The first Budget speech by Chancellor George Osborne was as keenly anticipated for its “swingeing” cuts in public spending and welfare as the feared tax rises a Conservative-Liberal Democrat coalition would deliver in the aftermath of the global financial crisis and worries over the security of sovereign debt.
Both expectations were met by Mr Osborne in a 55 minute address to the House of Commons as a new financial rule of thumb was introduced: The fiscal deficit should be tackled by 80 per cent spending cuts and 20 per cent tax rises. The main points of note in the sphere of corporate tax follow.
Corporation Tax: Phased Reduction in Headline Rate to 24 Per Cent
Over the next four years, the main rate of corporation tax (other than for ring fence profits, i.e., profits from UK oil and gas exploitation) will be reduced by 1 per cent per year from the current rate of 28 per cent to 24 per cent. This is aimed at making the United Kingdom more business-friendly and is part of a wider change of approach which aims to simplify and stabilise the tax environment for business. The main rate applicable to ring fence profits will remain at 30 per cent.
Corporation Tax: Reduction in Small Profits Rate
From 1 April 2011, the rate of corporation tax applicable to companies (other than closed investment-holding companies) which have profits below the lower limit (currently at £300,000) will be reduced for non-ring fence profits from 21 per cent to 20 per cent. The rate for ring fence profits will remain at 19 per cent.
Corporation Tax: Reform
The Government is planning to consult on reforms to taxation of intellectual property and to continue efforts to simplify other areas, such as the capital gains rules for groups of companies. An overhaul of the Controlled Foreign Companies rules is planned for 2012 with further consultation this summer on interim improvements to be introduced in 2011. A more territorial approach is to be taken in taxing foreign branches and the Government will consult on options for retaining branch loss relief. In addition, a business forum will be established and chaired by the Exchequer Secretary to the Treasury to consult with multinational businesses on the United Kingdom’s competitiveness.
Capital Allowances: Rate and Annual Investment Allowance Changes
Writing-Down Allowances (WDA)
In order to meet the cost of the reduction in the rates of corporation tax, the rate of capital allowances is being reduced. The general rate of plant and machinery WDA is currently 20 per cent per annum on a reducing balance basis. For expenditure on long-life and certain other assets the rate of plant and machinery WDA is currently 10 per cent per annum on a reducing balance basis.
The main rate of WDA will be reduced from 20 per cent to 18 per cent and the special rate from 10 per cent to 8 per cent from 1 April 2012 (corporation tax) or 6 April 2012 (income tax). The rate changes will have effect from a fixed date, so for those businesses where the chargeable period spans the change date hybrid rates will have effect for the whole of that transitional chargeable period. Oil and gas ring fence activities will retain their existing capital allowances treatment.
Annual Investment Allowance (AIA)
The limit on expenditure for which the AIA can be claimed will be reduced from £100,000 to £25,000 of expenditure per annum from April 2012. The AIA is effectively a 100 per cent first-year allowance for business expenditure on almost all plants or machinery (apart from cars). It is available to businesses regardless of their size or legal form, and was introduced for expenditure incurred on or after 1 April 2008 (for corporation tax purposes) or 6 April 2008 (for income tax purposes).
Banks: New Balance Sheet Levy
Following in the wake of the tax on bank bonuses, the Chancellor announced a new levy on banks imposed according to the liabilities on their balance sheet but excluding Tier 1 capital, insured retail deposits, repos secured on sovereign debt and policyholder liabilities of retail insurance businesses within banking groups.
The new levy (which will not be deductible for UK corporation tax purposes) will apply to the consolidated balance sheet of UK banking groups and building societies, the aggregated subsidiary and branch balance sheets of foreign banks and banking groups operating in the United Kingdom and the balance sheets of UK banks in non-banking groups.
It is proposed that the levy will be set at 0.07 per cent with a lower transitional rate of 0.04 per cent applying in 2011-12. There will also be a reduced rate for longer-maturity wholesale funding (i.e., more than one year remaining to maturity) to be set at 0.02 per cent for 2011-12, rising to 0.035 per cent thereafter. France and Germany have also committed to introducing similar levies.
