Is the UK really ‘Open for Business’, as Mr Osborne said? Baker Tilly believes businesses should benefit from a pleasantly positive and fairly balanced budget. Tax Partner, Tim Smith, reviews some of the key areas affecting businesses in the South. This year there will be three Finance Acts, the first time since 1915. The second is being passed very shortly and the third will follow in the Autumn, to legislate some of the changes announced in the Emergency Budget. The underlying policy objective is to reverse the trend of declining UK fiscal competitiveness and enable private sector investment and growth while at the same time assisting with debt reduction.

Corporation Tax rate changes

One indication of the desire to improve global competitiveness was the review of Corporation Tax, reducing the main rate from its current level of 28% by 1% a year to 24% by 2014. In the recent past businesses have been relocating abroad in order to reduce their tax bills; this reduction programme should encourage some businesses to return and stop others leaving in the future as Britain’s tax rate will soon be one of the lowest in the G20, and the lowest it has ever been.  Smaller companies will also benefit - the small company rate, which was to increase to 22% next April, will instead reduce to 20%.

Capital Allowances

The reduction in corporation tax rates is being funded by future Capital Allowance changes, which will have a negative impact, particularly on capital intensive businesses. Companies will still obtain full relief on capital expenditure, but this will be spread over a longer period.

The main changes are the planned reductions, from April 2012, to:

• Annual writing down allowances from 20% to 18% per annum,
• Long life and integral features allowances from 10% to 8% per annum.

The effect of the change in the annual writing down allowances will mean that it will now take 12 years to obtain a tax deduction on 90% of the qualifying capital expenditure. At 20%, it took more than 10 years and at the previous long established rate of 25% it took 9 years. With the change from 10% to 8% for other assets, it will take 28 years (previously 22 years) to obtain a tax deduction on 90% of the expenditure.

Entrepreneurs’ Relief

Qualifying shareholders will be delighted to hear that despite an immediate increase in Capital Gains Tax (from 18% to 28% for higher rate tax payers) Entrepreneurs’ Relief will still create an effective rate on business gains of only 10%. The lifetime allowance for gains on which this rate can be applied has been increased from £2m to £5m with effect from 23 June. Combined with the corporation tax reductions, this should encourage enterprise and industry. 
There are some key requirements that need to be met to qualify for Entrepreneurs’ Relief, including:

• The Business must be a trading company or trading group
• The claimant must be an employee or officer of the company, with a minimum 5% shareholding, which excludes many employee shareholders
• 1 year minimum ownership period.

VAT

The increase to 20% will not bite until 4 January 2011, and although it will undoubtedly depress retail sales, it could 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 retailers and web based businesses supplying end users, as well as any partially exempt suppliers will be disappointed.

National Insurance Contributions (NICs)

One final aspect of tax which affects all businesses is NICs. There will be an increase in the basic NI threshold, of £21 per week, which will be good news for companies and their employees alike. 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.

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 in the 2010 Finance Act No.3 which will treat these distributions as exempt. Capital distributions may still be taken in to account in computing capital gains.

Other matters

Although nothing was said about the Business Payment Support Service, it is understood it will continue, but second and third time applications will undoubtedly be reviewed more stringently than first time applications.

The Government also announced that it would be introducing legislation on the Controlled Foreign Companies regime in 2012. There will be interim measures introduced in Spring 2011 based on further consultation during the summer. This is a long standing area of concern for UK based multinationals where the need to balance UK competitiveness with the protection of UK tax revenues will be a test of the new Government’s policy objectives.