Corporation tax rates
A further reduction in the main rate of corporation tax has been announced. The planned 1% decrease announced to take effect from 1 April 2012 is now to be a 2% decrease with the rate moving from 26% to 24%. Further 1% reductions to 23% and 22% are to take place from 1 April 2013 and 1 April 2014 respectively. The small company rate will remain at 20%.
Enterprise Investment Scheme (EIS)
Changes announced in 2011 are due to come into effect on 6 April 2012. These are:
- the maximum amount that an individual can invest in total in a tax year rises from £500,000 to £1m
- the size of a company that can benefit from EIS (subject to meeting all the qualifications) is increased to £15m gross assets and fewer than 250 employees.
Other changes announced include:
- the maximum annual amount that can be invested in an individual company under either EIS or the Venture Capital Trust is to be increased from the current £2 million limit to £5 million
- to receive EIS relief the individual cannot be ‘connected’ to the company. The rules are to be relaxed by removing limits on loan capital that is provided by an EIS investor to the company.
The income tax relief given to an EIS investor is 30% of their investment. The new SEIS relief below will give an increased rate of tax relief but with a significant reduction in the maximum amount of the total annual investments that will qualify.
Seed Enterprise Investment Scheme (SEIS)
This is a new relief to start from 6 April 2012. The tax breaks for the investor are:
- income tax relief at 50% in respect of qualifying SEIS shares up to an annual maximum investment (in all SEIS companies) of £100,000
- a capital gains tax (CGT) exemption where SEIS shares are sold more than three years after they are issued (as for EIS)
- a further CGT exemption where an individual makes a capital gain in 2012/13 and reinvests the proceeds in qualifying SEIS shares before 6 April 2013.
The investor can be a director of the company (if the investor is not a director, they cannot be a current employee but can previously have been an employee).
However, like EIS, the investor must not be connected to the company (broadly, this means they must not directly or indirectly control more than 30% of the share capital).
There are significant restrictions on the company including:
- the maximum amount which can be raised by a company through SEIS is £150,000 and this is an overall total not an annual limit
- the gross assets of the company must not exceed £200,000 immediately before the shares are issued
- the issuing company must have less than the equivalent of 25 full time employees immediately before the shares are issued
- the company must exist to carry on a new qualifying trade.
The original proposals also specified that the company must have been incorporated within two years of the date on which the qualifying shares are issued. Following consultation, one key change is that a company will be eligible by reference to the age of any trade rather than to the age of the company. A company with subsidiaries can also now qualify.
In addition, there are copious anti-avoidance rules which are largely drawn from the EIS regime.
The aim of the relief is to encourage business angels to invest in small enterprises and obtain a tax refund of half their investment. It remains to be seen whether the mountain of restrictions on the company will inhibit the use of the regime.
Annual Investment Allowance (AIA)
The AIA is a capital allowance available for many businesses on most purchases of plant and machinery, long-life assets and integral features. Relief is given on the full cost up to an annual maximum allowance. As previously announced, the allowance is to be reduced to £25,000 from £100,000 with effect from 1 April 2012 for companies and 6 April 2012 for unincorporated businesses.
Where a business has an accounting period that straddles the date of change the allowances have to be apportioned on a time basis. For example a company with an accounting period ending on 30 September 2012 will have an allowance of £62,500 (£100,000 x ½ + £25,000 x ½ ). However it should be noted that for expenditure incurred after the 1/6 April, the maximum allowance that can be attributed to that expenditure is a fraction of £25,000. The fraction will be the amount of the £25,000 that is included in the calculation of the overall AIA for the accounting period.
Planning the timing of purchases of significant items of plant becomes very important to ensure that the maximum available AIA can be secured.
Suppose the company with the 30 September year end wishes to buy new plant costing £35,000. If they had bought it in February 2012 they will be able to claim an AIA on the full £35,000 but if they buy it in June 2012 they will only be able to claim an AIA of £12,500 (£25,000 x 6/12 ). They would actually then be better off if they waited until October when they will have a full £25,000 available.
Writing Down Allowances (WDA)
As previously announced, WDA rates reduce from 1/6 April. The main rate of 20% will be reduced to 18% and the lower rate of 10% which applies to integral features and long-life assets will reduce to 8%. It will be necessary to calculate hybrid rates where the accounting period straddles 1/6 April which will give a rate between 20% and 18% (or between 10% and 8%) for that period.
Capital allowances on cars
The 100% first year allowance (FYA) available on new low emission cars purchased (not leased) by a business is revised and extended with effect from 1 April 2013. The current rule is that a 100% FYA is generally available where a car’s emissions do not exceed 110 grams per kilometre (gm/km) until 31 March 2013. The availability of a 100% FYA is to continue for a further two years for purchases from 1 April 2013 but only where emissions do not exceed 95gm/km.
Cars with emissions between 111-160gm/km inclusive currently qualify for main rate WDA (18% from April 2012).The threshold is to be revised down to 130gm/km for additions from 1 April 2013 for businesses within the charge to corporation tax and 6 April 2013 for businesses in the charge to income tax.
