Businesses

Successful Business Payment Support Service extended
VAT rules to cause New Year headache for businesses
Cars and vans - plug in for tax benefits
Widening the scope for R&D tax relief
What's new on the international front?
More clarity to the worldwide debt cap...?
New policy for Insurance Tax
Anti-avoidance - what you need to watch out for
Despite the rumours what remains unchanged?

Successful Business Payment Support Service extended.

The Government has announced that it will continue the operation of the business payment support service (BPSS) for "as long as it is needed". This is a welcome announcement for cash strapped businesses who are struggling to meet their tax liabilities.

Launched at the 2008 Pre-Budget Report, the BPSS allows businesses who are facing temporary financial difficulties to apply for more time to pay their tax liabilities. BPSS covers most taxes and duties including income tax, corporation tax, national insurance contributions, PAYE and VAT. HM Treasury's website reports that the BPSS has been very successful, helping over 160,000 businesses to spread over £4 billion of tax.

To benefit from the BPSS, businesses have had to show that they are genuinely unable to pay their tax liabilities when they fall due. However, the Pre-Budget Report introduces a new requirement for businesses to provide an independent review of their needs if they are asking for additional time to pay tax liabilities exceeding £1 million. Further details on this service can be found on HM Revenue & Customs website.

VAT rules to cause New Year headache for businesses

A number of important changes to the European Union (EU) VAT system will take effect from 1 January 2010 and beyond. This so-called 'VAT package' will affect any business involved in supplying or receiving cross-border services and reclaiming VAT incurred in another EU country.

Although the detail was already known, HM Revenue & Customs has announced that a single statutory instrument has been prepared for all changes which amend the VAT Regulations and come into effect on 1 January 2010.

The main changes include:

• The general place where services will be taxed in 'business to business' transactions will be where the recipient is established. However, there will be important exceptions to this rule, including services relating to property and transport. Changes will also be made to the time when VAT has to be accounted for
• Businesses involved in selling services across borders will also have additional reporting requirements in the form of EC Sales Lists
• The refund process for VAT incurred in other EU countries will also become more automated because claimants will use an electronic portal in their member State of establishment

The legislation to introduce some of these changes was included in Finance Act 2009. However, secondary legislation is required to amend the VAT Regulations. Legislative changes are also necessary to amend the reporting requirements for the intra-EU movement of goods.

The new rules will affect businesses in a number of ways and 1 January 2010 is now very close. If they have not already done so, businesses should take action now to ensure that they are ready to comply with the new rules.

Cars and vans - plug in for tax benefits

Car benefits
From 6 April 2010, there will be a 0% taxable benefit for employees provided with wholly electrically propelled cars and vans. This compares to the current position where these cars are subject to a benefit based on 9% of their list price, while the benefit on wholly electrically propelled vans is a flat rate of £3,000. This reduction in the benefit will last for five years.

In a further 'green' measure the emission level for cars benefiting from a reduced tax benefit has been lowered from 120g/km to 99g/km. Cars below this emission level will qualify for their tax benefit being calculated on 10% of the list price of the car, with the relevant percentage for all other cars falling between 15% and 35%. 

Fuel benefit
Where an employee is provided with private fuel by their employer for a company car the benefit is calculated as a percentage of a 'prescribed amount', with the relevant percentage being based on the carbon emissions of the car. With effect from 6 April 2010 the 'prescribed amount' will be increased from £16,900 to £18,000.

For company vans, the taxable benefit on private fuel is a set amount of £500 which will be increased to £550 with effect from 6 April 2010.

Capital allowances
Subject to European approval, new electric vans will benefit from a 100% first year capital allowance where a business incurs expenditure on or after 1 April 2010 for corporation tax and 6 April 2010 for income tax.

This provision is in addition to the existing 100% capital allowance available for electric cars and cars with carbon emissions of less than 110g/km.

Widening the scope for R&D tax relief

There is a welcome relaxation in the rules for companies claiming research & development (R&D) tax relief for small and medium enterprises (SMEs), with the removal of the requirement for them to own the underlying intellectual property.

The R&D tax relief for SMEs already gives a tax deduction of £175 for every £100 spent on qualifying R&D. In addition to this enhanced deduction, a qualifying loss can be surrendered in exchange for a repayable tax credit, making this relief extremely valuable for businesses.

Although there is a similar, but slightly less valuable, R&D tax relief available for large companies, the changes announced in the Pre-Budget Report do not affect this as there has never been the requirement for claimants under the large company R&D scheme to own the underlying intellectual property.

For the purposes of R&D tax relief for SMEs, a company is an SME if it has less than 500 employees and either turnover of less than €100 million or a balance sheet total of less than €86 million.

The change will be effective for accounting periods ending on or after 9 December 2009 and will mean some companies who were previously unable to qualify for R&D tax relief for SMEs will now qualify for this significant relief.

What's new on the international front?

The Pre-Budget Report heralded a welcome development with the introduction of a 10% corporation tax rate (a 'Patent Box') on income from patent rights which will become effective from 1 April 2013. This may stem the flow of intellectual property rights being established or transferred outside the UK tax net, but there is a long lead time before any benefits will be enjoyed. The Government appears to recognise the longer term benefits of such a tax incentive and that tax revenues received from a lower tax rate is better than no revenue at all.

Further good news for international groups is that the Government is considering an exemption for foreign branch profits from UK corporation tax. The exemption, if brought in, would align the rules with the dividend exemption provisions which have been recently introduced and would reduce the administrative burden.

