Business Taxation

• Capital allowances
• Research and development expenditure
• Goods appropriated from trading stock
• Anti-avoidance provisions
• Small companies relief: associated company rules
• Charities
• Entrepreneurs' relief
• Approved occupational pension schemes
• Aggregates levy
• Landfill tax
• Postponement of plans re income shifting

Corporation tax rates and bands
Financial Year to	31 March 2009	31 March 2008
Taxable Profits	%	%
First £300,000	21	20
Next £1,200,000	29.75	32.5
Over £1,500,000	28	30
Small companies marginal relief fraction
£300,000 - £1,500,000	7/400	1/40

The small companies' rate increases to 22% from 1 April 2009.

Capital allowances

This Budget sees the introduction of significant changes to the capital allowances regime many of which had been announced in the business tax reform package as part of the 2007 Budget. The key measures are:

• The withdrawal of industrial buildings allowances (IBAs), enterprise zone allowances (EZAs) and agricultural buildings allowances (ABAs).
  
  IBAs and ABAs will be subject to a phased withdrawal starting with chargeable periods ending on or after 1 April 2008 for corporation tax and 6 April 2008 for income tax. The phasing out of IBAs and ABAs will be done by reducing the amount of allowance by 25% p.a. over the 3 year period. EZAs will be withdrawn for corporate tax payers for chargeable periods ending on or after 1 April 2011 and 6 April 2011 for income tax payers.


• There will be a new classification within the capital allowance legislation of 'integral features'. The list of assets falling within the definition will include electrical power and lighting systems, cold water systems, air conditioning, lifts and some others. Expenditure on such assets on or after 1 April 2008 for corporate tax payers and 6 April 2008 for income tax will go into a new "special rate pool" and attract writing down allowances (WDAs) at the rate of 10% p.a.


• The rate of WDAs for plant and machinery (including cars) will be reduced from 25% p.a. to 20% p.a. , this will be effective for chargeable periods ending or after 1 April 2008 for corporation tax and 6 April 2008 for income tax. For businesses whose accounting periods straddle these dates a pro rata hybrid rate will be used.


• Extension of the 100% first year allowance (FYA) for expenditure on refuelling equipment for natural gas, biogas and hydrogen for a further 5 years to 31 March 2013. In addition the 100% FYA in respect of low emission cars (emitting 110g of CO₂ or less per km) will also be extended over the same 5 year period, but the emissions limit will reduce to 110g/km from 1 April 2008.


• The new annual investment allowance (AIA) previously announced will take effect for capital expenditure incurred on or after 1 April 2008 for corporation tax purposes and 6 April 2008 for income tax purposes. The AIA will give a 100% allowance for the first £50,000 of capital expenditure on most plant and machinery (except cars) regardless of the business's size. Expenditure in excess of this figure will be subject to the ordinary rules for capital allowances. There are special rules for associated companies and groups, and the allowance will not be available to partnerships which include limited companies.


• The introduction of first year tax credits which will enable loss making companies to claim a cash payment from the Government if they are unable to fully relieve their 100% FYA in respect of certain designated energy-saving or environmentally-beneficial plant and machinery. This measure will apply to expenditure incurred on or after 1 April 2008, and will provide a payable tax credit of 19% of the losses surrendered. There are certain anti-avoidance provisions including a claw-back in the event of a sale of the equipment within a four year period.


• Small pools of plant and machinery expenditure (and the new special rate pools) where the pool total amounts to £1,000 or less can be written off and claimed in full. This measure is to help small businesses who otherwise would have to claim WDAs every year on insignificant unrelieved expenditure. This measure was dovetailed with the AIA referred to above. This measure takes effect for chargeable periods beginning on or after 1 April 2008 for corporation tax and 6 April 2008 for income tax.


• Enhanced capital allowances; the energy efficient and water saving (environmentally-beneficial) schemes, are to be extended by introducing an additional technology on the water technology criteria' list. This list is to be extended to include assets relating to waste water recovery and reuse systems. There are four additional sub-technologies to the energy technology criteria list:
  
  
  1. compressed air master controllers
  2. compressed air flow controllers
  3. heat pump dehumidifiers and
  4. white LED lighting. Housekeeping changes will also be made to the existing criteria

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Research and development expenditure

Another pre-announced tax reform is an increase in the rate of relief available for research and development expenditure and vaccine research expenditure (VRR). For small and medium sized companies (SME) the relief will increase from 150% to 175% of the expenditure and for large companies the increase is from 125% to 130%. The effective date will be announced by way of a Treasury order when the proposals have been cleared with the EC. A cap is also being introduced to restrict the amount of relief available under the SME and VRR schemes to €7.5m per R&D project.

