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BUDGET 2008 NEWS |
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Corporation tax Long funding leases See TM ¶171 As detailed in a previous update legislation is being put in place to counter avoidance schemes involving chains of leases and premiums.
The Budget announcement amends these slightly to limit the scope to the areas of avoidance by limiting the application of the rules so that it no longer applies to cases where the lessor is not entitled to capital allowances on the asset, where a contribution from the lessee reduces the lessor’s expenditure for capital allowances purposes or where indemnity payments are made to compensate the lessor for loss arising due to damage of or by the asset.
Capital allowances Successions to trade See TM ¶272 The rules on a succession of trade for capital allowances purposes will be extended in order to combat avoidance schemes that seek to gain balancing allowances through a series of transactions. The scheme involves the transfer of a trade to a profitable group before it is sold on in a short period of time. If the market value was lower on the final onward sale a balancing allowance could then be obtained by the profitable group. To counteract this the final acquisition will be taken to have taken place at the tax written down value. This will only apply where the cessation of trade generates a balancing allowance and the arrangements were put in place solely to secure that allowance and will result in the final purchaser being entitled to the benefit of the remaining qualifying expenditure.
Integral features See TM ¶300 Following consultation the “new special rate pool” will be introduced alongside the annual investment allowance. This pool will attract an annual writing down allowance of 10%. The list of integral features is as follows: - electrical systems (including lighting), - cold water systems, - space or water heating systems, powered systems of ventilation, air cooling or purification, and any ceiling or floor comprised in this, - lifts, escalators and moving walkways, - external solar shading, and - active facades.
This will have a variety of results depending on the situation. In some cases where such items would have qualified previously there is a loss of 15%, while others who previously would not have qualified will make a substantial gain.
This pool will be extended to include thermal insulation of all existing buildings used for a purpose other than a residential property business. It will also include long life assets, effectively changing the rate from 6% to 10%.
According to the Budget Note the pool will encompass the original expenditure on acquisition of any of the above systems and also “replacement expenditure”, which is considered to be any replacement in a 12 month period where the cost incurred exceeds 50% of the total replacement cost at that time. This alters the current position regarding part replacements of such items where it is considered that substantially the whole of the asset must be replaced before it is considered capital expenditure. If this is the test that is applied, in practice it may mean securing a quote for replacement of the whole system in order to secure a revenue deduction.
Plant and machinery pool See TM ¶342 With the reform of allowances the continuing plant and machinery pool will attract writing down allowances of 20% as opposed to the previous rate of 25%. As this comes into effect on a fixed date a “hybrid rate” must be used for accounting periods straddling the date.
Example For a company with a year end of 31 December 2008, 91 days would fall before the introduction date of 1 April 2008, with 275 falling after. The calculation proceeds as follows:
This percentage is then applied to the residue in the pool for that year only. In order to simplify this calculation HMRC are provide a ready reckoner.
Taxpayers with small plant pools or, under the new regime, special rate pools of less than £1,000 will be able to write off the entire pool at their own choice. This is a simplification method introduced to cut the administrative burden for smaller taxpayers.
Annual investment allowance See TM ¶366 As part of the business reform package announced at the previous Budget the legislation to enact the new annual investment allowance (AIA) has been published, coming into affect 1 April 2008 for companies and 6 April 2008 for unincorporated traders. As opposed to the existing system of first year allowances, with the exception of the 100% allowances, a business will be able to claim 100% allowances on up to £50,000 of expenditure on plant and machinery in a year, with the exception of cars. Any amounts over this will fall to the new pools of expenditure to obtain relief at either the 10% or 20% rate, depending on the type of asset. Where an accounting period is not a year in length the limit will be proportionately varied. This will also apply where the period straddles the introduction of the new rules.
In some cases a single AIA will be attributed to more than one company or unincorporated business. In a group situation the AIA will be split between the group companies.
For other companies the situation will be less clear and will not follow the current “associated companies” test. As a starting point every company and unincorporated business will be entitled to an AIA. However, like the group situation, one AIA may be required to be split across more than one taxable person. For this to happen both companies or unincorporated businesses must be controlled by the same person or group of people. Unlike in relation to the associated companies definition for the small companies marginal relief provisions this does not include the business interests of connected persons. So it is possible under this situation that two companies may be associated in terms of the tax rates applying but still be able to claim a separate AIA by virtue of this exclusion. If the taxable persons are still associated in these terms then they must also share premises or be involved in “similar activities”, this last test being based on the European Union’s NACE classification system. These tests will be applied on an accounting year basis for companies and a tax year for unincorporated traders. If either of these are satisfied then the AIA will be allocated among the companies or businesses, but unlike the small companies band the taxpayer will be able to decide on the split. It should also be noted that a company and an unincorporated business will not be required to split an AIA, so it would be possible for a sole trader to have one AIA and for his personal company to have another.
The AIA will not be available where the main purpose of a transaction is to gain entitlement to an AIA that the business would not have otherwise been entitled to.
