CCH Live News - Budget 2012

Budget 2012

Corporate tax

Overview

Imagine that it is Christmas and that you are a child once again (I think it is safe to assume that no actual children are reading this). Will you wake early, eager to see if Santa has been? Will you rush downstairs once your parents have given the (reluctant) go-ahead? Will you tear at the wrapping paper, discarding ribbons and the like as you go? Not in this case because this is no ordinary Christmas. This year, Santa and his elves have been briefing the press. As far back as November, you learnt that you wouldn't be getting a bike. Too expensive, said the chief elf. Fortunately, you did hear on the news that Santa has held his ground and that you will be getting a train set. However, there's a catch. It has been reported that the train set is to be given over a number of years (you hope that you won't have to wait too long for the train).

So, like our imagined Christmas, was this year's Budget low on surprise and generosity? Not in the case of big business where, as in previous Budgets, George Osborne was keen to take on the role of Santa Clause. Back in 2010, the Government set out its road map for the reform of corporation tax. The aim was to make the UK's corporation tax system the most competitive in the G20 through, mainly, a phased reduction in the main rate of corporation tax down to 24 per cent, fundamental reform of the CFC regime and improved rules for the taxation of intellectual property (including the introduction of a patent box). Roll forward two years and much of this has already been delivered or is provided for by Finance Bill 2012. But now there is more.

In what will be a surprise to many people (some papers did predict it if predict is the right word) the main rate of corporation tax is to be reduced further to 24 per cent from April 2012, to 23 per cent from April 2013 and to 22 per cent from April 2014. This will mean a main rate only 2 percentage points higher than the small profits rate so it seems a safe bet that at some point the small profits rate will disappear (now that would be a simplification). The reduction in the main rate is, clearly, very good news although perhaps not for those individuals with the misfortune of having to prepare deferred tax calculations. I have some personal experience of this and can confirm that building rate changes into what are already complex calculations is not an easy task.

Of the other new announcements, the targeted support for the oil and gas industry and the creative sector stand out. For the oil and gas industry, the Government will act to bring greater certainty with regard to decommissioning expenditure amongst other changes. For the creative sector (the video games, animation and high-end television industries), a relief similar to that available to the film industry is expected (didn't Alistair Darling suggest this in his last Budget?). In a similar vein, the Chancellor again confirmed his intention to move to an above-the-line credit system for R&D relief for large companies. This follows on from the positive changes provided for by this year's Finance Bill which go beyond the much-publicised increase in the rate of relief for SMEs. The move to an above-the-line credit system for large companies. is particularly encouraging as it should increase the visibility of the relief and make it easier for companies to make use of it (it is confirmed in the Budget documents that loss-making companies will be able to claim a payable tax credit).

And what of the bad news? Banks will be disappointed to see another rise in the rate of the bank levy and those businesses keen to push the envelope will be concerned at the continued focus on anti-avoidance (in George's own words, aggressive tax avoidance is morally repugnant). In addition to the usual raft of targeted anti-avoidance rules (TAARs), the Chancellor also announced that we are to have a general anti-avoidance rule (GAAR) from next year. It is difficult to find fault with the GAAR suggested by Graham Aaronson although the amount of trust to be placed in HMRC may be a good place to start. It is to be hoped that the Government responds to the concerns which will be raised during the consultation process.

Returning to the Christmas analogy, my wish list would have included more help for small businesses. The reductions in the amount of annual investment allowance and in the rates of writing-down allowances take effect soon and it would have been good to have seen these reversed. However, it was not to be and there are still some positives for smaller businesses. The Government is now committed to looking at a simpler, cash-based tax system for unincorporated businesses with a turnover up to the VAT threshold (£77,000) and at standardised business expenses (which would allow fixed amounts rather than the actual amounts to be claimed). There is also the prospect of a new disincorporation relief and changes to tax administration for smaller businesses. All of these measures will be subject to a consultation process.

Stephen Relf MPhil ACA CTA is a tax writer with CCH specialising in corporate tax.

Detailed Budget Measures

Full reform of controlled foreign companies rules

The measure reforms the Controlled Foreign Companies (CFC) rules to introduce a modernised regime that fits with a move towards a more territorial corporate tax system and better reflects the way that businesses operate in a globalised economy.

