The headline affecting corporate taxes in this year’s Budget is that oil companies and banks have been asked to increase their contribution, so that motorists and companies in other sectors may benefit. Companies will no doubt welcome the immediate cut in the main corporation tax rate to 26% from 1 April. This will be legislated in Finance Bill 2011, together with next year’s 25% rate. The small profits rate remains unchanged at 20%. There is an extension of short-life capital allowances from four years to eight years, for expenditure from 1 April 2011. There are also a few new anti-avoidance measures.
George Osborne delivered his first full Budget on 23 March. Those who simply looked at the net total impact of the announcements might conclude that nothing much happened. After all, the Budget is expected to cost the Exchequer just £10 million in 2011/12; £265 million in the following year and raise £25 million in the year after. In the context of public expenditure of over £700 billion in each of those years, these are simply rounding differences. However, there are large pluses and minuses concealed by these numbers.
The headline is that oil companies and banks have been asked to increase their contribution, so that motorists and companies in other sectors may benefit. The rate of corporation tax on North Sea oil and gas income rises from 50% to 62% – effectively a windfall levy reflecting the additional profits earned from the high oil price. Oil companies may not take much reassurance from the Chancellor’s offer to re-think the regime, should the oil price drop below $75 per barrel. Perversely, it might encourage UK exploration, since the cost will reduce to 38%, as exploration costs typically qualify for a 100% deduction. However, some may consider that political uncertainty could deter investment. Banks will also be unhappy that bank levy has been increased, so that banks do not benefit from the cut in corporation tax. Corporation tax is charged on profits, whereas the levy is based on the balance sheet; not the same thing at all.
Companies will no doubt welcome the immediate cut in the main corporation tax rate to 26% from 1 April. This will be legislated in Finance Bill 2011, together with next year’s 25% rate. HM Treasury asked business whether it would like all the planned reductions enacted in one go, or simply year by year – and it seems that the answer is that annual changes are preferred. The logic for this is probably driven by groups with large deferred tax assets. There’s an interesting question about when the new corporation tax rate should be reflected in financial statements. IFRS and UK GAAP require that tax changes be reflected when ‘substantively enacted’. The Finance Bill will probably achieve this status in early July, when it concludes its stages in the House of Commons. However, this year the new corporation tax rate will be introduced under a Budget resolution at the end of the debate on 29 March, under the Provisional Collection of Taxes Act 1968. Consequently, companies with 31 March 2011 or subsequent year-ends will need to use the 26% rate to calculate their deferred tax. Those with earlier year-ends may not use the new rate, but will no doubt need to refer to it in accounts disclosures. US GAAP requires full enactment, which probably means the rate cannot be used until the Finance Bill receives Royal Assent.
The small profits rate remains unchanged at 20% – and it certainly looks as though a mainstream rate of 20% is the government’s goal. This would cost about £2.5 billion, before considering additional revenue from extra activities in the UK, encouraged by the lower rate.
The very last change to make it into the Budget is the extension of short-life capital allowances from four years to eight years, for expenditure from 1 April 2011. The Office of Budget Responsibility said it came too late to be examined and so the figures will need to be proved in the autumn review. The impact of the 2012 writing-down allowance reduction to 18% is to extend the period over which 90% of allowances are given to 12 years. This doesn’t help investment, as much more plant has a shorter useful life due to the significant technology now built in. Short-life assets carry an administrative burden, since plant must be tracked; however, the benefit of getting full relief within eight years should justify the investment in systems. I do wonder whether it might be worth examining the case for dropping capital allowances and simply allowing accounting depreciation to be deducted. The oddest change came in the form of adding hand dryers to the list of energy-efficient kit qualifying for enhanced allowances.
We must wait until May for the full consultation response on R&D tax credits, but there’s a payment on account in the Budget. SME R&D credits will rise from the current 175% to 200% in 2011 and then 225% in 2012. The cap on the amount that may be offset against PAYE will be lifted but the repayment rate will be reduced, so that the amount that may be claimed against PAYE remains unaltered. The reason is that EU limits on state aid restrict the amount that may be repaid in this way. Strangely, this wasn’t mentioned in the Budget papers. Another change is that – both for large and SME companies – sub-contracted expenditure may be included in the base. It’s clear that R&D tax credits are here to stay!
What then of enterprise? Extending the Enterprise Investment Scheme is welcome: the income tax relief goes up to 30%; the amount that can be raised and invested goes up and it will be open to bigger companies, as will VCT investments. HM Treasury will look at excluding some of those ‘guaranteed return’ investments from the scheme, which will be a good idea. SMEs should benefit from business rate reductions (limited to £275,000 over five years) and enhanced capital allowances if they set up business in one of the 21 new Enterprise zones.
There were few new anti-avoidance measures, although HM Treasury confirmed that it will go ahead with the group mismatches legislation. There are some changes following the consultation: the legislation won’t apply to savings below £2 million and the purpose test will be changed to exclude certain currency hedging transactions. The derecognition anti-avoidance legislation also goes ahead, with some changes, including one that looks to be retrospective to 6 December 2010, in relation to removing debits.
One new measure limits the use of the associated company exemption in a complex structure to avoid corporation tax on chargeable gains, where multiple assets are disposed of. The structure has been around for over a dozen years and more recently had been used to split up a property portfolio.
There will also be a consultation about restricting corporation tax deductions for asset-backed pension contributions. A number of large groups with significant pension deficits have made asset-backed contributions: the consultation is intended to limit unintended tax deductions from some structures.
Revised draft legislation has been published allowing UK resident investment companies to elect, in certain circumstances, for a designated currency to be used for tax purposes, other than the functional currency used in its accounts. The draft legislation includes provisions that restrict the ability to elect a designated currency for tax purposes to companies whose main purpose is to make investments. The draft document also makes provision for newly incorporated companies. This should be beneficial for those groups which have used companies with foreign currency share capital to make foreign currency loans. This has been effective under SSAP20, but the potential adoption of new UK GAAP based on IFRS could mean that the accounting position changes. This election will prove helpful.
All in all, despite the numbers, much for UK companies to absorb.
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Bill Dodwell, Head of Tax Policy Group, Deloitte