Capital allowances in Enterprise Zones
Over the past year the Government has designated a number of very specific areas as Enterprise Zones. Businesses in these areas enjoy certain reliefs, for example, a relief from business rates. From 1 April 2012, 100% capital allowances will be available for parts of some of the Enterprise Zones known as ‘designated assisted areas’. Some of these areas have already been announced and the Chancellor announced further designated sites in his Report.
The relief is only available to companies and is subject to a number of detailed conditions including:
- the plant must be new
- the plant must not represent a replacement of existing plant.
Capital allowances: fixtures
As announced in Budget 2011, legislation will be introduced in Finance Bill 2012 to make the availability of capital allowances to a purchaser of a fixture subject to certain conditions.
Following consultation, changes have been made to help ensure fair application of the legislation.
Enhanced capital allowances: energy saving technologies
100% FYAs are given on certain energy saving capital expenditure. The categories of qualifying expenditure will be updated by Treasury Order in summer 2012, subject to State aid approval. The main change will be the inclusion of a new technology category: heat pump driven air curtains.
Tax credits for expenditure on environmentally beneficial plant or machinery
Legislation will be introduced in Finance Bill 2013 to extend the availability of first year tax credits, for a further five years from 1 April 2013. These credits are available for companies surrendering losses attributable to their expenditure on designated energy-saving or environmentally beneficial plant or machinery.
Research and development expenditure (R&D)
There are currently a number of restrictions which effectively limit the scope of this relief and it is planned to remove these broadly from 1 April 2012. The proposals include:
- removing the rule limiting a company’s payable R&D credit to the amount of PAYE and NIC it pays
- removing the £10,000 minimum expenditure condition
- increasing the additional deduction for R&D expenditure by SMEs by a further 25% making the total deduction 225% of actual expenditure.
It has also been announced that there will be an ‘above the line’ R&D tax credit to encourage R&D activity with a minimum rate of 9.1% before tax. It is planned for inclusion in Finance Bill 2013 following consultation.
The concept of a Patent Box has been the subject of consultation by HMRC for the past couple of years and legislation is now being brought forward to apply from 1 April 2013.
The essence of the legislation will be to allow companies to elect to have a 10% rate of corporation tax on all profits attributable to qualifying intellectual property (IP). This will cover patents granted by the UK or the European Patent Office. Some other rights will be included by Treasury Order.
The reduced rate applies to a proportion of the profits derived from:
- the licensing or sale of the patent rights, or
- the sale of the patented invention or products which incorporate the patented invention.
Profits derived from routine manufacturing, development or exploitation of brands and marketing intangible assets are excluded.
A company qualifies for the Patent Box if the company satisfies the ‘development condition’. This means it has made a significant contribution to:
- the creation or development of the item protected by the patent, or
- a product incorporating this item.
A company which does not own the patent rights but has been given exclusive rights throughout an entire national territory will qualify for the Patent Box as long as it satisfies the ‘development condition’ in relation to those rights.
The full benefit of the regime will be phased in over the first four financial years following commencement on 1 April 2013. In the first year the proportion of relevant profits to which the 10% rate will apply is 60% and this will then increase annually to 100% from April 2017.
Corporation tax reliefs for the creative sector
The Government will introduce corporation tax reliefs for the production of culturally British video games, television animation programmes and high end television productions. Consultation will take place over the summer. Legislation will be in Finance Bill 2013 and will take effect from 1 April 2013, subject to State aid approval.
The Chancellor made the comment in his speech that he wanted to ensure that Wallace and Gromit stay in this country.
Controlled Foreign Companies (CFCs)
The CFC regime can apply to a UK company which has a subsidiary operating in a country with a low rate of corporation tax. Under the regime a UK company may be charged to corporation tax on relevant profits of the subsidiary. As the rules have been in place for 25 years they needed an overhaul to better fit with more recent developments in both UK and global corporate tax.
The aim of the proposed new regime is to target only those circumstances that result in the artificial diversion of UK profits.
Under the proposals a CFC charge can arise only if:
- a foreign company is controlled from the UK (ie a CFC), and
- the CFC passes through an initial ‘gateway’ and has ‘chargeable profits’ as defined by detailed tests, or
- none of the entity level exemptions apply.
The initial gateway consists of qualitative tests to ensure the rules only apply to profits that have been artificially diverted from the UK. So, for example, trading profits will not be chargeable profits if the control or management of a CFC is not carried on to a significant extent in the UK.
Even if the initial gateway is passed, the CFC may not have chargeable profits as detailed in various quantitative tests.
Alternatively a charge can be removed by using the entity level exemptions. These include for example:
- the low profits exemption (broadly, the accounting (pre-tax) profits are not more than £50,000 or not more than £500,000 and non-trading income is not more than £50,000 per 12 month period)
- where the tax paid under the law of the CFC’s territory of residence in respect of its profits is at least 75% of the corresponding UK tax.
The new rules are to apply to CFCs with accounting periods which begin on or after 1 January 2013.
A company does not have to consider the gateway test first. If a specific entity level exemption applies, a CFC charge will not arise in the relevant accounting period.
Tax simplification for the small business
A voluntary cash accounting basis for calculating tax for small unincorporated businesses (up to the VAT registration threshold) is to be consulted on with a view to introducing legislation in Finance Bill 2013. The aim is to assist the small business by making it easier to calculate their tax.
Other plans include considering a simplified expenses system and a disincorporation relief.