The introduction of a new controlled foreign companies regime has been delayed and will now not be announced until at least 2010.

Finally, anti-avoidance rules have been announced to counter schemes whereby multinational groups enter into risk transfer arrangements (involving loan relationships and derivative contracts) and are able to take advantage of losses incurred at the entity level which outweigh the overall economic risks to the group. From 1 April 2010 an entity's losses created by these arrangements will be ringfenced and restricted against its profits from similar hedging arrangements.

More clarity to the worldwide debt cap...?

This announcement reiterates an earlier ministerial statement of 9 November 2009 outlining amendments and further clarifications to the worldwide debt cap legislation. These clarifications include:

• preference shares not being included in the definition of 'amounts borrowed' in the gateway test
• that guarantee fees will be included in the definition of 'finance income'
• changes to the definition of the group treasury company exemption
• excluding securitisation companies from the rules
• eliminating mismatches between company and group accounting treatment

This highlights how the original proposals were rushed and should have been subject to greater consultation. The rules are complicated for many groups to understand, and onerous for them to comply with as they require a number of additional calculations and returns to be made.

The general principle underlying the debt cap is straightforward - if UK debt is greater than group debt then there is a disallowance of interest - however the legislation is highly complex.

New policy for Insurance Tax

The Chancellor announced a measure that will extend the scope of Insurance Premium Tax (IPT) to certain fees charged by insurance intermediaries.It is intended to close a perceived loophole relating to certain fees charged on insurance contracts taken out by individuals in their personal capacity. It will not apply to commercial lines of insurance.

IPT is levied on the gross premium charged by an insurer, which ordinarily covers the costs of administration and any commissions or fees paid to intermediaries. Under the current IPT legislation, if an intermediary charges a fee in relation to arranging or administering an insurance directly to the insured, the fee is potentially not subject to either VAT or IPT.

Over the past few years, a number of intermediaries have restructured their services in order to take advantage of the opportunity to save IPT - by charging an arrangement fee to the insured, rather than taking a commission from the insurer.

HM Revenue & Customs (HMRC) was recently unsuccessful in challenging such an arrangement and proposals were subsequently made to change the IPT legislation. The Chancellor's announcement, which will effect payments made on or after 9 December 2009, should therefore not come as a surprise to the insurance industry as it follows a period of consultation.

Anti-avoidance - what you need to watch out for

The Chancellor has repeatedly stated that he wants to create a modern and fair tax system and has announced, in the Pre-Budget Report, a round of measures which he estimates will raise up to £165 million per year whilst protecting a further £5 billion.

The main anti-avoidance measures which could apply to businesses are summarised as follows:

• Stamp duty and stamp duty reserve tax - Following the case of HSBC Holdings Plc and Vidacos Nominees Limited v Commissioners for Her Majesty's Revenue and Customs, the Government has announced that it will introduce legislation to remove the ability for shares to be routed though a European Union clearance service, without the payment of 1.5% stamp duty or stamp duty reserve tax. This will take effect for scheme transfers made on or after 1 October 2009.
• Sale of lessor companies - it was possible to avoid previous targeted anti-avoidance legislation in relation to the sale of lessor companies by inserting intermediate companies, in certain circumstances. However, this has now been closed with effect from 9 December 2009.
• Capital allowance transfers - legislation was announced on 21 July 2009 to restrict the way in which certain capital allowances can be used where a company is sold from one group to another and the main purpose, or one of the main purposes of the transaction is to transfer excess capital allowances. These provisions have been extended to include transfers of companies from unincorporated shareholders, the changes taking effect from 9 December 2009.
• Plant and machinery leasing - legislation will be included in the Finance Bill 2010, effective from 9 December 2009, to target two specific types of avoidance; where artificial losses are generated and where tax-timing differences are made permanent.

In addition to a number of targeted anti-avoidance measures, HM Revenue & Customs (HMRC) has issued a note stating that its interpretation of the Enterprise Investment Scheme (EIS) tax relief legislation as it applies to companies carrying on a trade in partnership has changed. Its previous view was that a company carrying on a trade as a partner or a member in a limited liability partnership could qualify for EIS tax relief. However, its revised interpretation is that companies with these arrangements cannot qualify for EIS tax relief. Broadly, where shares have already been issued, HMRC will honour the relief, however, where shares are yet to be issued (regardless of whether an advance assurance has already been obtained) the shares will not qualify for EIS tax relief.

Despite the rumours what remains unchanged?

As ever, there were a number of rumours prior to the Pre-Budget Report about what might be included, ranging from feared uplifts in capital gains tax on individuals to changes to tax on business. However, the reality proved to be rather thinner than expected and some of the wilder speculation proved to be unfounded.

It was thought that the Chancellor might seek to restrict the amount of losses which banks could carry forward against future profits or to introduce a windfall tax on them. The windfall tax was not introduced to allow "banks to rebuild their capital base and become stronger", although the Chancellor has instead introduced the 'bank payroll tax' and more details on this are provided in our commentary.

The corporation tax rate for small companies remains unchanged at 21% with the increase to 22%, originally announced in the 2007 Budget to take effect from 1 April 2009, being deferred yet again, this time until 1 April 2011.

One absence was in relation to property. Clare Hartnell, Head of Property and Construction at Grant Thornton noted that "it is disappointing that Stamp Duty Land Tax (SDLT) relief in disadvantaged areas has not been reintroduced."