CCH Comment:

The new regime will apply for accounting periods beginning on or after 1 January 2013. This is later than expected but that extra time may be valuable. We are some way from the end position yet as some aspects of the rules are still under discussion and further changes are likely to be made both before and after the Finance Bill

2012 is published later this month. However, there is much to like about the new regime and the Government are to be congratulated for responding to points made during the consultations.

For more details see the Tax Information and Impact Note.

Corporation tax reform: patent box

The patent box will allow companies to elect to apply a 10 per cent rate of corporation tax from 1 April 2013 to all profits attributable to qualifying patents, whether paid separately as royalties or embedded in the sales price of products. The regime will also apply to other qualifying intellectual property rights such as regulatory data

protection (also called ‘data exclusivity’), supplementary protection certificates (SPCs) and plant variety rights. Other non-qualifying profits in these companies will continue to be taxed at the main rate. The patent box will potentially benefit a wide range of companies which receive patent royalties, sell patented products, or use patented processes as part of their business.

CCH Comment:

Companies which are able to elect into the regime, and do so, will benefit from an effective rate of tax of 10 per cent on their profits from qualifying patents. It should be noted that although the new regime will take effect from April 2013, the benefits will be phased in over four years. Also, the reduction in the effective rate of tax will be achieved by the making of an additional deduction in arriving at taxable profits; the regime does not provide for a reduction in the main rate of corporation tax.

For more details see the Tax Information and Impact Note.

Research and development tax relief

Following consultation in November 2010 and June 2011, the Government intends to legislate improvements to R&D tax relief in Finance Bill 2012. In particular, for the small or medium enterprise (SME) scheme only:

  • the rate of additional deduction for a SME company will be further increased from 100 per cent to 125 per cent from April 2012, giving relief of 225 per cent in all;
  • to allow the increase in the additional deduction for SMEs while remaining within state aid limits, the rate of payable credit for SMEs will be reduced to 11 per cent, and vaccine research relief for SME companies will be withdrawn;
  • the rule limiting the amount of payable R&D tax credit to the amount of a company's PAYE/NIC liability will be removed; and,
  • the existing definition of when a company is a going concern will be clarified to confirm that companies in administration or liquidation are excluded from relief.

For the SME and large company schemes:

  • the requirement for minimum expenditure of £10,000 a year will be removed; and,
  • the scope of the definition of an externally provided worker will be widened.

CCH Comment:

There are some significant and welcome changes here, notably the increase in the rate of the additional deduction for SMEs. This means that, for every £100 spent on qualifying R&D on or after 1 April 2012, a SME will be entitled to tax relief of £225, giving a tax saving of £45 (at 20 per cent). Many small companies have

been reluctant to claim R&D tax credits in the past and it is to hoped that these changes will go some way to addressing this.

For more details see the Tax Information and Impact Note on the measure.

Enterprise zones: first-year allowances for designated areas

The measure will introduce 100 per cent first-year allowances (FYAs) for companies investing in plant or machinery for use primarily in designated assisted areas within Enterprise Zones.

CCH Comment:

This is good news for companies in the right areas. However, a number of challenging conditions apply, including that the expenditure is investment and not replacement expenditure and that it is incurred other than for the purposes of carrying on an existing business in its current form.

For more details see the Tax Information and Impact Note on the measure.

Capital allowances: feed-in tariffs and the renewable heat incentive

This measure will make changes to the capital allowances treatment of expenditure on plant or machinery to generate renewable electricity or heat to:

  • designate expenditure on solar panels as special rate for capital allowances purposes; and
  • ensure that enhanced capital allowances are not given for expenditure on plant or machinery where tariff payments are received under either of the renewable energy schemes introduced by the Department of Energy and Climate Change (DECC) – FiTs or the RHI.

CCH Comment:

Capital expenditure which is designated as special rate for capital allowance purposes still qualifies for the annual investment allowance (AIA). The AIA can be allocated as the taxpayer sees fit and allocating the AIA against special rate expenditure in priority to main rate expenditure can accelerate relief.

For more details see the Tax Information and Impact Note on the measure.

Capital allowances: fixtures

This measure will make the availability of capital allowances to a purchaser of fixtures conditional on:

  • previous business expenditure on qualifying fixtures being pooled before a subsequent transfer on to another person; and
  • a seller and purchaser using one of two existing procedures to fix their agreement about the value of the fixtures transferred within two years of the transfer; or, exceptionally,
  • the past owner providing a written statement of the amount of the disposal value of fixtures, which he had some time earlier been required to bring into account (for example, when he permanently ceased his business) within two years of a later sale of the property.

