Business Tax and Investment Incentives
Corporation Tax
| Corporation tax rates and bands are as follows: |
| Financial Year to |
31 March 2005 |
31 March 2004 |
| 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% |
| |
| Small company’s marginal relief fraction |
| £10,000 - £50,000 |
19/400 |
19/400 |
| £300,000 - £1,500,000 |
11/400 |
11/400 |
|
Small company dividends
Since the introduction of the 0% starting rate on company profits of £10,000 or less, companies
have been able to make distributions out of profits which have borne little or no charge to
corporation tax. The Chancellor has now introduced a measure for distributions made on or after
1 April 2004 whereby all distributions to non-companies must be out of profits which have borne a
minimum rate of 19% corporation tax. Dividends paid to corporate shareholders will not be affected.
Companies which do not distribute profits will not be affected by this measure and will still be able
to take advantage of the starting rate and small companies marginal relief.
Alongside the above measure there is a proposal to notify commencement of a company’s trade
within three months of starting the trade and this would bring the rules for companies broadly in line
with those which currently apply to the self-employed.
The rate of first year allowance that can be claimed by small businesses increases from 40% to 50%
on plant and machinery expenditure. The relief applies to most expenditure, but excludes cars, long
life assets and assets for leasing.
The increase will apply to companies on or after 1 April 2004 and on or after 6 April 2004 for
businesses subject to income tax. The relief has been granted for a year.
The rate of first year allowance for medium sized businesses remains at 40%. The 100% first year
allowance for small businesses in respect of computers and communication technology ceases on
31 March 2004.
Research and development tax credits
New clearer guidelines have been issued on the definition of research and development and will
apply for company accounting periods ending on or after 1 April 2004. The new definition of
research and development will apply not only to the research and development tax credit, but also
to research and development allowances and various investment reliefs.
As announced in the Pre-Budget Report, qualifying expenditure for research and development tax
credit is being expanded to include expenditure on software, power, fuel and water.
For large companies the changes will take effect from 1 April 2004 and for small and medium sized
businesses at a date to be announced once State aid approval has been received.
Venture capital schemes
The Chancellor has introduced a number of measures which will affect the Enterprise Investment
Scheme, the Corporate Venturing Scheme, the Venture Capital Trust Scheme and also the treatment
of venture capital losses. Under the Enterprise Investment Scheme the annual investment limit is to
be raised from £150,000 to £200,000 for shares issued on or after 6 April 2004. There will also be a
relaxation of the ‘same day rule’ with immediate affect. Furthermore there is also a relaxation of the
rules concerning repayment of loans to investors in that they will not automatically be denied relief
for subsequent investments in the same company.
The main change to the treatment of venture capital trusts (VCT) is that income tax relief will now be
increased to 40% from 20%. This will apply to shares issued in the period 6 April 2004 until 5 April
2006. On the other hand capital gains tax deferral relief will not be available for reinvested gains in
VCT shares issued on or after 6 April 2004. In addition the annual investment limit for individuals will
be raised from £100,000 to £200,000 with effect from 6 April 2004.
For all Venture Capital Schemes there is a welcome relaxation in the rules governing subsidiaries.
Up until now qualifying companies had to own 75% of the subsidiary and the new proposed
measure is that this requirement will be reduced to 51% except for subsidiaries which hold or
manage property for which the current 90% requirement will still apply.
Enterprise management incentives (EMI)This Budget has seen the introduction of an important relaxation of the qualifying conditions for
companies granting EMI share options. Under the current rules qualifying companies are not
permitted to have subsidiaries unless they are 75% owned. As from Budget Day this requirement
has been removed making it easier for companies to take advantage of this incentive and facilitate
the retention of key employees.
International accounting standards (IAS)
There has been much publicity about the introduction of, and compliance with, international
accounting standards in 2005. Whilst generally this will apply to listed companies other companies
may choose to adopt these standards. The Chancellor’s announcement today has ended the
uncertainty surrounding compliance with these standards in terms of whether the results would be
accepted for UK tax purposes. For accounting periods beginning on or after 1 January 2005,
accounts produced under IAS will be valid for UK tax purposes. This is clearly a welcome measure
for business as it will avoid all the complications and costs that would have resulted from having to
prepare two sets of accounts on different bases. In particular the changes will cover the treatment
of intangible fixed assets, research and development, loans, derivative contracts and accounting
currency.
Transfer pricing
As part of the reform of corporation tax and to counter the effects of decisions of the European
Court, legislation is to be introduced to extend the transfer pricing rules to apply to transactions
between connected businesses not only cross-border but within the UK.
The revised rules will apply to all large companies. Small and medium sized businesses will be
exempt from the rules in most circumstances.
The changes to the rules will apply to the calculation of profits on or after 1 April 2004. There will be
a temporary relaxation of penalties for failing to keep evidence to demonstrate an arm’s length result
until 31 March 2006. Companies that are dormant as at 1 April 2004 will be exempt from the rules
for as long as they remain dormant.
Management expenses
Relief for the expenses of managing investments is to be extended from 1 April 2004 to all
companies, whether or not they currently qualify as investment companies.
The timing of relief of management expenses will be amended from when ‘disbursed’ to align with
the accounting treatment. Capital expenditure will specifically be excluded from deduction as a
management expense.
UK permanent establishments of non-resident companies will now be able to obtain relief for the
costs of managing their investments.
Miscellaneous measures
Companies planning to set up operations in mainland Europe will probably welcome the
introduction of the European Company Statute which comes into force on 8 October 2004. This will
permit the formation of a ‘European company’ which clearly will facilitate trading across a number
of European states. Although this is an EU regulation it does require the introduction of secondary
legislation in the UK to enable its implementation. The formation of such companies will require a
number of tax changes and the Government has indicated that a consultation will be required to
include draft Finance Bill clauses in 2005.
An anti-avoidance measure has been introduced affecting companies who are members of
partnerships. Under current law it is possible for profits and capital to be allocated in the most tax
favourable way so that a partner not liable to UK tax could be allocated a disproportionate part of
profits and a partner liable to UK tax a disproportionate part of capital. From Budget Day a corporate
partner will be charged corporation tax on increases in its capital account which in reality represent
a profit share if profit had been allocated in proportion to partnership capital.
With effect from 6 April 2005 employees will be able to receive up to £50 a week of childcare
contracted by their employers with an approved child carer free of tax and national insurance.
Small community amateur sports clubs will welcome the increase in the tax threshold below which
they will not have a corporation tax liability. The current thresholds will double, i.e. trading income
less than £30,000 and profits derived from property if the gross property income is less than
£20,000. These thresholds take effect from 1 April 2004. Those clubs falling below the threshold will
also be exempt from completing an annual tax return.
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