Corporate and Business tax

Comment

There is no doubt that the introduction of a 0% starting rate of corporation tax in 2002 has done much, together with national insurance increases which have just taken effect, to encourage many businesses to contemplate incorporation.

Capital allowances

As announced in the Pre-Budget Report, legislation has been introduced to stop certain devices designed to exploit the rules on capital allowances. In the past it has been possible to enhance capital allowances by means of artificial transactions which depress the market value of certain assets on a sale. The effect has been to accelerate the remaining capital allowances relating to those assets so as to obtain a tax advantage. The new legislation is effective for events occurring on or after 27 November 2002. The new rules apply to industrial and agricultural buildings, flat conversion and assured tenancy allowances and mineral extraction allowances. Plant and machinery is not included, at least in part because it is harder to depress artificially its market value. The devices are blocked by denying any further allowances to the vendor on any shortfall between the written down value of the asset and the sale proceeds where the purpose of the transaction includes tax avoidance.

First year allowances (FYAs) on information and communication technology (ICT)

Since 1 April 2000, small businesses have been able to claim 100% FYAs on expenditure on ICT - specifically computers, software and internet enabled mobile phones. The allowance was expected to cease on 31 March 2003 but the deadline has now been extended for one further year to 31 March 2004.

However the allowance is not available for expenditure on the provision of software for leasing. Schemes using licences of software have been designed and marketed in an attempt to secure the allowance in situations when it would not otherwise have been available. The government has announced legislation, effective for expenditure incurred on or after 26 March 2003, which will deny FYAs to anyone who exploits software or software rights by the granting of rights to use, or otherwise deal with, that computer software.

Comment

Later this year it is intended to raise the company law thresholds used to determine whether a business is ‘small’ or ‘medium-sized’. This will substantially increase the number of businesses qualifying for the 100% FYA on ICT expenditure and the more general 40% FYA available to both small and medium businesses on expenditure on other plant and machinery.

Energy saving plant and machinery

100% FYAs were introduced in 2001 for expenditure on certain energy saving plant and machinery. The regime was extended in 2002 and has now been expanded further.

Capital expenditure incurred on or after 1 April 2003 will qualify for 100% FYAs if it relates to investment in qualifying technologies that can reduce water use and improve water quality. Details of the qualifying technologies will be available at www.eca.gov.uk

Action point

‘Clean’ cars were added to the list in April 2002. A clean car is one with CO2 emissions not exceeding 120gm/km. There are now a significant number of cars with low enough emissions to qualify. Acquiring such a car will give a business the benefit of a full tax write-off in year one rather than the normal 25% limited to a maximum of £3,000.

Employee benefit trusts (EBTs)

EBTs are vehicles through which employers provide remuneration and other benefits indirectly to their employees. They have been used in recent years often to facilitate an up-front corporation tax deduction in the company for contributions to an EBT whilst delaying, or avoiding, an income tax and national insurance charge on the employees. As announced in the November 2002 Pre-Budget Report, new rules have been introduced which apply to all contributions made to EBTs from 27 November 2002. The effect is to give the employer a deduction for contributions to an EBT only when a payment is made out of the EBT in a form that gives rise to a liability to income tax and national insurance in the hands of the employee.

The new legislation does not affect the deductions available for provision of certain retirement benefits.

Comment

The changes certainly make the use of EBTs less attractive. However in many cases the effect is merely to delay the corporation tax deduction.
Action point

Companies making regular contributions to an EBT will wish to review their position to ensure that funds will not be locked into the EBT without a corporation tax deduction in the foreseeable future.

Employee share schemes

In the past, employers were not guaranteed a corporation tax deduction for the cost of providing shares to employees under a share scheme. To encourage employee share ownership, a statutory corporation tax deduction has been introduced for the cost of providing shares for employee share schemes. The new rules apply to accounting periods beginning on or after 1 January 2003. The deduction is available in respect of schemes where the employees are subject to UK tax on award of shares or would be but for the fact that the shares are obtained under an Inland Revenue approved scheme or Enterprise Management Incentives.

Employee share schemes - technical changes

A package of measures will be introduced to:

• simplify some aspects of Company Share Option Plans, Save As You Earn schemes and Share Incentive Plans
• reduce some of the administrative tasks of employers
• close loopholes in Company Share Option Plans and the taxation of unapproved plans
• allow more frequent exercise of options under Company Share Option Plans.

Research and development (R&D) expenditure

In 2000, an R&D tax credit was introduced for small and medium-sized companies (‘SME tax credit’). This enables SMEs to claim tax relief on 150% of qualifying R&D costs. The scheme was extended to a ‘large company tax credit’ in 2002 which enables large companies to claim tax relief on 125% of qualifying R&D costs. In some circumstances SMEs are entitled to claim the large company tax credit. It is now proposed to make a number of changes to the schemes:

• the annual threshold for expenditure to qualify for tax credits will be reduced to £10,000 (from £25,000)
• qualifying expenditure will include the costs of workers paid through a third party
• the calculation of qualifying staff costs will be simplified
• certain short life software costs will be included
• the large company credit will be available to SMEs who do not qualify for the SME tax credit because they are in receipt of other state aid for the project.

There will be consultation on widening the definition of R&D so that the number of activities qualifying for the credits will increase.

Corporation tax reform

Consultation continues with a view to:

• bringing companies’ capital gains into an income regime
• considering rationalising and simplifying the headings (‘schedules’) under which a company’s income is taxed
• reviewing the differences in tax treatment between trading and investment companies.

Construction Industry Scheme (CIS) reform

Special arrangements have been in place under the CIS since 1972. Although the rules were revised in 1999 they are still complex. The government is therefore seeking ways to reduce the regulatory burden on the industry and improve the level of tax compliance. The main proposals are to:

• replace Registration Cards and Gross Payment Certificates with a verification service
• introduce an employment status declaration
• replace vouchers with periodic returns.