In addition, the legislation will make a technical change to enable plant and machinery capital allowances to be claimed by a new owner on any fixtures expenditure that has not already been relieved under the Business Premises Renovation Allowances (BPRA) scheme.

CCH Comment:

These changes are being made to ensure that expenditure on a fixture can only be written off once against taxable profits. The measure is expected to have a (relatively) small negative effect on taxpayers, increasing the Treasury’s coffers by approximately £30m each year. The additional administrative burden imposed on taxpayers may be more of a concern, although not for the Treasury: it is remarked in the TIIN that businesses are being asked to merely formally record and sign up to what ‘should currently be established and agreed less formally’.

For more details see the Tax Information and Impact Note on the measure.

Capital allowances: anti-avoidance rules for plant and machinery

The measure will make the capital allowances anti-avoidance rules more effective. Broadly, the transactions that will be affected are those involving plant or machinery where there is avoidance or that are part of a scheme or arrangement that involves avoidance.

Where there is a transaction to obtain a tax advantage – essentially one where the parties to the transaction have an avoidance purpose – the effect of the anti-avoidance rules will be:

  • to deny first-year allowances or annual investment allowance for expenditure on plant or machinery; and
  • to restrict the amount of allowances the buyer of the plant and machinery can claim so that the tax advantage that was sought is cancelled out.

For more details see the Tax Information and Impact Note on the measure.

Capital allowances – flat conversion allowances: repeal of relief

Flat conversion allowances (FCAs) were introduced in 2001. The scheme was designed to increase the availability of low cost rental accommodation in urban areas by providing 100 per cent capital allowances for the conversion of empty or under-used space above shops and other commercial premises to residential use. The flats must be available for short term letting. FCAs are not available if the flats are of high value or the property in which they are situated was built after 1980. Take-up of the scheme has been much lower than anticipated, suggesting that the relief has not been successful in achieving its objective and is now being repealed.

For more details see the Tax Information and Impact Note on the measure.

Capital allowances – safety at sports grounds: repeal of relief

Capital allowances are not generally available for capital expenditure incurred on the fabric of buildings. The safety at sports grounds reliefs were introduced between 1975 and 1988, specifically to reduce some of the capital costs sports ground operators were incurring as a result of having to upgrade their existing sports grounds to comply with revised safety standards, and which otherwise would not have qualified for capital allowances. The reliefs are no longer required as the Government considers that the stock of existing sports grounds have been brought up to the standards appropriate for their size and use, and the reliefs are therefore now being repealed.

For more details see the Tax Information and Impact Note on the measure.

Improvements to the real estate investment trust regime

The measure will make improvements to the REIT regime by addressing barriers to entry and investment in the regime, and reducing the costs of complying with the requirements of the regime.

Barriers to entry improvements include:

  • the entry charge paid by a company joining the regime is to be abolished;
  • the requirement for a REIT to be listed on a recognised stock exchange is to be relaxed; and,
  • the diverse ownership requirement a REIT has to meet is being reduced.

REIT condition improvements include:

  • the rules regarding the REIT's assets are being relaxed to reduce the likelihood that commercial decisions are being influenced by the conditions of the REIT legislation;
  • the condition regarding the level of borrowing for a REIT is being made simpler to comply with; and,
  • there are also a number of other minor changes to the regime.

For more details see the Tax Information and Impact Note on the measure.

Tax transparent fund

The measure will facilitate the appropriate tax treatment of the new regulated asset pooling vehicle, the tax transparent fund (TTF), covering capital gains and stamp taxes on shares. The new regulated vehicle is expected to be in place by summer 2012.

CCH Comment:

The introduction of the TTF was announced at the last Budget and it is hoped that this new vehicle will enable the UK to compete as a fund domicile for tax transparent funds. The Finance Bill 2012 includes legislation enabling the Treasury to make regulations to provide the intended tax treatment for investors.

For more details see the Tax Information and Impact Note on the measure.

Bank levy amendments

This measure makes technical amendments to ensure that the legislation applies as intended to the liabilities of joint ventures (JVs) and that these liabilities will be aggregated with the chargeable equity and liabilities of a foreign banking group or relevant non banking group.

For more details see the Tax Information and Impact Note on the measure.

