2011 Autumn Statement

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BUSINESS TAX

Corporation tax rates

In accordance with the plans announced in March the main rate of corporation tax will fall from 26% to 25% from 1 April 2012. The small company rate is 20% and there has been no announcement of the rate for next year.

Enterprise Investment Scheme (EIS)

Changes announced in the March Budget are due to come into effect on 6 April 2012. These are:

• the maximum amount that an individual can invest in total in a tax year rises from £500,000 to £1m.
• the maximum funds that a company can receive under EIS rises from £2m to £10m
• the size of a company that can benefit from EIS (subject to meeting all the qualifications) is increased to £15m gross assets and fewer than 250 employees.

A number of other changes were announced in the Autumn Statement:

• the rules which identify individuals who are deemed to be connected to the company are to be relaxed in some circumstances
• the £1m per company limit that currently applies for Venture Capital Trusts will be removed
• anti-avoidance rules will be introduced to exclude companies set up for the purpose of obtaining the relief, and to exclude the purchase of shares in another company
• investment in Feed-in-Tariffs will be excluded.

Seed Enterprise Investment Scheme (SEIS)

This is a new relief which will be introduced from 6 April 2012. It will provide income tax relief at 50% in respect of investment in a small company whose total assets before the investment are less than £200,000. The relief will be limited to investments of up to £150,000 in each company and a maximum of £100,000 investment for an individual. In addition an individual who makes a capital gain in 2012/13 and reinvests some or all of the gain in a SEIS company in the same year will obtain exemption from CGT for the sum invested.

More information has been provided about this new relief for which the draft legislation runs to 45 pages. The proposals include the following:

• The relief will initially run from 6 April 2012 until 5 April 2017 but may continue after that date
• Income tax relief on a qualifying investment is confirmed at 50%
• Income tax relief will be withdrawn in certain circumstances including a disposal of the shares within three years
• The annual limit of £100,000 investment by an individual is confirmed
• A director may make a qualifying investment but not an employee or an associate of an employee
• An individual may not hold more than 30% of the shares in the company
• The issuing company must have been incorporated within two years of the date on which the qualifying shares are issued
• The company must exist to carry on a qualifying trade
• The gross assets of the company (including the proportion of assets of companies which hold at least 25% of the shares in the issuing company) must not exceed £200,000 immediately before the shares are issued
• The issuing company must not have more than the equivalent of 25 full-time employees immediately before the shares are issued
• The maximum amount which can be raised by a company through SEIS is £150,000 and this is an overall total not an annual limit
• Subject to conditions the disposal of SEIS shares will be exempt from CGT
• Where an individual makes a capital gain in 2012/13 and invests an amount which is at least equal to the gain in qualifying SEIS shares before 6 April 2013 then the gain will be exempt from CGT. If the shares fail to meet the qualifications for SEIS for three years then the exemption will be withdrawn.

Annual Investment Allowance (AIA)

The AIA is a capital allowance available for many businesses on most purchases of plant and machinery, long-life assets and integral features. Relief is given on the full cost up to a current maximum allowance of £100,000 for a full year. This allowance is to be reduced to £25,000 with effect from 1 April 2012 for companies and 6 April 2012 for unincorporated businesses.

Where a business has an accounting period that straddles the date of change the allowances have to be apportioned on a time basis. For example a company with an accounting period ending on 30 September 2012 will have an allowance of £62,500 (£100,000 x � + £25,000 x �). However it should be noted that for expenditure incurred after the 1/6 April, the maximum allowance that can be attributed to that expenditure is a fraction of £25,000. The fraction will be the amount of the £25,000 that is included in the calculation of the overall AIA for the accounting period.

Writing down allowances

Writing down allowances are to be reduced from April next year. The normal rate of 20% will be reduced to 18% and the lower rate of 10% which applies to integral features and long-life assets will reduce to 8%. It will be necessary to calculate hybrid rates where the accounting period straddles 1/6 April which will give a rate between 20% and 18% (or between 10% and 8%) for that period.

Capital allowances in Enterprise Zones

Over the past year the Government has designated a number of very specific areas as Enterprise Zones. Businesses in these areas enjoy certain reliefs, for example, a relief from business rates. The Chancellor has announced that 100% capital allowances will now be available for the Zones in the Black Country, Humber, Liverpool, North East, Sheffield, and the Tees Valley.

More information is now available in respect of the proposal to give 100% first year allowances on plant and machinery purchased by businesses in certain Enterprise Zone areas.

