- Corporation tax rates
- Capital allowances and short-life assets
- Capital allowances and energy saving technologies
- Research and development (R&D) tax credits for small and medium sized enterprises (SMEs)
- Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCT)
- Business premises
- Abolition of tax reliefs
- Bank levy
- Taxation of foreign branches
- Collective investment schemes (UCITS)
- Controlled foreign companies (CFCs)
Corporation tax rates
The Chancellor had previously announced in the June 2010 a gradual reduction in the main rate of corporation tax from 28 per cent to 24 per cent over a four year period.
In George Osborne's first spring Budget he has gone further and reduced the rate for the financial year beginning 1 April 2011 by a further 1 per cent to 26 per cent instead of the expected 27 per cent. Consequently, the main rate of corporation tax will reduce to 25 per cent for the financial year commencing 1 April 2012. The rate will therefore now reduce to 23 per cent for the financial year beginning 1 April 2014.
The Chancellor's aim is to restore the UK's attractiveness as a low tax regime to attract foreign investment and thus accelerate economic recovery. However the small profits rate of corporation tax will reduce by just 1 per cent as planned to 20 per cent for the financial year commencing on 1 April 2011.
Capital allowances and short-life assets
Nearly all recent Budgets have seen some changes to the capital allowance regime and this Budget is no exception. Businesses can elect for assets to be treated as short-life assets (SLA) with the advantage that any disposal before the cut-off period (currently four years) will enable the business to claim the full net cost of the asset over the period of ownership.
The Chancellor has announced that the cut-off period will be extended to eight years thus making the election more attractive for a wider category of assets. The measure takes effect for expenditure incurred by companies on or after 1 April 2011 and 6 April for unincorporated businesses.
Capital allowances and energy saving technologies
The list of technologies and products which qualify for enhanced capital allowances has been extended to include certain energy efficient hand driers. This will have effect on a date to be announced prior to the summer Parliamentary recess.
Research and development (R&D) tax credits for small and medium sized enterprises (SMEs)
The Budget statement included a very significant increase in the credit which will be available to SMEs for qualifying R&D expenditure. The Chancellor expressed a strong desire to restore the UK's manufacturing base by encouraging innovation. Legislation will be introduced in the Finance Bill 2011 to increase the additional deduction for SMEs from 75 per cent to 100 per cent of the qualifying R&D expenditure thus resulting in an effective 200 per cent deduction for such expenditure (currently 175 per cent).
This will be increased further by the legislation to be introduced in the Finance Bill 2012 which will extend the total effective deduction to 225 per cent. This is a very significant increase and should provide SMEs with a strong incentive to fund R&D in the future. In addition, legislation will be introduced in Finance Bill 2012 as follows:
- the rule limiting a company's payable R&D tax credit to the amount of PAYE and National Insurance Contributions (NICs) it pays will be abolished;
- the £10,000 minimum expenditure condition will be abolished for all companies; and
- changes will be made to the rules governing the provision of relief for work done by subcontractors under the large company scheme
These changes are subject to State aid approval.
Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCT)
The Chancellor has announced a number of very significant changes to both schemes. The aim is to help smaller companies to obtain finance by increasing the incentives for potential investors.
Legislation will be introduced in the Finance Bill 2011 to increase the rate of income tax relief from 20 per cent to 30 per cent of the amount subscribed for shares qualifying under EIS. Further changes will be introduced in the Finance Bill 2012 to increase:
- the thresholds for the maximum size of qualifying company for EIS and VCTs to 250 employees and gross assets of £15 million
- the maximum annual amount that can be invested in an individual company to £10 million
- the annual amount that an individual can invest under EIS to £1 million.
The above three changes will apply from 6 April 2012.
The Chancellor made two important announcements:
- The small business rate relief holiday will be extended by one year from 1 October 2011
- The business premises renovation allowance will be extended for a further five years from 2012.
Abolition of tax reliefs
After a period of consultation, the Government intends to abolish a number of tax reliefs next year as part of a simplification process including late night taxis, luncheon vouchers and the cycle to work days (provision of meals).
On 8 February 2011 the Chancellor announced an increase in the levy for the remaining 10 months of the 2011 calendar year which increased these tax revenues by nearly 50 per cent. In the Budget statement it was announced the levy rates to be applied from 1 January 2012 would be increased to offset some of the reduction of the corporation tax rate.
Taxation of foreign branches
UK companies with foreign branches are subject to layers of taxation. The foreign branch will be subject to local taxes in a foreign jurisdiction and then the branch profits are also subject to UK corporation tax with credit for the foreign tax already suffered. This reduces the UK's attractiveness as a location for the parent body of the business. It also creates an anomaly between foreign branches and foreign subsidiaries.
One of the Chancellor's stated aims in this Budget is to create a more competitive tax system and therefore legislation is being introduced in Finance Bill 2011 to allow companies to elect for the exemption of branch profits from UK corporation tax. This may look attractive but the election is irrevocable and in the circumstances where branches turned out to be loss making then a tax deduction against UK corporation tax might well be lost.
Collective investment schemes (UCITS)
With the stated aim of maintaining UK competitiveness in the financial services sector the Chancellor has announced that there will be no adverse tax consequences in the UK when a foreign UCITS fund is managed by a UK resident manager. The draft legislation will be included in the Finance Bill 2011.
Controlled foreign companies (CFCs)
Any UK companies with foreign subsidiaries can be affected by the CFC rules. Legislation will be introduced in the Finance Bill 2011 to:
- Exempt commercially justified activities that do not erode the UK tax base
- Introduce improvements in the rules that will make it easier for UK businesses to make overseas acquisitions and carry out reorganisations
- Help non-UK businesses that want to invest or locate in the UK.