In addition, the Government will consider introducing a tax on financial activities as part of the Financial Services Authority’s review of the Remuneration Code of Practice (published in August 2009 in response to the public criticism of the incentive practices of large banks and other financial institutions).
Clarification on the treatment of capital distributions has been eagerly awaited since the beginning of the year when the availability of the recently introduced dividend exemption for company dividends received by UK companies was thrown into doubt. The legislation in Part 9A of the Corporation Tax Act 2009 extended the exemption to foreign distributions but excluded both UK and foreign distributions of a “capital” nature.
Until recently, established practice has been to treat UK distributions as being of an income nature subject only to some specific exceptions. Rewrite drafting in the Income Tax (Trading and Other Income) Act 2005 made this treatment impossible to sustain but was not noticed, and HM Revenue & Customs (HMRC) did not change its practice until after the introduction of the exemption regime in 2009.
The existing rule that limits the application of the distribution exemption regime to distributions of an income nature will therefore be removed. This change will have effect for all distributions made on or after 1 July 2009.
The new legislation will also make clear that distributions made out of reserves arising from a reduction in capital are distributions for the purposes of the dividend exemption. This change will have full retrospective effect for distributions by UK resident companies and will apply to distributions made on or after 1 July 2009 by non-UK resident companies. Recipient companies will be able to opt for the retrospective effects of this legislation not to apply.
Income Tax: Personal Allowance, Basic Rate Limit and National Insurance Thresholds for 2011-12
The personal allowance for persons aged under 65 will be £7,475 for 2011-12. The basic rate limit will, however, be reduced to prevent higher rate taxpayers from benefiting from an increased personal allowance.
For National Insurance, the secondary threshold for employers will rise by £21 a week above the level that indexation would reach. The exact level of the secondary threshold for 2011-12 will not be known until publication of the retail price index for September. The secondary threshold change is in addition to the increase in the primary (employee) threshold already planned for 2011-12 and the 1 per cent rise in rates.
Capital Gains Tax: Rates and Entrepreneurs’ Relief
The rate of capital gains tax for higher rate taxpayers (or where a portion of the taxable gains exceeds the basic rate band for income tax) will increase from 18 per cent to 28 per cent. The rate for gains not exceeding the basic rate band for income tax will remain at 18 per cent. The lifetime limit of gains for entrepreneurs’ relief (tax at 10 per cent) will be extended to £5 million (increased by the March Budget to £2 million). Each of these changes takes effect for disposals on or after 23 June 2010.
Non-UK Domiciled Individuals
As noted in the coalition’s programme for government, it was confirmed that there would be a review of the taxation of non-domiciled individuals. It remains, however, unclear how the tax position of such individuals will be affected.
VAT: Increase in Rate to 20 Per Cent
The rate of VAT was widely expected to increase, conforming with other large European Union Member States. The new rate of 20 per cent takes effect from 4 January 2011. The change in rate is accompanied by detailed anti-forestalling legislation to tackle avoidance of the higher rate.
General Anti Avoidance Rule (GAAR)
The documents published on Budget Day included a new approach to tax policy making. The stated objectives of the Government are predictability, stability and simplicity, with particular emphasis on tackling avoidance. At this stage, however, the Government commits only to engage informally with interested parties over the summer to explore whether there is a case for developing a UK GAAR, in the context of other planned changes to corporate tax.
As previously announced, rules will be introduced to prevent avoidance of tax where accounting practice allows or requires a loan or derivative or its associated cash flows to be “derecognised”. The tax rules will override the accounting practice and require the profits and losses to be computed as if the asset in question had been fully recognised.
Authorised Investment Funds
Rules will be introduced to prevent the artificial creation, inflation or repayment of the deemed tax attached to an annual payment made by an authorised investment fund.
Other Areas of Focus
The Government will also seek to tackle employee benefit trusts which avoid, defer or reduce the liabilities of employees and directors to income tax, national insurance or which avoid restrictions on pensions tax relief. Plans to counter manipulation of consortium relief were also confirmed.