The government has moved to discourage small businesses from incorporating for tax reasons by increasing the tax they will pay on profits up to £300,000, from 19% to 20% with effect from 1 April 2007. The small companies’ corporation tax rate will further increase to 21% in 2008 and to 22% in 2009.
In contrast the corporation tax paid by large companies with profits of £1.5 million or more will be cut from 30% to 28% from 1 April 2008. However companies with ring fenced North Sea oil and gas activities retain the current corporation tax rates of 19% and 30%.
The effective marginal corporation tax rate for profits between £300,000 and £1.5 million is 32.5% from 1 April 2007.
| Comment These corporation tax changes for small companies mean the tax due on profits made within a company will exceed the income tax payable on the same amount of profits made by a sole trader or partner, as the basic rate of income tax will drop to 20% from 6 April 2008. However, an individual will also have to pay Class 4 national insurance on his self-employed profits. The overall effect of the measures will be to reduce considerably the tax advantages of incorporation. |
The system of capital allowances is to be significantly revised from 2008/09. The proposals are:
In addition the following changes will be subject to consultation:
The current 50% first year allowance for plant and machinery which can be claimed by small businesses, which was due to expire in April 2007, will be extended to April 2008. The capital allowances that can be claimed on business cars have not altered but proposed changes to the rules are being consulted on further.
| Comment These changes to capital allowances remove many complicated calculations that must be performed on the sale of a building. The annual investment allowance may encourage smaller businesses to invest but in practice it will not affect the purchasing decisions of larger companies. |
In March 2006 the government issued a discussion document about business expenditure on cars. As a result of consultation, revised proposals have been issued.
The proposals are that:
As a consequence there would no longer need to be a specific distinction between cars costing more or less than £12,000.
In 2005 legislation was enacted to provide a 100% capital allowance to businesses or individuals who renovate business premises which have been empty for at least one year. This tax relief is to be brought into effect from 11 April 2007 with the following limitations:
In 2004 the landlords energy saving allowance was introduced to provide tax relief for the cost of insulation installed in let residential properties, up to maximum of £1,500 per building. The following changes are proposed:
Research and development (R&D) tax relief gives enhanced tax relief to companies who undertake qualifying R&D projects. The company must spend at least £10,000 on qualifying items in one year. The proposed changes, subject to state aid approval, are:
| Comment The increased R&D tax relief may make the tax relief more attractive to companies who had not previously claimed this relief but in practice it will still be difficult to ensure the project falls into the tight definition of R&D to qualify. |
The new Construction Industry Scheme will be introduced on 6 April 2007. Subcontractors may be entitled to receive payments without deduction of tax if they have satisfied certain criteria. Otherwise a standard deduction rate of 20% will apply for registered subcontractors.
A higher deduction rate of 30% is introduced to allow unregistered subcontractors to start work. One of the purposes of the higher rate is to encourage subcontractors to register with HMRC for the scheme.
From 6 April 2007 companies that raise additional funds under the Enterprise Investment Scheme (EIS), Venture Capital Trust (VCT), or the Corporate Venturing Scheme (CVS) will have the following restrictions imposed:
The definition of a qualifying subsidiary is relaxed to include direct 100% subsidiaries of 90% subsidiaries.
Currently, a VCT must have at least 70% of its investments in qualifying holdings. This means that a VCT may not be able to sell a holding without breaching this test. The rules are relaxed to allow a six month period to reinvest cash received from the disposal of a qualifying investment.
Also for EIS 90% of funds raised must be used in the trade within 12 months, an extension from the current six month period, for approved funds with a closing date on or after 7 October 2006.
| Comment The restrictions on the amount of funds that can be raised and the number of employees may reduce the size of company that can qualify for venture capital relief and as such may make investments under these schemes more risky. However the lengthening of the period during which funds can be held before being invested in a qualifying trade may allow managers to make more considered investment decisions. |
Where a partner makes a tax loss that individual can normally off-set the loss against their other income or capital gains (sideways loss relief). Currently, the amount of sideways loss relief a non-active partner can claim in one tax year is restricted broadly to the amount of capital that the partner has contributed to the partnership. A non-active partner is one who spends less than 10 hours a week involved in the partnership business, or has limited liability.
New legislation will exclude capital contributions paid by non-active partners on or after 2 March 2007, where the main purpose for contributing the capital to the partnership is for the partner to have access to losses sustained after that date for which sideways loss relief could be claimed. In its place there will be an annual cap of £25,000 on the amount of trading losses for which a non-active partner can claim sideways loss relief.
These provisions will not apply to losses derived from ‘relevant film related expenditure’.
The CFC tax rules potentially apply to tax UK companies with subsidiary companies operating in low tax jurisdictions. A proportion of the profits may be subject to UK tax if the profits are not paid by the subsidiary to the UK company. Following the recent European Court of Justice (ECJ) judgment in the Cadbury Schweppes case, changes have been made to the CFC rules, effective from 6 December 2006, to change the law to reflect the decision.
The changes will relax UK CFC rules by enabling UK companies to apply to HMRC to disregard those profits of their CFCs that arise from genuine economic activity in business establishments in other European Union Member States or certain other states in the European Economic Area.
The government will consult with business in 2007 on a wider package of reform.
In October 2006, in the Deutsche Morgan Grenfell case, the House of Lords determined that a company had paid tax earlier than it need have done under a ‘mistake of law’. The mistake could be held to have been discovered only when the ECJ gave its judgment in a similar case in March 2001.
The effect of this is to potentially allow similar claims for overpayment of tax back to 1973 and overrides the normal limitation period of bringing claims within six years of the event giving rise to the claim.
Legislation in 2004 has already removed the ability to make a claim on or after 8 September 2003 for events outside the six year limitation period. New provisions will be introduced in the Finance Bill which will remove the ability to continue with tax claims involving a mistake of law which were started before 8 September 2003 (except where the Courts have given final judgment before 6 December 2006).
A disclosure regime for tax schemes was introduced in 2004 that has enabled HMRC to respond to avoidance schemes more swiftly. The government has announced a number of measures to tackle artificial schemes brought to light under the disclosure rules.
HMRC will be given powers to investigate schemes where there are reasonable grounds to believe that a promoter has failed to comply with the statutory disclosure obligations.
| Comment Charities which have a small non primary purpose trade may already be exempt under legislation introduced in 2000. |