tax calculations and returns for smaller companies.