The Budget 2008 - Companies and Businesses

Corporation Tax Rates

The main rate of corporation tax as previously announced is 28% for financial year 2008 and this will continue in 2009.

Again, as previously announced, the small companies rate of corporation tax will be 21% for financial year 2008.

The change to the small companies rate of corporation tax also necessitates a change to the fraction used for calculating the tax for companies with profits between £300,000 and £1.5 million.

In order to qualify for the small companies rate of corporation tax, the profit of a company must be below £300,000. To the extent that the company has any associated companies, both the £300,000 limit and the upper earnings limit of £1.5 million, above which companies pay the standard rate of corporation tax are proportionately reduced.

For example, if a company has one associated company the profit limits would be £150,000 and £750,000 for each company.

A small change is proposed with effect from 1 April 2008 to the rules which identify which companies are associated for these purposes. This will ensure that business partners fall within the definition of associate only where "relevant tax planning arrangements" have at any time had effect in respect of the tax payer company.

HMRC will have to clarify exactly what they mean by this but the indication is that some sort of deliberate business splitting (ie, in order to obtain the advantage of the small companies rate) would have to occur before business partners are regarded as associated for these purposes.

Corporation Tax Rates - budget notice 2
Corporation Tax Rates - budget notice 3
Corporation Tax Rates - budget notice 4

Increase in research and development (R&D) relief and vaccine research relief

As announced in the 2007 Budget, the rate of R&D and vaccine research relief is to be increased for all companies. Finance Act 2008 will increase the available deduction as follows:

• small and medium sized companies (SMEs): from 150% to 175%
• large companies: from 125% to 130%

R&D and vaccine research relief are available to companies carrying out particular types of R&D, and both give relief by providing an enhanced tax deduction for qualifying expenditure. An SME can currently deduct 150% of qualifying expenditure instead of the usual 100% deduction for revenue expenditure, and will be able to deduct 175% of such expenditure when the new limits are introduced.

The changes will come into effect once final EC approval has been obtained.

Changes to obtain EC approval

As the reliefs for SMEs are notified EU State Aids, any changes to those reliefs must be approved by the European Commission. The EC have approved previous changes to the reliefs without requiring any adjustments but these substantial increases in relief have resulted in a requirement that the UK add the following conditions:

• cap the relief given on any single R&D project at €7.5m
• ensure that no relief is given to companies in difficulties: companies will only be able to make a claim if their accounts have been prepared on a going concern basis
• require large companies claiming vaccine research relief to make a declaration as part of the claim confirming that the relief has had an incentive effect

In practical terms, it is unlikely that these restrictions will impose any significant burden on companies. The impact assessment published by HMRC indicates that only one claim since the introduction of the R&D relief has exceeded £2m, and no claims under the vaccine research relief have exceeded £300,000.

Vaccine research relief is only claimed by around 10 companies a year, as the relief is only available for a very limited range of vaccine research, and of those, no more than 5 companies are large.

Increase in research and development (R&D) relief and vaccine research relief- budget notice

Capital allowances for 'green' vehicles and refuelling equipment

Businesses that purchase or lease new low CO2 emission cars currently get tax relief for the entire cost of the car in the year of purchase; this relief is to be extended until 31 March 2013.

The relief has been made slightly more difficult to obtain as the qualifying emissions threshold below which a car will be regarded as "low CO2" will be reduced from 120 g/km driven to 110g/km driven. A transitional rule will ensure that any qualifying leasing contracts entered into before 1 April 2008 are unaffected by the reduction in threshold.

Business that purchase 'green' refuelling equipment currently also get tax relief for the entire cost of the equipment in the year of purchase. This relief has been also extended to 31 March 2013, and has further been extended to cover biogas refuelling equipment.

Capital allowances for 'green' vehicles and refuelling equipment - budget notice 10
Capital allowances for 'green' vehicles and refuelling equipment - budget notice 11

Enhanced capital allowances on 'green' technologies

The list of technologies covered by the Energy Efficient and Water Saving (environmentally-beneficial) Enhanced Capital Allowance schemes is to be extended:

• the Water Technology Criteria List will be extended to include waste water recovery and reuse systems
• the Energy Technology Criteria List will be extended to include:
  • compressed air master controllers;
  • compressed air flow controllers;
  • heat pump dehumidifiers; and
  • white LED lighting

The full lists are available at http://www.eca.gov.uk/. The effective date of these changes has still to be announced.