Bank levy: rate change

As set out in Budget 2011, the Government intends that the Bank Levy should raise at least £2½ billion each year. To offset the forecast shortfall in receipts for 2011 and restore expected yield for future years above £2½ billion, the full rate of the Bank Levy will be increased to 0.088 per cent from 1 January 2012. A similar increase will be made to the half rate for chargeable equity and long term chargeable liabilities.

For more details see the Tax Information and Impact Note on the measure.

Solvency II and the taxation of life insurance companies

The measure will establish a new regime for the taxation of life insurance companies. It represents a wide ranging and fundamental revision of both the basis on which life companies' taxable profits are computed and the detailed rules by which those profits are taxed.

CCH Comment:

Changes to the rules were necessary following the EU Solvency II Directive but the opportunity has also been taken to simplify the tax regime for insurance companies and to bring it more in line with that applying for other companies. The new regime will have effect from 1 January 2013.

For more details see the Tax Information and Impact Note on the measure.

Lloyd's: stop-loss insurance

This measure will amend the tax treatment of premiums incurred by Lloyd's corporate bodies for member-level stop-loss insurance. It aims to align the timing of the tax deduction for the premiums with the recognition of the profits to which they relate.

For more details see the Tax Information and Impact Note on the measure.

Corporation tax: distributions in the form of assets and liabilities

This measure will ensure that the tax treatment of a transfer of an asset or liability is not determined by the country of residence of the participants in the transaction. This measure will ensure that the transfer of assets and liabilities between UK resident companies can be treated as a distribution for the purposes of corporation tax in all cases. A detailed change will also be made to clarify the interface between two overlapping provisions in the distributions rules.

CCH Comment:

The introduction of the broad exemption for distributions (in 2009) brought to light a number of issues with regard to the taxation of distributions. Some of those issues were addressed in 2010 but discussions continued on other areas. The measure described above will ensure that the tax treatment of transfers of assets between

companies will no longer depend on the residence of the companies concerned. Such transfers will now be distributions in all cases.

For more details see the Tax Information and Impact Note on the measure.

Amendments to the tax treatment of financing costs and income (debt cap)

This measure will amend Part 7 of the Taxation (International and Other Provisions) Act 2010 (TIOPA), the rules commonly called the debt cap. It will resolve a number of issues that have arisen on the application of the debt cap rules.

For more details see the Tax Information and Impact Note on the measure.

Changes to UK Generally Accepted Accounting Practice

This measure will ensure the current tax rules dealing with changes of accounting policy apply to the accounting transition adjustments arising as a result of changes to what constitutes UK GAAP.

CCH Comment:

Legislation applies to ensure that, in certain cases, income and expenditure are taken into account once where there is a change of accounting policy. This legislation will now extend to all changes of accounting policy including the changes to UK GAAP expected to be made this year.

For more details see the Tax Information and Impact Note on the measure.

Scope of the supplementary charge

Legislation will be introduced in Finance Bill 2012 to ensure the Supplementary Charge (SC) applies to ring fence chargeable gains, and to confirm that the scope of the SC matches the scope of Ring Fence Corporation Tax (RFCT).

The Government announced on 6 December 2011 that the legislation implementing both aspects of this measure will be effective from 6 December 2011, to prevent any potential future loss of tax to the Exchequer.

For more details see the Tax Information and Impact Note on the measure.

Mineral royalties relief: repeal

Mineral royalties relief was introduced in the 1970s, when income tax and corporation tax rates were very high. These high rates of taxation deterred mineral exploitation, as land owners were faced with either releasing their minerals for a negligible after tax sum, or with holding on to them. To the extent that the relief has affected landowner behaviour, much of this impact could be expected to have occurred already, given the length of time the relief has been in existence. As tax rates are now much lower than they were in the 1970s, the Government believes that the relief is no longer necessary and it is being repealed.

For more details see the Tax Information and Impact Note on the measure.

Harbour reorganisation schemes: corporation tax and stamp duty: repeal of reliefs

This measure repeals reliefs where the trade or assets of a company are transferred to a Harbour Authority under a certified harbour reorganisation scheme:

  • any assets transferred from the company to the Authority are treated as being transferred for a value that creates neither a gain nor a loss for the transferor;
  • any capital allowances, allowable capital losses or unused trading losses of the transferor company's trade are available to the Authority; and
  • no stamp duty is chargeable on the transfer of stock or marketable securities to the Authority.

The Government believes that the future need for these reliefs is low, and they are therefore being repealed.

