Business taxes
Corporation tax rates
The 0% starting rate is abolished from 1 April 2006,
as announced in the Pre-Budget Report. Companies with profits up to
£50,000 will therefore pay 19% tax. All other rates and bands remain the
same. The removal of the starting rate means an end to the complex
non-corporate distribution rate calculations.
Capital allowances
The rate of first year allowance for small businesses
will be 50% instead of 40%. The increase will apply for one year for spending
incurred from 1 April 2006 for companies and from 6 April 2006 for
self-employed people and partnerships. The rate for medium-sized businesses
remains 40%.
A consultation document on tax relief for business
expenditure on cars considers modernising the capital allowances regime, with
emphasis on providing further incentives for businesses to buy cleaner
cars.
Research and development tax relief
Companies with between 250 and 500 employees will
benefit from the 50% enhancement of qualifying expenditure instead of the
current 25%. The change will take effect if the European Commission grants
state aid approval. Further details of the proposal will be published later
this year.
Companies will have to make, amend or withdraw claims
to the enhanced deduction by the first anniversary of the filing date for the
tax return instead of within the present six-year time limit.
Group relief
Group relief is extended, from 1 April 2006, to the
losses of foreign subsidiaries that cannot be relieved elsewhere, where the
subsidiaries are resident in the European Economic Area (EEA) or have incurred
the losses in a permanent establishment in the EEA. Relief is restricted to
losses for which there is no possibility of relief in any other country.
Provisions to prevent abuse are effective from 20 February 2006. The change
follows a decision in the European Court of Justice involving Marks and Spencer
PLC.
Corporate capital losses
Three anti-avoidance measures, effective from 5
December 2005, will tackle schemes that enable companies to gain a tax
advantage from capital losses. They deter the artificial creation of capital
losses, the purchase of capital gains and losses and the conversion of income
streams into capital gains.
Taxation of leased plant and machinery
New legislation will align the tax treatment of
leased plant and machinery with that of plant and machinery acquired with other
forms of finance. The change will generally only apply to longer leases that
are essentially financing transactions finalised after 31 March 2006.
Trading by charities
The tax exemption for trades carried on by charities
is extended to where only part of the trade is carried on for a primary purpose
of the charity or carried out by beneficiaries. For periods starting after 21
March 2006, relief will be available on the profits that can reasonably be
attributed to that part.
Landlord’s energy saving allowance
The landlord’s energy saving allowance will be
extended from 6 April 2006 to include draught-proofing and insulation for hot
water systems. The qualifying expenditure is deductible from letting profits
that are subject to income tax.
Landfill tax
The standard rate of landfill tax will be increased
from £18 to £21 per tonne from 1 April 2006. The lower rate remains
at £2.
UK real estate investment trusts (REITs)
From 1 January 2007, a new tax regime that gives tax
exemption for income and gains from property will be available for companies or
groups that meet certain conditions.
Qualifying companies and groups must be UK resident,
listed on a recognised stock exchange and distribute at least 90% of their
tax-exempt profits. No single shareholder may control 10% or more of share
capital or voting rights. The ratio of interest on loans to fund the tax-exempt
business in relation to rental income must be less than 1.25:1. Existing
companies that switch to the REITs regime will be subject to an entry charge of
2% of the market value of their investment properties. The tax payment can be
spread over four years in instalments of 0.50%, 0.53%, 0.56% and 0.60%.
Distributions from the exempt property element will be
paid net of 22% tax. Other distributions will be taxed as normal dividends.
REITs will be qualifying investments for ISAs, PEPs
and child trust funds.
Reform of film tax relief
A new tax relief will apply to film production
companies which start principal photography on qualifying films after 31 March
2006. The relief will give a deduction for UK production expenditure of 100%
for films with total qualifying expenditure of £20m or less and 80% for
all other films. Where the deduction results in a tax loss, the company may
surrender that loss, up to the amount of its qualifying UK expenditure, for a
payable tax credit at a rate of 25% of the loss where the 100% deduction
applies or 20% otherwise.
Alternative finance arrangements
Certain finance arrangements, including Shari’a
compliant arrangements and the alternative finance version of low cost employee
loans, will be taxed no less favourably than equivalent arrangements that give
rise to interest. The changes take effect between 22 March 2006 and 6 April
2006.
The summary has been prepared very rapidly and
may contain errors for which we cannot be held responsible. The proposals are
in any event subject to amendment before the Finance Act is passed. Advice
should be taken before any action. |