These enhanced capital allowances schemes provide immediate tax relief for businesses buying 'green' technologies by allowing the entire cost of the technology to be deducted in the year of acquisition, rather than being spread over several years through capital allowances.

Enhanced capital allowances on 'green' technologies - budget notice 13

Capital Allowances: Introduction of First-Year Tax Credits

As announced in Budget 2007, legislation will be introduced in Finance Bill 2008 to enable companies that invest in designated energy-saving or environmentally-beneficial plant and machinery to obtain a tax credit from the Government where an enhanced 100% first year allowance ("FYA") results in a loss. Draft legislation was published in a technical note in December 2007.

This measure effectively extends the benefit of 100% FYAs to companies investing in "green" plant and machinery to companies that are loss-making in the period in which the expenditure is incurred. Where a company surrenders a loss attributable to such FYAs to the Government, it will receive a tax credit of 19% of the loss surrendered but not exceeding the greater of £250,000 and the total of the company's PAYE and national insurance contributions liabilities for the period for which the loss is surrendered. The loss must be one that can neither be set against the company's profits in that period nor surrendered by way of group relief.

The tax credit may be clawed back if the relevant plant and machinery is sold within four years of the end of the period for which the tax credit was paid.

This change will have effect for qualifying expenditure incurred by companies on or after 1 April 2008.

Capital Allowances: Introduction of First-Year Tax Credits - budget notice
Capital Allowances: Introduction of First-Year Tax Credits - draft legislation

Trading Stock

Businesses that dispose of goods from trading stock or acquire goods into trading stock other than in the course of a trade will, from and after Budget Day, have to adjust their profits to replace the cost of the stock or the actual proceeds with their market value.

This will merely put onto a statutory basis the so-called "market value rule" that has been common practice for some time.

Trading Stock - budget notice

Intangible assets: anti-avoidance

HMRC have moved to block a loophole in the "related parties" rules in the corporate intangible assets tax regime. A number of schemes have taken advantage of the potential for parties to cease to be related where one of them becomes subject to insolvency arrangements.

The corporate intangible assets tax regime provides for potentially advantageous tax treatment of intangible assets created on or after 1 April 2002, or created before that date and then acquired on or after 1 April 2002 - provided that the acquisition was not from a related party. The intention was that only intangible assets acquired from unconnected third parties could be brought into the new regime.

This caveat is intended to ensure that connected companies could not bring existing assets into this new tax regime by simply transferring those assets amongst themselves. Various schemes have been designed, using insolvency proceedings, to attempt to sidestep this caveat and gain the benefit of the new regime for existing assets.

There are four tests in the legislation which are used to identify whether parties are related and Finance Act 2008 will contain some additional measures to ensure that the results of these tests are not affected by any insolvency arrangements (or foreign equivalents) affecting one of the parties.

Intangible assets: anti-avoidance - budget notice

Capital allowances: anti-avoidance

HMRC have blocked a scheme that accelerates the availability of capital allowances in certain circumstances when a trade is sold or transferred by a company.

A trading company can, over time, build up a substantial difference between the market value of its plant and machinery and the tax written down value of that plant and machinery. Generally, when the company ceases to trade, a balancing allowance can be deducted where the market value of that plant and machinery is less than the tax written down value (conversely, there is a balancing charge when the market value exceeds the tax written down value).

This measure is designed to stop exploitation of this allowance; for example, if a company acquires a relatively unprofitable subsidiary and that subsidiary then sells on its trade to an unconnected third party, the subsidiary will cease to trade. Under the existing rules that subsidiary can claim a balancing allowance for the plant and machinery disposed of as part of the trade. This allowance can be group relieved to reduce the profits of the parent company.

With effect from today (12 March 2008), where a company sells its trade and:
-generates a balancing allowance; and
-the main purpose, or one of the main purposes, of the sale is to create that balancing allowance

then the trade will be treated as if it had been continuously carried on, so that no balancing allowance will be available to the vendor. However, the capital allowances will not be lost, as they will be available to the purchaser.

Capital allowances: anti-avoidance - budget notice

Funding bonds/PIK notes

Rather than paying interest on loan notes in cash, some companies issue further loan notes or funding bonds/PIK notes to the holder of the debt. This is treated as the payment of interest for all tax purposes and as such there is also often a requirement to deduct withholding tax at source from these bonds. The way this is done, is to issue further bonds to HMRC.

Last month, HMRC issued technical note and draft legislation which would allow them to satisfy claims for repayment of the tax deducted at source by using all or part of the funding bonds that had been used to pay the tax deducted.

