Business
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Extension of loss carry
back facilities
Deferral of rate increase for
small companies
Taxation of foreign
profits
Time to pay tax
Deferral of income
shifting
Release of trade debts
and late payment of interest
Simplification of
tax calculations
Capital allowances on
company cars
Spreading
payment of business rates
Empty property rate
relief
Land remediation
relief
Taxpayers' Charter
Extension of loss carry back facilities
All businesses making losses from carrying on trades,
professions or vocations will be able to carry back their losses
against the previous three years trading profits (as opposed to the
one year carry back which is currently in force in most
circumstances) against general income for unincorporated businesses
and total profits for companies. The proposed revision will apply
for one year. For companies this will be effective for accounting
periods ending in the period 24 November 2008 to 23 November 2009.
For unincorporated businesses it will be effective for the tax year
2008/2009. Claims will be made against the later years first.
The amount of losses which can be carried back to the preceding
year is unlimited and can be offset in line with the current rules,
but the amount carried back to the two earlier years will be
limited to a maximum of £50,000, that can be offset against all
profits of earlier accounting periods for companies, and only
profits of the same trade, profession or vocation for
unincorporated businesses. Any losses not relieved by carry back
are carried forward and set against profits of the same trade,
profession or vocation in future years.
A claim can only be made once the business has established its
losses. This can only be done by making a return which may prove
difficult for a business with other priorities and which is
struggling to keep its head above water.
"A return to the ability to carry back uncapped losses three
years would have been desirable, but even so this measure will be a
big help in providing cash refunds to all businesses that have
recently incurred losses but have been profitable in the last few
years" said Francesca Lagerberg, Head of the National Tax Office at
Grant Thornton.
Deferral of rate increase for small companies
The planned increase of the small companies' rate of corporation
tax has been deferred until April 2010.
Gordon Brown announced in his last Budget as Chancellor in 2007
that companies with taxable profits below £300,000 would face an
increase in their rate of tax from 19% to 20% from 1 April in 2007,
21% from 1 April 2008 and it was expected that the rate would be
increased again to 22% from 1 April 2009. Alistair Darling has now
said that the expected increase from 21% to 22% will be deferred
until 1 April 2010.
For those companies with taxable profits between £300,000 and
£1.5 million, corporation tax will therefore continue to be charged
at the 'marginal' rate of 29.75% on that band of profits.
While any reduction in the tax burden for companies is welcome,
particularly for the smaller businesses struggling in the current
economic climate, the Chancellor has once again been guilty of
'fiscal drag'. The limits of £300,000 and £1.5 million that decide
the rate of tax at which a company is liable were last changed in
1993. To continue to say that a company ceases to be 'small' once
its profits reach £300,000 is outdated and the system pulls many
more businesses into paying tax at the main companies' rate of 28%.
As well as the higher tax burden, such larger companies are
required to pay their corporation tax months earlier which is a
cashflow disadvantage that many businesses could do without.
Taxation of foreign profits
The Government has reacted to concerns from large corporates by
announcing earlier than expected changes to the taxation of foreign
profits.
The reforms outlined by the Government include the
following:
- An exemption on foreign dividends received by large and medium
sized companies
- A worldwide cap on debt interest
- A review of the controlled foreign companies (CFC) avoidance
rules consistent with a further move towards a territorial
approach
"The Chancellor has effectively shored up the UK's position so
that the trickle of companies relocating (their HQs) outside the UK
does not become a flood" says Paul Smith, International Tax
Director at Grant Thornton.
The Government's move on foreign dividend exemption will have a
positive impact for multinational companies with UK holding
companies, however more still needs to be done on simplifying the
corporate taxation system if the UK is to revive its
competitiveness.
Companies can bring foreign profits from fellow group companies
into the UK without suffering additional UK tax, providing a boost
in investment to the economy of billions of pounds.
"However this exemption comes at a price" continues Paul
Smith.
"Many groups will be forced to restructure as a result of
changes to the CFC exemption for holding companies. The removal of
the ability for companies to pay dividends rather than suffer a CFC
charge is additional administration."
Smith concluded, "Today's measures are generally to be
applauded. Many companies will regret that such positive moves have
only come about in such difficult economic circumstances. However,
it is unfortunate that these measures will only apply to medium and
large companies, as small companies are specifically excluded."
Time to pay tax
HM Revenue & Customs (HMRC) will provide a new service for
businesses in temporary financial difficulty and unable to pay
their tax bills.
HMRC will introduce a Business Payment Support Service covering
all taxes paid by businesses, including corporation tax, VAT, PAYE,
income tax and National Insurance Contributions. It will be
possible for businesses in difficulty to spread payment of their
tax bills over a timetable they can afford.
Businesses needing time to pay an outstanding tax bill or a bill
due soon will be able to call a dedicated phone service to agree
arrangements tailored to their needs.