• The relief will only be available to companies
• The plant must be new and represent an investment not a replacement of existing plant
• The company must be operating within a designated assisted area within one of the specified Enterprise Zones
• The allowance will apply for purchases made from 1 April 2012 up to 31 March 2017
• Certain types of business such as transport undertakings are excluded

Compulsory pooling

The Government is considering whether to introduce a requirement that businesses should pool their expenditure on fixtures within a short period after acquisition in order to qualify for capital allowances.

Research and development expenditure (R&D)

There are currently a number of restrictions which effectively limit the scope of this relief and it is planned to remove these for expenditure incurred on or after 1 April 2012. The proposals include:

• removing the rule limiting a company's payable R&D credit to the amount of PAYE and NIC it pays
• removing the £10,000 minimum expenditure condition
• changing the rules governing the provision of relief for work done by subcontractors under the large company scheme
• increasing the additional deduction for R&D expenditure by SMEs by a further 25% making the total deduction 225% of actual expenditure.

The Chancellor has announced a consultation next year on the introduction of an 'above the line' tax credit in 2013 for larger companies.

Controlled Foreign Companies (CFCs)

The CFC regime can apply to a UK company which has a subsidiary operating in a country with a low rate of corporation tax. The rules have been in place for 25 years but are seen as complex and in some cases disadvantageous to business. Some interim changes were made in 2011 but a major overhaul is planned for 2012. The aims of the new rules will be:

• to target and impose a CFC charge on artificially diverted UK profits, so that UK activity and profits are taxed fairly
• to exempt foreign profits where there is no artificial diversion of UK profits
• to not tax profits arising from genuine economic activities undertaken offshore.

All the existing legislation will be repealed and replaced. The key element of the new rules will be that the profits of foreign subsidiaries will be outside the scope of the rules unless they meet specified conditions set out in a ‘gateway’. These conditions set out what is to be treated for the purpose of the regime as profits artificially diverted from the UK.

General Anti-avoidance Rule (GAAR)

The Government commissioned an independent report from a leading tax lawyer on whether or not it would be appropriate to introduce a GAAR into the UK tax system. This is a route that has been used in a number of other countries.

The reviewer has just presented his report to the Government and recommends that a moderate rule targeted at abusive arrangements would be beneficial to the UK tax system. Such a GAAR would apply for income tax, CGT, corporation tax and NIC. It would not apply to 'responsible tax planning'.

It is now likely that the Government will undertake a consultation process in this matter but legislation is not likely until 2013 at the earliest.

High risk tax avoidance schemes

Certain types of tax avoidance schemes are currently subject to a disclosure regime which requires the scheme promoter to disclose details of the scheme to HMRC and for the users of the scheme to indicate their involvement on their tax return. Such schemes are usually challenged by HMRC but this procedure can take many years with Tribunal and Court hearings being required. If the scheme is blocked the scheme users have to pay the tax due but HMRC is concerned that the delay can still give them a significant cash-flow advantage.

HMRC is currently consulting on a proposal to introduce an additional charge on scheme users where the scheme fails. A user will be able to prevent this charge by paying the disputed tax to HMRC ahead of the challenge.

Tax treatment of asset-backed pension contributions

Rules are to be introduced from 29 November 2011 to limit tax relief for employers who enter into arrangements to make asset-backed contributions into their pension schemes. The new rules will ensure that the tax relief obtained more accurately reflects the actual costs to the employer.

Patent Box

The concept of a Patent Box has been the subject of consultation by HMRC for the past couple of years and legislation is now being brought forward to apply from 1 April 2013. The essence of the legislation will be to allow companies to elect to have a 10% rate of corporation tax on all profits attributable to qualifying intellectual property (IP). This will cover patents granted in the UK and the European Patent Office as well as supplementary protection certificates, regulatory data protection and plant variety rights. The Patent Box will apply to existing as well as new IP. It will also cover acquired IP provided that the company has further developed the IP or the product which incorporates it.

Company distributions

When a company makes a distribution to its shareholders in the course of a liquidation or winding up the distribution is treated as capital in the hands of the shareholder and CGT is payable in respect of any gain. If the company is a trading company this will qualify for the 10% Entrepreneurs’ Relief rate.

Smaller companies may not wish to go through the cost and administration involved in a formal winding up. In these cases, the company is informally dissolved, commonly referred to as ‘striking off’ and profits/assets are distributed to shareholders. Technically this is not a capital distribution but for many years HMRC have operated an Extra Statutory Concession (ESC) C16 which, subject to certain conditions, allows the CGT treatment to apply. As such this has been a very useful and well used concession.

As part of a rolling programme to remove or legislate all their ESCs, HMRC are about to introduce a statutory replacement for C16. This will apply to distributions made on or after 1 March 2012. It will allow the CGT treatment to apply in informal liquidations but is going to limit the total value of distributions made in such a process to £25,000.