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Corporation tax rates
The main rate of corporation tax is 23% from 1 April 2013. The Chancellor announced in December that the rate from 1 April 2014, which was planned to be 22%, will be reduced by an additional 1% to 21%.
The Chancellor has now announced that the main rate of corporation tax will be reduced to 20% from 1 April 2015 and unified with the small company rate.
The small company rate will therefore remain at 20%.
Annual Investment Allowance (AIA)
The AIA provides a 100% deduction for the cost of plant and machinery purchased by a business up to an annual limit. The Chancellor announced in December an increase in the limit from £25,000 to £250,000 for a period of two years from 1 January 2013.
Complex legislation provides details of transitional provisions where a business has an accounting period that straddles 1 January 2013:
- the overall AIA limit for the transitional period has to be calculated by reference to old and new annual limits
- there are potential further constraints for the maximum AIA relief in the sub-periods ending before or after 1 January 2013.
Example
A company has a 12 month accounting period ending on 30 June 2013 (which starts on 1 July 2012). The AIA will be £137,500 (£25,000 x ½ + £250,000 x ½).
However for expenditure incurred before 1 January 2013 the maximum allowance will be the AIA that would have been due for the whole of the accounting period to 30 June 2013 if the increase in the AIA had not taken place. This would have meant that the company would have been entitled to £25,000 for the 12 months and so this is the limit for the six months to 31 December 2012.
On 1 January 2015, the AIA will revert back to £25,000. This will mean that the same company will have an AIA in later periods as follows:
Accounting period to 30 June 2014 £250,000
Accounting period to 30 June 2015 £137,500
Comment
The rules for accounting periods straddling 1 January 2013 are complex and this is without the additional complications that arise if part of the accounting period commences prior to April 2012 (as yet another AIA limit needs to be factored in).
Action point
The main point to appreciate is that expenditure incurred after 31 December 2012 may give a full tax write off but expenditure incurred before 1 January 2013 may not give this result.
Also note that it may pay to defer the expenditure until after the end of your current accounting period as the full £250,000 AIA may be available.
Please contact us before capital expenditure is incurred for your business in a current accounting period so that we can help you to maximise the AIA available.
Capital allowances and cars
A 100% first year allowance (FYA) is available on new low emission cars purchased by a business. The current rule is that a 100% FYA is generally available where a car's emissions do not exceed 110gm/km. The availability of a 100% FYA is to continue for purchases as follows:
- for the two years from 1 April 2013 to 31 March 2015 but only where emissions do not exceed 95gm/km and then
- for a further three years from 1 April 2015 to 31 March 2018 but only where emissions do not exceed 75gm/km.
Cars with emissions between 111-160gm/km inclusive currently qualify for main rate Writing Down Allowance (18%). The threshold is to be revised down to 130gm/km for additions from 6 April 2013 for income tax (1 April 2013 for companies).
Comment
There are over 150 models that can be purchased in 2012/13 which qualify for a 100% FYA. If the purchase is deferred to 2013/14, the number falls to less than 30.
100% Capital allowances
100% FYAs on capital expenditure are available for certain classes of assets but exclusions apply. Expenditure on ships and railway assets is currently excluded but this exclusion is removed for expenditure on or after 1 April 2013.
Enhanced capital allowances of 100% are also available on qualifying plant and machinery expenditure under the energy-saving and water efficient technology schemes. Each year the qualifying technologies and products are reviewed and additions and deletions made. All amendments are subject to State aid approval and the lists will be updated by Treasury Order in summer 2013.
The main changes are the inclusion of two new technologies: carbon dioxide heat pumps for water heating and grey water re-use technology. In addition five technologies will be removed and certain criteria for a number of technologies in both schemes will be revised.
Computing taxable profits on a cash basis for smaller businesses
An optional basis for computing taxable profits is to be introduced for small unincorporated businesses for the 2013/14 tax year onwards.
The key aspects of the cash basis are that:
- small businesses would be taxed on their cash receipts less cash payments of allowable expenses, subject to a number of tax adjustments
- it is only available to unincorporated businesses
- it is an optional scheme and requires an election by the owner(s) of a business
- businesses can enter the cash basis if their receipts for the year are less than the amount of the VAT registration threshold (currently £77,000) or twice that (currently £154,000) for recipients of Universal Credit.