For more details see the Tax Information and Impact Note on the measure.

Loan relationships: debts becoming held by connected company

This measure will amend legislation that applies to debts becoming held by a connected company. It will introduce a targeted anti-avoidance rule to counter arrangements that are entered into in order to avoid or reduce a deemed release where a connected creditor company acquires discounted or impaired debt, or where companies that are party to impaired debt become connected.

For more details see the Tax Information and Impact Note.

The London Legacy Development Corporation (Tax Consequences) Regulations 2012

The regulations deal with income tax, corporation tax and stamp duty land tax consequences that would otherwise arise from transfers of property, rights and liabilities of OPLC, and the trading stock of LTGDC, to LLDC.

Corporation tax: main rate

The measure adds an additional one per cent to the previously announced reduction of the CT main rate, setting the CT main rate at 24 per cent for the financial year beginning 1 April 2012 and at 23 per cent for the financial year beginning 1 April 2013.

For more details see the Tax Information and Impact Note.

Bank levy: 2013 rate change 

As set out in the 2011 Budget, the Government intends that the Bank Levy should raise at least £212 bn each year. To ensure the Bank Levy raises at least £212

bn each year, and takes account of the benefit to the banking sector from the additional reductions in corporation tax, the rate of the Bank Levy will increase to 0.105 per cent from 1 January 2013. A proportionate increase to 0.0525 per cent will be made to the half rate, also with effect from 1 January 2013.

For more details see the Tax Information and Impact Note.

Corporation tax: grouping rules

The measure makes changes to the grouping provisions relaxing the normal commercial loan rules for loan notes carrying a right of conversion into unconnected companies listed on a recognised stock exchange.

For more details see the Tax Information and Impact Note.

General insurance: claims equalisation reserves

This measure will repeal the current legislation for the tax treatment of CERs. Regulations will be made by HM Treasury to cover equivalent reserves maintained by corporate and partnership members of Lloyd’s.

The measure will introduce a rule to tax built-up CERs in equal amounts over a six-year period commencing from the date the Solvency II Directive solvency requirements come into force. Alternatively, in any year during the transitional period, an election may be made to tax the remaining balance of the built-up reserve that has not yet been subject to tax.

For more details see the Tax Information and Impact Note.

Field allowances

A package of changes to field allowances comprising:

  • changes to the amount and qualifying criteria of the current small field allowance;
  • a new category of ‘qualifying oil field’, being a field meeting specific criteria which are targeted at the West of Shetland; and
  • an amendment to the field allowance legislation giving the Commissioners for HM Revenue and Customs (HMRC) the power to extend the allowance to oil and gas fields that have already received development approval and are to undergo additional development.

For more details see the Tax Information and Impact Note.

Update of the Enhanced Capital Allowances schemes for energy-saving and environmentally beneficial (water-efficient) technologies

This measure updates the lists of technologies and products covered by the energy-saving and water-efficient Enhanced Capital Allowances (ECA) schemes.

These two schemes are targeted at plant and machinery which is widely used by businesses, but where more efficient alternatives are available. The schemes allow 100 per cent of the cost of qualifying plant and machinery to be written off against taxable profits of the period in which the investment is made, benefiting a business’s cash flow.

For more details see the Tax Information and Impact Note.

Tax avoidance: corporate settlor-interested trusts

The measure will amend the settlements legislation to confirm that income which arises under a settlement and originates from any settlor who is not an individual is not treated as that of the settlor.

For more details see the Tax Information and Impact Note.

Sale of lessor companies: protecting revenues

The measure changes the sale of lessor company provisions to maintain the effectiveness of the legislation in protecting revenues.

For more details see the Tax Information and Impact Note.

Plant and machinery leasing: anti-avoidance

A lessee of plant or machinery under a long funding lease is entitled to claim capital allowances and is required to bring in a disposal value at the end of the lease according to a specified formula. Arrangements have been seen in which payments connected to the lease for the benefit of the lessee have not been brought into account in that formula.

The measure confirms that businesses engaging in transactions of this type are required to bring all relevant expenditure and receipts into account in arriving at disposal value.

CCH Comment:

This measure is in response to disclosures made under the DOTAS rules and, in common with similar measures, applies from 21 March 2012.

For more details see the Tax Information and Impact Note.

Site restoration payments

This measure counters avoidance involving site restoration payments.

For more details see the Tax Information and Impact Note.