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Goods appropriated from trading stock

The 2008 Finance Act will give statutory backing to the long standing tax rule that goods appropriated from trading stock other than by way of trade should be accounted for at their market value. Under UK GAAP such appropriations would generally be accounted for at cost or disposal proceeds and therefore this has often resulted in an adjustment in computing taxable profits. The statutory rule will put the matter beyond any doubt in the future. The measure takes effect from 12 March 2008.

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Anti-avoidance provisions

This Budget follows the now familiar pattern of using Budget day to introduce a raft of anti-avoidance provisions the most significant of which are detailed below:

• Leasing arrangements have again come under scrutiny and a further measure has been introduced to counter businesses exploiting differences between the taxation treatment of lease payments and lease income on the same items of plant. Another device which is being blocked is the granting of a lease in exchange for a capital payment or premium in circumstances where the capital payment escapes tax. These measures will generally have effect from 13 December 2007. Draft legislation has also been published dealing with avoidance schemes used by companies leasing plant or machinery and selling the right to the rental income.


• A number of schemes have been notified to HM Revenue and Customs involving large companies which enter into arrangements to avoid tax on returns from investments that are economically equivalent to interest. Six different areas of avoidance have been identified and the draft legislation will block these mostly with effect from 12 March 2008.


• Controlled foreign companies (CFCs) are again under the spotlight following the use of a number of avoidance schemes which relied on the use of a partnership or trust to escape a CFC charge. Such schemes misused one of the exemptions by arranging for profits to be earned purportedly outside of the scope of the rules. Such arrangements are blocked as from 12 March 2008.


• Corporate intangible assets can under certain circumstances qualify for relatively favourable tax treatment. However a key factor in determining whether the intangible assets qualify for this treatment is establishing whether the assets are 'existing assets'. Assets created before 1 April 2002 and transferred between related parties on or after that date are existing assets. In order to circumvent this rule companies have used liquidation, administration or similar arrangements to claim that the company is no longer a 'related party'. The Finance Act 2008 will contain sections to ensure that such arrangements are ineffective for the purposes of getting round the related party rules.


• Anti-avoidance legislation is being introduced with effect from 12 March 2008 to counter in certain circumstances the acceleration of capital allowances on the sale of a trade by a company. This could arise where the market value of the plant used in a trade was substantially less than its tax written down value. The scheme operates by a profitable group buying a loss making company and then selling on its trade a short time later. This would crystallise a large balancing allowance for the profitable group.


• Individuals who incur trading losses in businesses to which they devote less than 10 hours per week on average on the commercial activities will be limited to a maximum of £25,000 of "sideways loss relief" and so will no longer be able to claim these losses against other income sources or gains. If they entered into the arrangements for tax avoidance they will be entitled to no "sideways loss relief". Transitional rules apply where the basis period in which the loss arose straddles Budget day and consequently "sideways loss relief" maybe restricted for losses that arose before Budget day. This is to counter perceived avoidance arising from contrived trading arrangements, and mirrors a similar restriction applicable to partnerships. This measure takes effect on 12 March 2008.

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Small companies relief: associated company rules

This complex area of corporation tax law is still under review. However, in advance of potential major simplification, new legislation will ensure that companies will not be regarded as associate merely by virtue of being under the control of individuals who are partners in the same firm.

With effect on and after 1 April 2008 the associated companies rules are simplified as they apply to the small companies rate of corporation tax.

The small companies' rate currently applies to companies whose profits are less than £300,000. Where profits are above £300,000, but below £1,500,000, a marginal rate (29.75% from 1 April 2008) applies. These limits are reduced proportionately for companies 'associated' with other companies.

'Associated' generally means being under common control. The definition of 'control' is being changed for the small companies' relief. The change will ensure that the rights or powers held by a business partner will be attributed only when 'relevant tax planning arrangements have at any time had effect in respect of the taxpayer company'.

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Charities

Charities will be compensated for the loss of tax claims on gift aid due to the reduction in the basic rate from 22% to 20%. The Government will pay a transitional relief supplement of 2% for gift aid donations made on or after 6 April 2008 but before 5 April 2011. Claims will continue to be paid at new basic rate of 20% and the supplement will be paid separately.