First year tax credits See TM ¶388, ¶390 Again as part of the business tax reform package companies will be able to surrender losses generated due to capital allowances claimed on designated energy-saving or environmentally beneficial plant and machinery in return for a cash payment from government. This credit will be 19% of the amount surrendered subject to a maximum of the greater of the company’s PAYE and NIC liability for the period and £250,000. This will only be possible where the loss cannot first be utilised against other profits of the company or group relieved. Given that the lowest rate of corporation tax will be 21% it would appear that surrendering the loss by virtue of group relief where this is available would be advantageous.
To ensure that the credits are used as intended there is also a claw-back period of four years after the end of the accounting period to which it relates. If the asset is sold within this time the credits will be required to be repaid.
Environmentally beneficial technologies See TM ¶388 As highlighted in a previous update the definition of technologies covered by the enhanced capital allowances scheme will be extended to include waste water recovery and reuse systems.
Low emission cars See TM ¶391 The existing scheme allowing 100% first year allowances for expenditure on cars with a carbon dioxide emission level of less than 120g/km was intended to end on 31 March 2008. This will be extended for a further 5 years until 31 March 2013 but with the limit reduced to 110g/km. For those who have entered into leasing contracts for cars with an emission level between the two limits the leasing cost restriction will continue to be disapplied until the end of the existing contract.
Gas refuelling stations See TM ¶392 The 100% first year allowance for expenditure on natural gas and hydrogen refuelling equipment was due to end on 31 March 2008. Again this has been extended for a further 5 years and the scope has been widened to include refuelling equipment for biogas.
Research and development relief See TM ¶794+ The rates of relief given under these provisions will increase as was previously announced. For SMEs the rate will rise from 150% to 175%, with the large company scheme being uplifted from 125% to 130%. In order to ensure these pass European Commission guidelines, as they are notified State Aids, certain changes have to be made. Firstly it will only be available to companies where the last accounts were produced on a going concern basis. Secondly the maximum relief available will be restricted to €7.5 million per project. Finally the relief available under the vaccine research relief will be reduced from 50% to 40%. As this measure has to be approved by the European Commission the commencement date will be appointed by Treasury order.
Corporate intangible assets regime See TM ¶824 On the introduction of the new regime existing assets could only be brought into the scheme where they were purchased from “unrelated parties”. The tests used to ascertain whether parties are related or not can be affected by one of the companies going into liquidation, administration or other insolvency proceedings. New legislation will tighten the definition to ensure that any such event will not affect the outcome of the test.
Property authorised investment funds See TM ¶979 New regulations are to be introduced which will allow certain authorised investment funds to elect for tax treatment which will move the point of tax from the funds to investors.
Under the new regulations an AIF, can be exempt from corporation tax if it:
· is an open-ended investment company (OEIC); · carries on a property investment business, including investing in real estate investment trusts (REITs), and similar overseas alternative investment funds; · is readily, and freely available to encourage a genuine diversity of ownership; and · does not have corporate investors who, directly or indirectly, own more than 10%.
The distributions to investors will have tax deducted at the basic rate, and importantly non-taxpayers and exempt bodies such as pension funds can reclaim the tax incurred. This will be of benefit as under the existing regime exempt bodies and non-taxpayers could not reclaim the tax deducted at source as the distributions were dividends.
These changes, which will come into effect on 6 April 2008, are to compliment the existing UK-REIT regime, which are closed investments.
Within the supplementary documentation released by HMRC following the budget is a draft Statutory Instrument making provision for the exemption from SDLT for the transfer of property when an authorised unit trust (AUT) converts to an OEIC who wishes to join the new regime. The draft SI appears to be drawn widely enough to cover the conversion of any AUT to an OEIC. This change was not covered anywhere else in the budget documentation.
Associated companies simplification See TM ¶1360 Following representations the Government will introduce legislation effective from 1 April 2008 to restrict the attribution of rights and powers of business partners as associates for the purposes of the small companies rate only. The new measure will ensure that business partners are only included where tax planning arrangements have at any time had effect in respect of the taxpayer company in order to secure greater relief under the small companies relief provision. In the absence of such arrangements the partner’s rights will no longer be included in determining the associate status.
Corporation tax rates See TM ¶1342 The rates of corporation tax for FY 2008 will be as previously announced at 28% and 21% for large and small companies respectively. The small companies’ relief fraction will become 7/400. It has been confirmed that the mainstream rate of corporation tax will remain at 28% for FY 2009.
Corporate venturing scheme See TM ¶1896 With effect from 6 April 2008 the qualifying activities for the corporate venturing scheme no longer include:
· Shipbuilding; · Coal production; or · Steel production.
The government have stated that they have removed the above on the advice of the European Commission to ensure that they are not deemed to be providing State aid.
Controlled foreign companies See TM ¶2145+ A number of anti-avoidance provisions are being introduced to combat schemes that HMRC have become aware of through the tax avoidance disclosure regime. These involve the use of a partnership or trust to secure one of the exemptions from the charge or arranging for profits to be earned in a way that they may fall outside the scope of the existing rules. In order to close these the definition of “control” will be amended to take account of the right to receive income from or the proceeds of sale of the shares and a widening of the profits that should be included in the calculation of apportionment. While HMRC do not believe that the schemes work they are legislating to ensure that the matter is put beyond doubt.
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