The advantage of agreeing payment terms is that late payment
surcharges will not be levied on amounts included in the
arrangement. However, interest will continue to apply from the
original due date.
The clear message from Government is that this measure is only
for businesses who can show they will have real difficulty in
meeting payments. However, those who are struggling should contact
HMRC as soon as possible rather than panic and put off the
issue.
Deferral of income shifting
Buried in the Pre-Budget Report was the statement that the
Government has deferred implementing the proposed income shifting
rules, which were due to take effect in some form from April 2009.
The issue remains 'under review' but appears to be disappearing off
the radar for the near future.
These proposed rules came on the back of the Government's defeat
in the Jones v Garnett case (also known as Arctic Systems Ltd). The
Government was seeking to implement rules to prevent what it
perceived as 'unacceptable tax avoidance' where individuals
(particularly spouses in family businesses) can structure their
remuneration to maximise the use of lower rate tax bands.
The concession not to bring in legislation in Finance Bill 2009
has been the result of a hard and protracted fight by the
accountancy profession and others.
"The initial proposals were piecemeal and threatened to ride
roughshod over the principles of independent taxation", claimed
Francesca Lagerberg, Head of Grant Thornton's National Tax Office.
"A deferral is very welcome, as is getting any new measures right
from the outset. It would be far better to see a longer term
overhaul of the taxation of small businesses rather than rushing
through any changes in this area.
The Government remains intent on keeping this issue under review
but at least, it is hoped, clearer lines of demarcation will
emerge."
Release of trade debts and late payment of interest
The Government is making changes to the tax rules concerning the
release of trade debts in relation to connected companies. In
addition, there is a change to the rules on the late payment of
interest between connected companies. The changes will take effect
for company accounting periods beginning on or after 1 April
2009.
Where companies are 'connected' there are special rules relating
to the release of debts between them. Companies are 'connected'
under these rules if one controls the other, or they are both under
common control. A creditor that formally releases a connected
debtor from a trade debt is currently denied a deduction for the
loss on the debt, but the debtor may be taxed on its 'profit'.
Under the first change proposed, the debtor company would not be
taxable on the release thus removing the current unequal
treatment.
The second change concerns the rule that restricts the timing of
a deduction for interest payable to a connected creditor that is
not subject to UK corporation tax (the late paid interest rule).
The deduction is only allowed on a paid basis, rather than on the
accruals basis that normally applies. A consultation has taken
place as a result of the European Court of Justice having forced
HMRC to accept that the existing rules relating to late paid
interest could not be maintained under the European Community
Treaty freedom of establishment rules. HMRC is still to provide
clarification on the finer details of how the late paid interest
rules will be changed and, in particular, how they will be applied
to close companies.
Simplification of tax calculations
The Government has provided an update on plans to simplify tax
for smaller businesses and outlined the next stage in the
process.
The 2008 Budget announced a review to consider whether it is
possible to simplify corporation tax calculations and statutory
return obligations for smaller companies. Since then there has been
liaison between Government and business to identify where there are
complexities and what can be done to reduce burdens in these
areas.
Discussions with businesses and professional bodies have reached
agreement that simplification and certainty are key issues for
businesses. To date the review has been focusing on companies with
a turnover of less than £750,000 and with fewer than 10 employees,
however the specific criteria setting out the businesses to be
impacted is yet to be confirmed.
The Government has announced two options on which it is now
seeking further consultation.
One option will consider whether it is possible to align current
statutory accounting and tax calculation obligations into a new
accounting standard incorporating tax obligations. The other option
will look at a new tax regime based around company cash flow.
Although these changes are aimed at making life easier for small
businesses, the Government has also said that new anti-avoidance
legislation would need to be introduced to prevent abuse and has
conceded that this might significantly reduce the simplification
benefits.
Capital allowances on company cars
Budget 2008 proposed the abolition of the current system of tax
relief for cars, bringing in an environmentally based pooling
system.
Capital allowances on cars are currently available to businesses
allowing them to write off a proportion of the cost each year
against taxable profits. Cars costing more than £12,000 ('expensive
cars') are dealt with separately from those costing less than
£12,000. The current rate of writing down allowance (WDA) is 20%
and , for expensive cars, the allowance is restricted to a maximum
of £3,000 per annum. The only current exception is for cars with
very low carbon dioxide (CO2 )emissions (up to 110g/km) which are
eligible for a first year 100% allowance.
From 1 April 2009 for companies and from 6 April 2009 for
unincorporated businesses, qualifying expenditure on cars will be
allocated to one of two pools dependant upon the car's specific CO2
emissions. Cars with emissions of over 160g/km (ie the heavier
polluting cars) will be separated into a 'special rate pool' and
attract allowances at 10%, while those with emissions of 160g/km or
less continue to be eligible for allowances at 20%.
