Business Tax and Investment Incentives

Corporation Tax

Corporation tax rates and bands are as follows:

Financial Year to 31 March 2001 & 31 March 2002

Taxable Profits

First £10,000 10%

Next £40,000 22.5%

Next £250,000 20%

Next £1,200,000 32.5%

Over £1,500,000 30%

Small companies' marginal relief fraction 1/40

Tax trap

Never let the tax tail wag your financial dog - in planning your personal and business strategies, concentrate on sound strategies and treat tax breaks as a bonus.

Venture Capital Schemes

The Chancellor has announced a number of important changes to Venture Capital Schemes which are aimed at reducing the proportion of money raised under Enterprise Investment, Venture Capital Trust and Corporate Venturing Schemes which has to be employed within 12 months. These proposals will mean that only 80% of money raised needs to be employed within the initial 12 month period and the balance can be employed within the following 12 month period. This change takes effect for shares issued on or after Budget Day and also where the company is at present going through its first 12 month period. A relaxation of the rules that restrict or withdraw the Enterprise Investment Scheme relief in circumstances where a company returns value to investors or floats is also proposed. The "value received rules" have also been amended so that the two year period prior to the issue of shares during which relief can be lost is reduced to one year. Also insignificant amounts of value received will be largely ignored and receipts will be disregarded in most circumstances where value is returned without unreasonable delay.

An important change has been announced to the Enterprise Investment Scheme where companies cease to be unquoted during the three year period after the shares are issued. It is proposed that the company in question needs only to be an unquoted company at the time that the Enterprise Investment Scheme shares are issued provided no arrangements existed at that time for the company to become quoted. This will bring the Enterprise Investment Scheme rules into line with the Corporate Venturing Scheme rules with effect from Budget Day.

Another important change has been made with regard to the granting of loss relief against the investor's total income where the loss is on unquoted shares. It is proposed now that the company need only be unquoted at the time the shares are issued provided no arrangements existed at that time for the company to become quoted.

Withholding Tax on Interest and Similar Payments

From 1 April 2001 companies will no longer have to deduct income tax from payments of interest, royalties, annuities and annual payments to UK resident companies and non-resident companies that are within the charge to UK corporation tax on that income. Payments to individuals will continue to be paid net of income tax. The new regime may be further extended so that these payments can also be made gross to UK bodies that are exempt from tax. The special provisions allowing gross payments of interest etc., between group companies will become redundant and will be repealed. The Inland Revenue are to give guidance on the evidence required by a company to enable a gross payment to be made.

Relief for Company Gains on Substantial Shareholdings

Following consultation on the issue of corporate shareholders disposing of substantial shareholdings in trading companies and not being able to roll over those gains into new substantial shareholdings in other trading companies, it is envisaged that a new relief will be introduced to allow companies making disposals of such substantial shareholdings to defer gains if certain conditions are met. The relief will now apply to shareholdings of 20% or more of the ordinary share capital of a qualifying trading company. The ongoing consultation has resulted in a number of important changes to the proposals especially in that close companies will now be included providing they are either trading or a member of a trading group. Also the qualifying period during which a substantial shareholding has to have been held is to be reduced from 2 years to 1 year. The consultation paper will be published in June 2001.

Limited Liability Partnerships (LLPs)

The legislation allowing the creation of LLPs comes into effect from 6 April 2001. A number of tax measures have been announced in the Budget to avoid LLPs being used for tax avoidance purposes and to bring the tax treatment into line with existing partnerships. Legislation is being introduced to prevent LLPs being used for investment or property dealing purposes in order to obtain loss relief against other income. Individuals investing in LLPs which are used as vehicles for investment will not be able to claim interest relief on money borrowed to invest in the LLP.

Non Resident Close Companies - Capital Gains

Capital gains arising in non-resident close companies will no longer be attributed to UK resident participators from Budget Day where:

the UK participator's interest is 10% or less in the gain (increased from 5%), or
the gain arises on any chargeable assets outside the UK in a trade carried on outside the UK, or
the gain would be attributed to an exempt approved pension scheme

The rules for giving credit for tax on gains against tax on subsequent distributions is also amended to the earlier of;

3 years of the end of the accounts period, or
4 years from when the gain arose

There was previously a 2 year time limit from the date of the chargeable disposal.

Capital Allowances

Some minor changes have been announced to the proposed Capital Allowances Act 2001 which will correct a number of points missed when the legislation was redrafted. The new Act will apply for chargeable periods ending on or after 1 April 2001 for corporation tax and 6 April 2001 for income tax. The changes concern sale and lease-back arrangements, partnerships involving companies and an anomaly which meant that if two people were treated as owning a fixture then neither of them could get capital allowances on it.

It has also been announced that businesses will be able to claim 100% first year allowances on investment in designated energy saving plant and machinery. An "Energy Technology List" will be published for 1 April 2001 defining qualifying technologies, energy saving criteria and products falling within the scheme.

A new measure has also been announced to enable property owners to claim 100% capital allowances on capital spending for the renovation or conversion of vacant space above shops and other commercial premises if these are to be made available for rent. Spending will qualify for the new scheme if it is incurred after the Finance Act receives Royal Assent and if the property was built before 1980 and does not consist of more than 5 floors in total. This measure is aimed at encouraging urban regeneration.

Chargeable Gains of Groups of Companies

The 2000 Budget saw an important change in the taxation of chargeable gains within groups in that it allowed companies within a group to transfer assets on a tax neutral basis so that companies within a worldwide group could effectively treat a disposal of an asset by one company as if it had been made by another company in the group. Under the transitional rules however there has been some uncertainty about subsidiary companies holding assets transferred to them before 1 April 2000 within an old group and then leaving that group after that date whilst remaining within a worldwide group. The amendment makes it clear that a degrouping charge would not arise in such cases nor will it arise where a company that was previously the principal company of an old group leaves the worldwide group with assets transferred to it before 1 April 2000.

The proposals also enable companies to obtain relief for incidental costs incurred in making a disposal even if the costs were borne by a different company within the group.

Double Taxation Relief

In addition to the pre-budget report changes to double tax relief allowing:

extension of on-shore pooling rules for double tax relief to allow relief for rates of foreign tax paid up to 45% even if this was at more than one level in a chain of companies, and
changes to the way in which the mixer cap is calculated, the following amendments are made:
companies may claim relief for less than the full amount of foreign tax,
the rate of underlying tax attributable to dividends from UK subsidiaries held by an overseas holding company is deemed to be equivalent to the UK corporation tax rate at the date of payment of the dividend, and
minor changes to wording ensure the provisions apply properly to non-residents trading in the UK.