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To view the tables referred to in this article, please access the digital edition of the magazine http://ab.digitaleditions.co.uk/may11_uk/?jtp=62
The main thrust of the reforms was to assist large and small and medium-sized businesses (SMEs). This wasn't a Budget that concerned itself with new and innovative ideas; the chancellor reintroduced ideas, or built on already-successful schemes. This year's Budget was swiftly followed by a finance bill. The Finance (No 3) Bill was published on 31 March and ran to 389 pages.
Many of the bill's highlights were already known before 23 March. However, a large number of forthcoming discussion papers and consultations were announced in the Budget.
These included consultations on research and development (R&D) reforms, proposals to alter the taxation of non-domiciled individuals, how HMRC will work with tax agents, proposals to amend gift aid, controlled foreign companies (CFC) legislation, income tax and national insurance contribution (NIC) reform, pension reform and IR35.
Rates and allowances
Income tax rates, allowances and thresholds for the 2011-12 tax year can be found at the start of the bill in part 1 (1 to 3). With effect from 6 April 2011, the personal allowance for those under 65 will increase by £1,000 to £7,475. The basic rate limit will also reduce by £2,400 to £35,000.
The rates of employee's and employer's Class 1 and Class 4 NICs will rise by 1% with effect from 6 April 2011. This will be partly mitigated by increases to the earnings threshold and lower profits limit.
The commitment to attract large business to the UK was one of the themes of this year's Budget. There are two important announcements for corporation tax (CT) - an additional rate change and regional CT rates with the consultation, Rebalancing the Northern Ireland Economy.
The chancellor had already announced planned CT reductions but made an additional cut in the main rate. There will be an additional 1% cut in the main rate of CT on top of the four annual reductions announced in the June 2010 Budget, giving a main rate of 26% for 2011 which will drop to 23% in 2014.
The small profits rate of CT will drop from 21% to 20% with effect from 1 April 2011, as previously announced. Both changes in the rates are in part 1 (4 to 7) of the bill.
Several changes to capital allowance rates and limits were announced in the 22 June 2010 budget and have been included in the bill.
The level of the annual investment allowance reduces from £100,000 to £25,000, with effect from April 2012.
The rates of writing-down allowances are also due to reduce with effect from 1 April 2012 (corporation tax) or 6 April 2012 (income tax) as follows:
- from 20% to 18% per annum for expenditure allocated to the main rate pool
- from 10% to 8% per annum for expenditure allocated to the special rate pool.
For businesses with chargeable periods spanning 1 April (CT) or 6 April (income tax) a hybrid rate will be required.
The annual allowance for pensions reduces from £255,000 to £50,000 with effect from 6 April 2011 and the lifetime allowance is also set to reduce from £1.8m to £1.5m on 6 April 2012.
R&D tax credits
R&D is a relief that works. There are two schemes for obtaining R&D relief - the SME scheme and the large company scheme. As part of the corporate tax reform programme, the government consulted on the effectiveness of the current R&D tax relief schemes and is considering the support provided in light of the Dyson Review. The government commitment is to ensure that the R&D tax credit schemes continue to encourage innovation by UK companies.
Relief is available where a R&D project seeks to achieve an advance in overall knowledge or capability in a field of science or technology. This would be through the resolution of scientific or technological uncertainty.
Part 2 (43) of the bill will bring in an additional deduction for spending on qualifying R&D expenditure. For SMEs, the relief will be increased from 75% to 100% from 1 April 2011. The effective rate of relief for expenditure will therefore be increased from 175% to 200%. If an SME makes a loss, it can choose to receive tax relief by way of a tax credit. The credit is limited to the amount of PAYE and NIC liabilities for the period.
There will also be a further increase of 25% to the deduction for SMEs with effect from 1 April 2012, giving a total deduction of 225%.
The minimum expenditure threshold under both schemes is £10,000, though there will be a consultation to remove or reduce this limit.
The chancellor set out several substantial changes to the tax credit system. The changes to child tax credit (CTC) and working tax credit (WTC) took effect from 6 April 2011 and are as follows:
- The baby element of CTC will be removed from 6 April 2011.
- The withdrawal rate will be increased from 39% to 41%.
- Families with household income above £40,000 will start to have their family element tapered away from 6 April 2011 at a rate of 41%.
- The consumer price index (CPI) will be used to uprate all of the tax credit elements from April 2011 and the child element of CTC will increase by an additional £150.
- The previous announcement that those aged 60 and over would be able to qualify for WTC by working at least 16 hours per week will still go ahead from April 2011.
- The tax credit income disregard will change from £25,000 to £10,000 from 6 April 2011.
- WTC will be frozen for three years from April 2011.
- The proportion of costs covered by the childcare element of CTC will be reduced to 70% from 80%.
EIS and VCT schemes
The chancellor potentially injected new life into the Enterprise Investment Scheme (EIS) and Venture Capital Trust (VCT) schemes.
From the 2011-12 tax year and subsequent years, the rate of income tax relief for shares subscribed for under the EIS scheme will be increased from 20% to 30%. Part 2 42 (2) of the bill amends Income Tax Act 2007 (EIS) to reflect the change.
From 6 April 2012, the limits will be amended for a company qualifying under the EIS scheme. The changes are summarised in the table.