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Entrepreneurs' relief

Details have been awaited for some time of the new relief for the disposal of businesses and business assets which will apply from 6 April 2008. Now that that draft legislation is available it is clearer what will - and what will not - attract relief.

The relief is available where an individual (or in certain circumstances, a trustee) makes a 'material disposal' of his or her business. This includes the sale of the business as a whole, the sale of an interest in a partnership, and the sale of shares in a qualifying company. To qualify for relief on the sale of shares, the shareholder must own at least 5% of the ordinary share capital in the company, and as a result can exercise 5% of the voting power, and be an officer or employee of the company. The company must be a trading company or holding company of a trading group as currently defined for business asset taper relief.

The conditions of ownership need to be in place for at least 12 months before the disposal for relief to be available.

Where the material disposal comprises a sale of shares or of a share in a partnership, the disposer can also claim relief against the gains on the disposal of an asset which was used in the business. The later disposal can take place within three years of the disposal of the business interest, although the relief is restricted where rent has been charged on the property.

The sale of assets without the sale of the business, or the cessation of trade will not qualify for relief. This will affect farmers who sell off parcels of land, which presently qualifies for taper relief, but will not attract any relief after 5 April 2008.

As already announced, the relief will be available against gains on the disposal, and will be a limited to a lifetime amount of £1,000,000. The gains subject to relief will be scaled by deducting 4/9 of the amount, leaving 5/9 in charge, and effectively providing a 10% rate of tax on the gross gains.

There are also rules to allow a the owner of shares in a company which is the subject of a takeover to elect to be taxed on the sale, allowing the new relief to trigger, and rules to cover business disposals before 6 April 2008, but where the gains on the disposal have been deferred into Qualifying Corporate Bonds or EIS and VCT shares. These will all potentially attract relief under the new rules.

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Approved occupational pension schemes

Legislation is to be introduced to confirm that in calculating its corporation tax liability the amount a company was permitted to deduct in respect of pension costs between 1 April 2004 and 5 April 2006 was limited to the pension contributions paid in the year. Past years computations from 1 April 2004 will need to be corrected if necessary and any accrual provided in accounts in future will need to be added back in the tax computation.

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Aggregates levy

The rate of aggregates levy will rise from £1.95 per tonne to £2 per tonne with effect from 1 April 2009.

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Landfill tax

Standard rate

The standard rate of landfill tax is to increase from £32 per tonne (effective from 1 April 2008) to £40 per tonne. The new £40 per tonne rate will have effect for any standard rated disposal made, or treated as made, on or after 1 April 2009.

Exemption for waste from cleaning up contaminated land

Waste from cleaning up contaminated land disposed of by landfill is exempt from landfill tax. This exemption is to be phased out.

Applications for landfill tax exemption certificates will not be accepted by HM Revenue and Customs on or after 1 December 2008. Anyone in possession of a valid exemption certificate will have until 31 March 2012 to dispose of their waste if they wish to benefit from the exemption. All certificates issued under the scheme will cease to be valid on or after 1 April 2012 and disposals to landfill of waste from cleaning up contaminated land made on or after that date will be liable to landfill tax at the appropriate rate.

These provisions will be included in secondary legislation to be published in summer 2008.

Looking to apply for a relief certificate?

HM Revenue and Customs website will provide you with form LFT2 'Reclamation of contaminated land' which explains how to apply for a relief certificate.

Landfill communities fund

Landfill tax and environmental bodies enrolled under the Landfill Communities Fund should be aware of the secondary legislation to be introduced as outlined in BN81 (page193).

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Postponement of plans re income shifting

After HM Revenue & Customs lost the landmark case of Arctic Systems following a ruling by the House of Lords, the Government announced their intention to legislate to prevent individuals arranging their affairs to gain a tax advantage by shifting part of their income to another person who is subject to a lower rate of tax ('income shifting').

Draft legislation was published in December, which many people think is unworkable. An early Day Motion was signed by 174 MP's urged the Government to reconsider its proposals.

The Government has not backed down. It has announced it now intends to introduce legislation through Finance Bill 2009, and whilst it has said that the legislation will not be backdated to 6 April 2008, it could become effective from some later date such as the date of the Pre-Budget Report.

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