Cars that have a private use element will still need to be
accounted for in a separate pool, to allow the appropriate
restriction for private use, but the rate of WDA will be determined
with reference to the CO2 emissions as above.
These changes will only affect expenditure incurred on or after
1 April/6 April 2009 as appropriate. Cars acquired outright or on
leases that made a car available prior to this date will continue
to be subject to the old rules. This will include restrictions on
expensive cars for a transitional period of approximately five
years. Further details will be published by Her Majesty's Revenue
& Customs (HMRC) in due course.
Other changes to the tax treatment of cars include a relaxation
of the restriction for expensive leased cars, which will now only
apply at a flat rate of 15% to cars with CO2 emissions above
160g/km. Also, certain hire cars, such as taxis, were exempt from
the expensive car rules, but will fall within the new rules
including those that apply to higher polluting vehicles.
Motorcycles will, from 1 April/6 April 2009 be excluded from the
definition of cars, and will therefore not be subject to these
rules. Expenditure incurred on motorcycles on or after this date
will, however, be eligible to qualify for the £50,000 Annual
Investment Allowance.
HMRC has also released a report on the interaction between
company cars, employee car ownership schemes and mileage allowance
payments HMRC will continue to monitor the growth in employee car
ownership schemes (ECOS schemes) and tax-free mileage allowance
payments as part of these arrangement, although no further changes
are to be made at this time.
Spreading payment of business rates
A cashflow benefit has been announced with respect to paying
business rates in the current economic climate.
Rates bills can be issued in respect of premises that should
have been subject to business rates, backdated to 2005. A new
measure means that the Government will give more time to pay
certain backdated business rates bills issued before 31 March 2010.
Businesses facing such bills will now be able to pay their
liability for previous years in equal interest-free instalments
over eight years, rather than immediately.
This will benefit businesses affected by recent rating reviews,
including several occupiers of ports who have been affected.
The Treasury estimates that this measure will result in a £80
million giveaway in 2008/09.
Essentially, this is a small gesture by the Treasury to provide
a cashflow boost to struggling businesses.
Empty property rate relief
The Government announced a temporary reprieve for business rates
on empty property for the financial year 2009/10. The business
rates are levied where a commercial property is left empty and
disused for three or six months, and this measure was intended to
incentivise businesses to re-let any disused property with a view
to keeping the letting market buoyant.
The threshold for when the rates become due has been increased to
properties with a gross rateable value above £15,000. The reprieve
is set to last a year.
Heavy lobbying from the property sector has
been heeded with a response from the Government for businesses with
modest property portfolios. However, the threat of seeing disused
properties demolished remains a possibility.
The larger players in the property sector will remain unimpressed
by the changes at a time when the commercial property market has
taken a battering and any cash flow benefit would go a little way
to nursing potential capital losses to the sector's collective
balance sheet. Perhaps the Chancellor will review the position come
next Spring. One can live in hope.
Land remediation relief
Further changes to the availability of Land Remediation Relief
will take effect for expenditure incurred on or after 1 April
2009.
Land Remediation Relief gives bodies liable to corporation tax a
deduction of 150% for qualifying expenditure on removing or
mitigating the effect of contamination of land. Claimants currently
have the option to surrender a loss arising from a Land Remediation
Relief claim in return for a cash payment from the Exchequer. The
new measures announced in the Pre-Budget Report seek to give
greater clarity on what categories of expenditure qualify for
relief and extends the relief to specified expenditure on bringing
long term derelict land back into productive use.
Expenditure will qualify for relief if the remediated land had
been derelict since 1 April 1998. Additionally, the relief will
only be available where the land was already derelict when it was
acquired by the claimant. The Government has set out a detailed
list of the specific qualifying costs on derelict land
remediation.
There will also be secondary legislation to allow relief on
contaminated land in relation to naturally occurring contamination.
This will include relief for the costs of treating land
contaminated by Japanese Knotweed, radon and arsenic in ways that
the Government considers appropriate (ie not by removal to landfill
sites).
Taxpayers' Charter
With the broadening of powers at HM Revenue & Customs'
(HMRC's) disposal, introduced in the Finance Act 2008, many
professionals were concerned that there was not sufficient
corresponding regulations binding HMRC's behaviour. Following a
comprehensive consultation process earlier in the year, the
Pre-Budget Report has confirmed that a Taxpayers' Charter will be
brought into effect and given specific legislative authorisation in
the Finance Bill 2009. This point is important as it means the
Charter can be relied on in courts and therefore will have 'teeth',
making HMRC accountable if it is breached, rather than being
something akin to a mission statement.
A fresh consultation will begin in January to establish the
wording of the Charter. It is proposed that the Charter be short,
simple, easy to understand and easily accessible, with a single
Charter setting out high level principles that will be linked to
service standards and that will cover the rights and obligations of
the taxpayer. HMRC and the Department for Work and Pensions are
looking for a joint launch of the respective Charters in 2009.