In other words, HMRC reserve the right to transfer across the funding bonds issued to them (and if necessary to have a larger bond split into smaller bonds for this purpose), rather than handing over cash to the person claiming the tax repayment.

Funding bonds/PIK notes - budget notice

Timing of income payments by unauthorised unit trusts

In enacting the Income Tax Act 2007, a mistake was made in the timing of payments to HMRC of tax deducted at source by trustees of unauthorised unit trusts. The measure – which has effect on or after Royal Assent to Finance Bill 2008 – reinstates the previous position and removes a cash-flow advantage for trustees of such funds created by the mistake.

Timing of income payments by unauthorised unit trusts - budget notice

Alternative Finance Arrangements

Finance Act 2006 already permits the introduction of rules relating to new alternative finance arrangements to be made by Treasury Order. However, that Act does not permit Treasury Orders to amend rules for existing alternative finance arrangements. The Finance Bill will remedy this omission: Treasury Orders made on or after the date of Royal Assent to the Finance Bill will be able to amend existing rules for alternative finance arrangements.

Alternative Finance Arrangements- budget notice

Capital Allowances: Plant and Machinery: Rate Changes & New Special Pool

Further to the announcement in Budget 2007, legislation will be introduced in Finance Bill 2008 to reduce the main rate of writing down allowances ("WDAs") for expenditure on general plant and machinery from 25% to 20%. The legislation will also increase the rate of WDAs on long-life assets from 6% to 10%.

New expenditure on long-life assets will immediately be allocated to, and historic expenditure in the long-life asset pool will be subsumed into, a new "special rate" pool (which will also include expenditure on "integral features" and thermal insulation - see BN07).

Where a taxpayer's chargeable period spans the operative date for the rate changes, historic expenditure in each pool will attract WDAs at a "hybrid" rate for that period (reflecting the application of the relevant old and new rates for different parts of that period).

Draft legislation was published in a technical note in December 2007.

These changes will have effect for the calculation of WDAs for chargeable periods ending on or after 1 April 2008 for corporation tax payers and 6 April 2008 for income tax payers.

Capital Allowances: Plant and Machinery: Rate Changes & New Special Pool- budget notice
Capital Allowances: Plant and Machinery: Rate Changes & New Special Pool - draft legislation

Capital Allowances: Plant and Machinery: Annual Investment Allowance

As announced in Budget 2007, legislation will be included in Finance Bill 2008 to introduce a new annual investment allowance ("AIA") for the first £50,000 of a business's expenditure on most plant and machinery (including long-life assets and integral features – see BN07 – but excluding cars) each year. Draft legislation was published in a technical note in December 2007.

An AIA will be available to each qualifying business: it may be claimed by any individual carrying on a qualifying activity, any partnership consisting only of individuals and any corporate group (but not by each company: the reasoning is that companies within a group are legally and economically inter-dependent and should therefore only receive a single allowance). Detailed rules are proposed to prevent "related" companies and businesses from enjoying multiple AIAs.

The 50%/40% first-year allowances available to small and medium-sized enterprises until the end of the tax year 2007/08 will cease to be available following the introduction of the new AIA. However, other enhanced first-year allowances currently available, like allowances for other forms of qualifying expenditure (for example on research and development or business premises renovation), will remain available.

This change will have effect for expenditure incurred on or after 1 April 2008 for corporation tax payers and 6 April 2008 for income tax payers, but only a proportion of the full AIA will be available for expenditure incurred in a chargeable period that spans the relevant effective date.

Capital Allowances: Plant and Machinery: Annual Investment Allowance - budget notice
Capital Allowances: Plant and Machinery: Annual Investment Allowance - draft legislation

Capital Allowances: Small Plant and Machinery Pools

In response to comments received in response to last year's consultation on the annual investment allowance ("AIA") (see BN12), Finance Bill 2008 will make provision to allow businesses with unrelieved qualifying expenditure of £1,000 or less in either the main (20%) pool or the new special (10%) rate pool (see BN08) to claim a plant and machinery writing-down allowance ("WDA") of up to that amount. This mechanism will not be available for expenditure in "single asset" pools.

This measure aims to remove the administrative burden for small and micro businesses of calculating WDAs on a very small pool of qualifying expenditure, particularly in circumstances where future expenditure is likely to be fully relieved by the AIA.

This change will have effect for chargeable periods beginning on or after 1 April 2008 for corporation tax payers and 6 April 2008 for income tax payers.

Capital Allowances: Small Plant and Machinery Pools - budget notice