16 March 2005 Budget Report
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Business Tax and Investment Incentives
Corporation Tax
| Corporation tax rates and bands are as follows: |
| Financial Year to |
31 March 2006 |
31 March 2005 |
| Taxable Profits |
£ |
% |
£ |
% |
| First |
10,000 |
0 |
10,000 |
0 |
| Next |
40,000 |
23.75 |
40,000 |
23.75 |
| Next |
250,000 |
19 |
250,000 |
19 |
| Next |
1,200,000 |
32.75 |
1,200,000 |
32.75 |
| Over |
1,500,000 |
30 |
1,500,000 |
30 |
| Non-corporate Distribution Rate |
|
19 |
|
19 |
| |
| Small company’s marginal relief fraction |
| £10,000 - £50,000 |
19/400 |
19/400 |
| £300,000 - £1,500,000 |
11/400 |
11/400 |
|
Capital allowances
A new Business Premises Renovation Allowance is to be introduced for companies and individuals incurring capital expenditure on bringing business premises, either owned or let, back into business use. The scheme will apply to property that has been vacant for a year or more situated in 'designated disadvantaged areas' of the UK. A 100% first-year capital allowance will be given for capital expenditure on renovating or converting vacant business properties. The allowance will provide an enhanced rate for expenditure that currently qualifies for plant and machinery, industrial buildings or agricultural buildings allowance and a new relief for expenditure on commercial buildings, including offices and shops. The scheme will apply once state aid approval has been granted.
International Accounting Standards
Various technical amendments are to be made to the legislation included in the Finance Act 2004 and regulations made in December 2004 dealing with the adoption of International Accounting Standards by large companies. These amendments include changes to the loan relationship rules, derivatives and intangibles legislation.
Securitisation special purpose companies are to be allowed to continue to use UK GAAP as it stands at 31 December 2004 for computing taxable profits for all accounting periods beginning in 2005 even if they apply International Accounting Standards. The definition of such companies is to be extended and the Finance Bill will contain a power to include regulations to establish a permanent regime for such companies.
Anti-avoidance measures applying retrospectively from 14 December 2004 are to be introduced to prevent companies from crystallising losses in advance of transition to International Accounting Standards in respect of loan relationships and derivative contracts.
Double tax relief
Legislation is to be introduced to clarify the amount of double tax relief available on foreign income that is a trade receipt for UK tax purposes, or on other income that is computed in a similar way for UK tax purposes (e.g. rents from foreign property). The legislation will define the expenses and related transactions that may be attributed to the foreign source income. The new rules will apply to companies from 16 March 2005 and to individuals and partnerships from 6 April 2005.
A general anti-avoidance clause, applying from 16 March 2005, is to be introduced to prevent excessive double taxation relief claims as a result of a highly contrived scheme or arrangement with tax avoidance as its main purpose, or one of its main purposes, and where the scheme falls within certain prescribed circumstances.
Additional anti-avoidance legislation, applying from 16 March 2005, is to be introduced to prevent two known avoidance schemes involving circumvention of the controlled foreign company legislation and obtaining credit for underlying foreign tax on income treated as UK dividends, but for which the overseas payer has obtained a deduction as interest.
Corporate intangible assets
Amendments have been made to the definitions of related parties and the market value rules, with effect from 16 March 2005, to stop recently disclosed avoidance schemes.
Payment entitlement under the single payment scheme for farmers is to be added to the classes of qualifying assets under the corporate intangibles legislation on or after 22 March 2005.
Extended relief for film makers and anti-avoidance measures
The Chancellor has again helped The British Film Industry by extending the tax relief for low budget films (those with production expenditure of up to £15 million) until 31 March 2006. This relief was introduced initially in 1997 and this is the third extension. In order to qualify, the first day of principal photography has to be before 1 April 2006 and the film must be completed before 1 January 2007. As previously announced in the 2004 Pre-Budget Report, a number of tax avoidance schemes surrounding film production were made ineffective from 2 December 2004, where the avoidance schemes sought to obtain double relief on film expenditure or used film relief alongside other arrangements, to defer tax for more than 15 years or in some cases indefinitely. The anti-avoidance measures also prevent film partnerships obtaining artificial loss relief. These anti-avoidance measures apply on or after 2 December 2004.
Incentive for spinout companies
The Budget has introduced an important measure to assist spinout companies, many of which have been created by universities, public sector research establishments and NHS trusts. These spinout companies usually benefit from transfers of intellectual property from the founding body and the employees of such companies normally acquire employment related shares. The new measure is effective from 2 December 2004 and allows companies to elect for deferment of PAYE and NICs until such time as the spinout companies are successful. This removes what was a serious barrier to the success of spinout companies.
Miscellaneous measures and anti-avoidance
The rules introduced by The Finance Act 2004 regarding compulsory disclosure of avoidance schemes to HM Revenue & Customs have now resulted in a list of schemes being blocked by new anti- avoidance measures in this Budget. The most notable of these include exploitation of group continuity rules for loans and derivatives to convert income into capital or the exploitation of different accounting treatments within the group. Schemes that exploited charges on income within corporate computations and also rent factoring schemes which attempt to bypass previous anti-avoidance by executing arrangements in excess of 15 years have also been blocked. These measures all take affect with effect from 16 March 2005.
This Budget brings a reform of taxation regarding collective investment schemes including authorised investment funds, unit trusts and open-ended investment companies. The proposed changes will exempt managers of such schemes from tax on chargeable gains where units are held on a temporary basis and also allow life assurance companies and friendly societies to hold units in unauthorised unit trusts without losing the chargeable gains exemption in certain circumstances. In addition, it will put on a statutory footing an existing HM Revenue & Customs practice of allowing amounts reinvested in accumulation units to be treated as a deduction on disposal of the units. This last measure will apply with effect from 16 March 2005 and the previous two from 6 April 2005.
As a result of representations received from the life insurance industry, the proposed legislation in the Pre-Budget Report 2004 has been significantly revised. In particular this legislation will prevent certain transfers of business from one life company to another where these artificially reduce taxable profits. In addition, there has been a clarification of a number of other issues identified as a result of the consultation.
Anti-avoidance legislation has been introduced to stop the exploitation of different tax treatments of the same entity in the UK and another country. A number of schemes have been set up where the same entity can obtain a double deduction for an expense or a deduction for a payment where no tax has been paid on the corresponding receipt. Such schemes usually exploit tax anomalies through a hybrid entity or a hybrid instrument. The new legislation will be invoked if four conditions apply: the company must be involved in a hybrid entity or a hybrid instrument scheme; there must be a UK tax advantage; one of the main purposes of the scheme is obtaining a UK tax advantage; and the tax involved is not 'minimal'. The legislation takes effect on 16 March 2005 but companies are to be given time to unwind arrangements where they are already in place and terminated by 1 July 2005 and do not involve connected parties.
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