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BUSINESS TAX AND INVESTMENT INCENTIVES

CORPORATION TAX

Corporation tax rates and bands are as follows:

Financial Year to 31 March 2001 31 March 2000
Taxable Profits
First £10,000 10% 20%
Next £40,000 22.5% 20%
Next £250,000 20% 20%
Next £1,200,000 32.5% 32.5%
Over £1,500,000 30% 30%
Small companies' marginal relief fraction 1/40 1/40

CAPITAL ALLOWANCES

The 40% first year allowance for investment in machinery and plant by small and medium sized businesses is to become permanent. In addition, small businesses that invest in information and communication technology (computers, software and internet-enabled mobile phones) will for 3 years from 1 April 2000 be able to claim 100% first year allowances.

The capital allowances system is to be simplified in legislation to be introduced later this year through the Tax Law Rewrite Bill to:

bullet remove the requirement to notify expenditure on which machinery and plant allowances are claimed
bullet remove the need for a separate car pool for cars costing less than £12,000
bullet give capital allowances to oil companies on machinery and plant used under an oil production sharing contract
bullet relax certain rules for lessors of plant using sale and lease back arrangements
bullet clarify the code for machinery and plant allowances for non-residents
bullet extend the herd basis to shares in production animals and confirm that capital allowances are not due.

ENTERPRISE INVESTMENT SCHEME (EIS) AND VENTURE CAPITAL TRUSTS (VCTs)

This Budget sees a major change in the rules for both EIS and VCTs. Up till now the qualifying period for holding investments so that they would rank for income tax relief has been 5 years. For shares issued on or after 6 April 2000 the minimum holding period will be reduced to 3 years for both VCTs and for EIS companies carrying on a qualifying trade at the time of issue. If the EIS company had not started trading at the time of issue then the qualifying period will expire after the qualifying trade has run for three years. Clearly this will give a major boost to both the EIS and VCTs and together with this change it will also be possible from Budget Day for EIS investors to invest alongside Venture Capital funds even when the fund has a significant influence on and preferential rights to profits. Measures have also been announced to safeguard VCT investors reliefs where a portfolio company is sold, merges or undergoes a capital reconstruction and receives shares as a consequence.

CHANGES TO COMPANY CHARGEABLE GAINS

The Chancellor announced an important change to the taxation of chargeable gains within groups. Up until now, companies have been able to transfer assets on a no gain/no loss basis where they are members of the same group of UK resident companies. From 1 April 2000 it will be possible to transfer an asset between companies on a no gain/no loss basis within worldwide groups so long as the asset remains within the charge to UK corporation tax on chargeable gains. This will make the restructuring of companies which operate on a worldwide basis much easier from a UK tax perspective.

In addition measures were announced today which will help companies to deal with the administration of capital gains tax. Firstly, from 1 April 2000 it will be possible to make an election to match up capital gains and losses within the group to eliminate the need for notional transfers of assets prior to disposal outside of the group. Secondly, it will now be possible to agree valuations of land and buildings held at 31 March 1982 in advance of any sales. This measure will be for a trial period and will be limited to those companies holding 30 or more properties since 31 March 1982 or those with property portfolios in excess of an aggregate current value of £30m. The trial period will last for two years and it should be noted that the service will only be available in respect of entire property portfolios.

The Government has committed itself to consultation on a new rollover relief to be available to companies holding substantial shareholdings. The basic idea is that companies holding shareholdings in excess of 30% in trading companies or groups would be able to rollover gains on the disposal of such shareholdings into other qualifying shareholdings or business assets. A technical note is to be published this summer and we can expect clauses to be included in the Finance Bill 2001.

IR35 UPDATE
Full details of the scheme to counter avoidance of tax and NICs through the use of personal service companies and other intermediaries have been announced. The new scheme takes effect from April 2000 – contact us if you think the new rules might affect you.

GROUP RELIEF FOR COMPANIES

Following the ICI v Colmer case, the Revenue has accepted since February 1999 that group relief was available where the existence of a group or consortium was established through companies resident in the European Union or European Economic Area. From 1 April 2000 group relief will be extended to groups established through companies resident anywhere in the world. Also from 1 April 2000 group relief will be extended to UK branches of overseas companies. The rules for overseas branches of UK companies are also amended to enable a UK company to surrender losses arising from an overseas branch if those losses are not relievable (other than against profits within the charge to UK corporation tax) in the overseas country.

DOUBLE TAXATION

Following the review of the current system over the last 2 years, the main measures to be implemented include:

bullet the current credit method of relief is to be retained
bullet the rate of underlying tax attributable to a dividend paid from one company to another will be capped at a rate equal to the UK corporate tax rate
bullet a company will no longer be able to specify the particular profits out of which it pays a dividend
bullet there will be a number of changes to the way in which relief for underlying tax is calculated
bullet companies will be able to carry back one year or carry forward indefinitely foreign tax on dividends and on profits of foreign branches which cannot be relieved immediately
bullet relief will be allowed to all non-residents for foreign tax paid on the income of their UK branches or agencies.
PLANNING TIP
It’s sometimes too late to involve us in your personal and business plans, but it’s never too early. Discuss your personal and business strategies with us at an early stage.

MISCELLANEOUS BUSINESS MEASURES

bullet The importance of intellectual property to business is being recognised and an intellectual property review will take place to examine the possibility of tax reliefs for the cost of purchasing intangible assets. The sale of intellectual property will also be exempted from stamp duty.
bullet Companies will not be penalised for entering into "ratchet loans" which link interest rates to profits, also such loans will be exempt from stamp duty.
bullet The level at which small employers can pay PAYE and NIC on a quarterly basis has been increased from £1,000 to £1,500. This will benefit an additional 80,000 small employers with effect from 5 April 2000.
bullet The forthcoming Finance Bill will also see help for the UK film industry in that the legislation will clarify an area which has caused much uncertainty in the past over the tax treatment of expenditure on films.

CONTROLLED FOREIGN COMPANIES

Amendments to the conditions for exemption under the "exempt activities test" are to be applied to overseas holding companies and intra-group service companies for accounting periods beginning on or after 21 March 2000. The definition of control is to be strengthened with effect from Budget Day. Companies will no longer be able to side-step the CFC rules by the use of "designer rate tax regimes" in respect of accounting periods beginning on or after 6 October 1999.

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