Companies

Open for business.....

What a pleasant surprise for companies! Lots of good news, and not much bad.....

A five year review of corporation tax, reducing the main rate from its current level of 28% by 1% a year to 24% by 2014 will be good news to all UK companies. In the recent past, we have seen clients relocating abroad in order to reduce their tax bills-  this corporation tax reduction programme should encourage some businesses to return and stop companies leaving in the future, because Britain’s tax rate will soon be  one of the lowest rates in the G20, and the lowest it has ever been internally.  Smaller companies have also benefited- the small company rate, which was planned to increase to 22% next April, will instead reduce to 20%.

Capital intensive businesses will be a bit disappointed to hear that the Annual Investment Allowance (the amount of capital  expenditure on which a company can get 100% tax allowance) is reducing; it was raised in April from £50,000 to £100,000- with effect from April 2012 it will reduce to £25,000. This means 95% of companies will still get full relief for their capital expenditure in the first year.

The other 5% of companies will still get the relief eventually- writing down allowances are being reduced a bit, but will still give tax relief for all capital items which were previously covered, albeit over a longer time period.

Shareholders will be delighted to hear that despite a general increase in capital gains tax (CGT) from 18% to 28% for higher rate tax payers, Entrepreneurs’ Relief will still create an effective rate on business gains of only10%. The fantastic news here is that the lifetime allowance for gains on which this rate can be applied has been increased from £2m to £5m with effect from midnight on 22 June. Combined with the corporate tax reductions, this should encourage enterprise and industry.

There was always going to be some bad news about VAT. The 2.5% increase to 20% will not bite until 4 January next year, and although it will undoubtedly depress retail sales in January 2011, it is likely to encourage a surge in consumer spending in the latter part of this year, which might even cancel out the January dip. Any B2B supplier will be indifferent to the increase, but retail, web based businesses supplying end users and any partially exempt supplier will obviously be disappointed.

Nothing was said about the Business Payment Support Service, which we understand will continue, although second and third time applications will undoubtedly be reviewed more carefully than first time applications. We also assume that the relentless progress of on-line filing will continue, with the change to iXBRL filing still coming in for years ending after 31 March 2010. Remember that this only applies for returns filed from 1 April 2011, so you can get one more year’s grace by filing early.

One final aspect of tax which affects all of our corporate clients is national insurance (NI). There is going to be an increase in the basic NI threshold, of £21 per week, which will be good news for companies. Unfortunately the previous Government’s planned increase in NI rates will still come into force, increasing rates by 1% on both employees and employers NI with effect from April 2011. The Chancellor also announced a three year scheme to encourage new businesses outside of London and the South East, to exempt them from up to £5,000 of class 1 employers NIC for each of their first ten employees, in their first year of business.

I hope you enjoy looking into our analysis of the detail of the proposals announced in our first coalition budget for over 60 years. We certainly enjoyed writing them, because contrary to many people’s expectations, there really wasn’t any unexpected bad news buried in the small print.

So is the UK really ‘Open for Business’, as Mr Osborne said? Here at Baker Tilly, we certainly feel our clients will benefit from a pleasantly positive and fairly balanced budget.

In detail

Capital gains tax changes
With effect from midnight on Budget day, two main rates of CGT come into force; the existing rate of 18% applies to basic rate taxpayers while higher rate taxpayers will pay 28%. Entrepreneurs’ relief, charging tax at a reduced rate of 10%, will be available for the first £5 million of lifetime gains, (previously £2 million).

VAT to increase to 20%
As we predicted, VAT will rise by 2.5% to 20% next year. Although 2.5% is a relatively large increase it will still mean that the UK’s VAT rate is below the average for the European Union.

No general tax amnesty but harsher enforcement of new powers and penalties likely
This Budget has demonstrated the risk that tax rates can change with very little notice. But we can expect more wide-ranging measures to increase government tax take in due course.

Amendments to worldwide debt cap
A number of small technical changes are to be made to the worldwide debt cap rules for calculating the interest disallowance for groups that are affected.

100% deduction for green lorries and vans
A 100% First Year Allowance is being introduced effective from April 2010, for business expenditure on zero emissions goods vehicles, in a five year period.  This relief was previously announced in the Budget earlier this year and the 2009 Pre-Budget Report, but was subject to compliance with the European Commission State aid rules.

Phased reduction of corporation tax rates
The Chancellor announced the hoped-for reduction in corporation tax rates. From next April, the main rate will reduce by 1% to 27% and by a further 1% in each of the three successive years to an all time low of 24%. He also announced that the small company corporation tax rate will be reduced next April by 1% to 20%, instead of the previously announced increase to 22%.

Reduction in capital allowances rates
The rates of writing down allowances on qualifying expenditure are to be reduced for chargeable periods ending on or after1 April 2012. Expenditure qualifying for the 100% Annual Investment Allowance will also be reduced from £100,000 to £25,000 from that date. These measures are to fund tax reductions, principally the phased reduction in corporation tax rates.

No general tax amnesty but harsher enforcement of new powers and penalties likely
This Budget has demonstrated the risk that tax rates can change with very little notice. But we can expect more wide-ranging measures to increase government tax take in due course.

Employers get NIC relief
The 2011 increases in national insurance contribution rates are to go ahead as planned, but employers and employees on annual earnings up to £20,000 will be protected by an increase in the starting point. The top of the employee 12% band will also be lower than expected to match the starting point for 40% income tax.

Employers get more NIC relief
Alongside the 2011 increases in NIC rates, there is to be another attempt at a ‘NIC Holiday’, letting new employers outside the South East off their NIC bills for the first ten employees they hire.

Capital Distributions
Following the introduction of the dividend exemption regime in the 2009 Finance Act, most dividends received by UK companies from 1st July 2009 are exempt from UK corporation tax. However the relief only applies to dividends that are not capital in nature. There was some concern that certain distributions could be treated as capital and therefore not be exempt. Retrospective legislation will now be introduced which will treat these distributions as exempt.
 

Consortium relief – amendment to rules for companies
Proposed changes have been made to the consortium relief rules that should enable UK members of a group that also contains a foreign company that is a member of a consortium to access for the first time the unused losses of UK resident consortium companies.