The annual maximum amount that an individual investor may invest under the scheme will increase from £500,000 to £1,000,000.
In addition to EIS and VCT announcements, the lifetime limit on business disposals was also increased from £5m to £10m, effective from 6 April. The change can be found in Part 1 (9) of the bill, altering section 169N of the Taxation of Chargeable Gains Act (TCGA) 1992. This makes the UK a better place for doing business.
Gains which are eligible for the entrepreneurs' rate are taxable at 10%, rather than the normal capital gains tax rates of 18% and/or 28%.
The lifetime limit has changed several times since the introduction of entrepreneurs' relief in 2008 and the lifetime limits since inception are shown opposite.
Furnished holiday lettings
Schedule 14 of the bill contains the changes to income tax, corporation tax, capital allowances and chargeable gains. In the 2010 Budget the government announced that it would not repeal the furnished holiday lettings (FHL) rules. Instead, the existing rules (including the European Economic Area (EEA) extension) continued to apply for the 2010-11 tax year, while the government consulted on its revised proposals.
As a result of the consultation, the government decided to revise the availability and occupancy thresholds, which will now apply with effect from April 2012 rather than April 2011. In addition, businesses which meet the occupancy threshold in one year may elect to be treated as having met the occupancy threshold in each of the two following years.
The ability to offset losses from an FHL business against general income will be withdrawn. From 6 April 2011 (1 April 2011 for companies), losses may only be set against income from the same FHL business. The legislation will also confirm that the FHL rules apply to properties situated in the EEA.
The increase in the number of days for which a property is actually let or available to let in order to qualify for FHL, will have effect from 1 April 2012 and 6 April 2012 for companies and individuals (and partnerships) respectively. See table.
A new CFC regime is expected to be introduced in Finance Bill 2012, although there are interim improvements to the current CFC rules to be included in the bill. The changes contained in schedule 12 are:
- an exemption for certain intra-group activities where there is little connection with the UK
- an exemption for CFCs whose main business is the exploitation of intellectual property (IP), where both the IP and the CFC have minimal connection with the UK
- a statutory exemption which runs for three years for foreign subsidiaries that, as a consequence of an acquisition or a reorganisation, come within the scope of the CFC regime for the first time
- amendment of the current exemption for CFCs with a low level of profits, increasing the limit for large groups from £50,000 to £200,000 profits per annum, and replacing the need to calculate chargeable tax profits with an accounts based test
- extension of the transitional rules for holding companies until July 2012.
The new regime will be a mainly entity-based system that will operate in a targeted way, bringing within a CFC charge only the proportion of overseas profits that have been artificially diverted from the UK.
It is expected that the government will publish further details on the new CFC regime for consultation in spring 2011.
The chancellor announced a moratorium, exempting micro and genuine startup businesses from new domestic regulation for three years from 1 April 2011.
Micro-businesses are defined as those with fewer than 10 employees, while genuine startups will be businesses starting their trade on or after 1 April 2011.
These will not have carried out a similar business in the previous six months, have not resulted from the transfer of the same activities carried out by another business or resulted from the taking over of an existing business.
The chancellor announced 21 new enterprise zones in the Budget to attract business to certain disadvantaged areas. Businesses located in enterprise zones will be able to apply for discounts of up to 100% on their business rates for up to five years.
Other advantages for the new zones include simplified planning processes, superfast broadband and the potential for enhanced capital allowances.
Office of Tax Simplification
The chancellor asked the Office of Tax Simplification (OTS) to carry out a review of all tax reliefs by Budget 2011, identifying changes that can be made to simplify the tax system.
The OTS published its final report on the review of tax reliefs on 3 March 2011. The report recommended that 45 reliefs should be abolished, 17 reliefs should be simplified and 54 reliefs should be retained. The OTS also found that there are eight expired reliefs which should be removed from legislation.
The OTS was also asked to provide an interim report to the chancellor by Budget 2011, to identify areas of the tax system that cause the most day-to-day complexity and uncertainty for small businesses and recommend priority areas for simplification.
On 10 March 2011, the OTS published the interim report highlighting several priority areas for reforming the taxation of small businesses. A formal response from the chancellor is expected.
In the June 2010 Budget it was announced that legislation would be introduced from April 2011 to tackle the use of trusts and other vehicles to reward employees who seek to avoid, defer or reduce tax liabilities.
The legislative changes are contained within schedule 2, Employment income provided through third parties. The clauses and schedule insert a new part 7A into the Income Tax (Earnings and Pensions) Act 2003. The new rules create a tax charge which applies where certain loans of money or assets by third parties to employees are made; where money or assets are earmarked for the employee by a third party; where outright payments of money or transfers of assets to an employee by a third party occur, and where these have not otherwise resulted in a charge to tax as earnings from employment.
Stamp duty land tax
For purchases of residential properties completed on or after 6 April 2011 where the purchase price is more than £1m, the rate of stamp duty land tax will increase to 5%. At present, the highest rate of SDLT is 4% and applies to purchases where the consideration exceeds £500,000.
The first time buyers' threshold of £250,000 applies from 25 March 2010 to 24 March 2012. There has not yet been an announcement to extend this relief.
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