Emergency Budget - what are the key business tax changes?

HfM Accountants have kindly provided a summary of the key changes to business taxation announced in this week's Budget.

Corporation Tax

The present 28% corporation tax rate for larger companies is to be reduced by 1% per annum from 1 April 2011 as follows:

1 April 2011 - 27%
1 April 2012 - 26%
1 April 2013 - 25%
1 April 2014 - 24%

For smaller companies, those with taxable profits below £300,000, the small companies rate of corporation tax will reduce from the present 21% to 20% on 1 April 2011.

National Insurance Contributions

The 1% increase in employers’ contributions will go ahead from April 2011. However, the threshold before contributions become payable will increase by £21 pw more than indexation. This means that contributions for lower paid workers will be lower overall.

The Government also promised a three-year scheme to exempt new businesses in targeted regions from up to £5,000 of class 1 employer NIC payments, for each of their first 10 employees hired in their first year of business. Subject to meeting the necessary legal requirements, the Government aims to have the scheme up and running by September, but any qualifying new business set up from 22 June 2010 will also benefit.

Capital Allowances

As you are probably aware, depreciation charged in your accounts is not an allowable deduction for tax purposes. Instead HMRC allow you to claim capital allowances at fixed rates that vary dependent on the nature of the assets.

Partly to offset the reductions in corporation tax rates most rates of capital allowances are to be reduced - from 1 April 2012 (for limited companies) and from 6 April 2012 (for unincorporated businesses).

The proposed reductions are:

1. Writing down allowances will be reduced from 20% to 18% on the cost of qualifying plant and machinery. This will also affect any unrelieved expenditure in the main rate pool;
2. Writing down allowances on long life assets, integral features and specified cars will be reduced from 10% to 8%. This will also affect any unrelieved expenditure in the special rate pool;
3. The annual 100% investment allowance available for qualifying capital expenditure up to £100,000 will be reduced to £25,000.

A new 100% first year allowance is to be introduced giving full relief for expenditure incurred on new zero-emission goods vehicles. The relief is back dated to April 2010 as it was originally announced by the previous Government.

Enterprise Management Incentives (EMIs)

From the date the June Budget receives Royal Assent the following change to the present EMI rules will be made:

The requirement that a company granting qualifying EMI options to its employees must operate “wholly or mainly” in the UK is to be replaced by a requirement that it be required to have a “permanent establishment” in the UK.

VAT - Increase in standard rate

From 4 January 2011 the standard rate of VAT will increase from 17.5% to 20%. The reduced rate of VAT stays at 5%.

If you want to find the amount of standard rate VAT in a VAT inclusive price from 4 January 2011, simply divide the total cost including VAT by 6.

VAT - Users of Flat Rate Scheme

Due to the increase in the standard rate to 20% from 4 January 2011 the Flat Rate Scheme rates will change from the same date. If you currently use this scheme or have previously considered the decision to be marginal, you will want to reconsider its attractiveness by reference to the new rates.

Insurance Premium Tax (IPT)

From 4 January 2011 the standard rate of IPT will increase from 5% to 6%. The higher rate will also increase from 17.5% to 20%.

Research and development (R&D) tax relief

The Government are introducing a relieving measure that was originally announced in the last Pre-Budget Report. Qualifying expenditure incurred by SMEs on or after 9 December 2009 will now qualify for the relief even if the intellectual property derived from the R&D is not owned by the company making the claim.

Tax Avoidance

The coalition government seems as committed as their predecessors to further reducing the attractions of overt tax avoidance schemes.

Schemes using trusts to reward employees and to assist in the avoidance, deferral or reduction in income tax or NIC including avoiding the new pensions tax relief restrictions, will be legislated against with effect from April 2011. The Chancellor has confirmed that Employer Funded Retirement Benefit Schemes (EFRBS) are within these measures. The government is also consulting on the introduction of a General Anti-Avoidance Rule. Other specific anti-avoidance measures have also been introduced to counter specific schemes.

Other Business Tax Measures

Various other specific business tax announcements were made including clarifications on the treatment of UK companies receiving capital distributions, changes to the “worldwide debt cap” rules for large groups of companies, amendments to the rules for companies claiming consortium relief and harmonising of the interest rules for late payments and repayments of corporation tax.

Posted June 24, 2010

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