In response to feedback on the draft legislation that was issued for consultation in December 2012, HMRC has made some design changes to the legislation including:
- businesses using the cash basis will continue to do so until their circumstances change so that the cash basis is no longer suitable for them
- businesses using the cash basis will not have to use flat rate expense rates for their cars.
No detail has been provided on the circumstances in which a business will no longer be able to use the cash basis.
Special rules apply on the transition to and from the cash basis.
Comment
The cash basis is being introduced by the Government under the banner of 'tax simplification'. However, the main driver for the cash basis is the introduction of Universal Credit. Universal Credit is being introduced by the Government from 2013 and will eventually replace the Tax Credits system and other state benefits. The Government has been clear that income reporting for self-employed claimants must be reported monthly and will therefore be aligned with the 'simple' new cash income reporting system that HMRC are introducing.
Under current proposals, the cash basis may be more complicated than the conventional basis. While the actual accounting treatment may be simpler it will still be necessary to have regard to tax rules for the deductibility of some expenses. There are also the transitional rules to consider for existing businesses wishing to opt into the new system.
Flat rate expenses
As part of the simplification for unincorporated businesses, legislation is being introduced to allow two deductions to be based on fixed rates, rather than actual costs. The rules apply from 2013/14 onwards.
Flat rate expenses will be available for:
- cars, vans and motorcycles. For cars or vans the rate for the first 10,000 business miles is 45p, after which the rate reduces to 25p. For motorcycles the rate is 24p
- business use of a home. Provided certain conditions are satisfied, the following monthly rates will be allowed:
| Business use in a month | Deduction |
|---|---|
| 25 hours or more | £10 |
| 51 hours or more | £18 |
| 101 hours or more | £26 |
Where a person uses premises both as a home and as business premises, for example a pub, the total expenses of the property need to be adjusted for the private use. Legislation will introduce a fixed scale which can be used for the private use so that the business element of the expenses will be relieved.
Claiming expenses on a flat rate basis will not be open to partnerships which include a corporate partner.
Research and development (R&D) relief
Following consultation, legislation will be introduced to provide an 'Above the Line' (ATL) credit scheme to further encourage R&D investment by large companies. The aim of the ATL scheme is to increase the visibility of large company R&D relief and provide greater cashflow support to companies with no corporation tax liability.
The taxable credit will be 10% of qualifying expenditure incurred on or after 1 April 2013 with the credit, net of tax, being fully payable to companies with no corporation tax liability.
The ATL scheme will initially be optional but will become mandatory on 1 April 2016. Until this time eligible companies that do not elect to claim the ATL credit will be able to continue to claim R&D relief under the current scheme which provides for an additional 30% deduction of any qualifying expenditure to reduce chargeable profits (or increase a loss) but which does not permit a payable credit.
Close company loans to participators
A close company (which generally includes an owner managed company) may be charged to tax in certain circumstances where it has made a loan or advance to individuals who have an interest or shares in the company (known as participators). Loans and advances are also caught where they are made to an associate of the individual such as a family member. The corporation tax charge is 25% where the loan is outstanding nine months after the end of the accounting period. Three changes to the rules are proposed to tackle avoidance.
- The first change is to put beyond doubt that the charge applies where loans are made via intermediaries such as Limited Liability Partnerships, partnerships and trusts. The charge will apply where at least one participator in the close company is a member, partner or trustee.
- The second change will impose the 25% charge on certain arrangements where value is extracted from a close company and an untaxed benefit is conferred on an individual participator (or associate) other than by way of a loan or advance.
- The third change is to prevent the practise of avoiding the payment of the tax charge by repaying the loan before the tax is due (nine months after the end of the accounting period) and then effectively withdrawing the same money shortly after. This change may also prevent refunds of the 25% tax already paid where loans are redrawn shortly after.
The changes have effect from Budget day.
Action point
These changes may affect a number of owner managed companies so do please contact us if you consider these changes will have an impact on your current arrangements so that the corporation tax position can be accurately reported.
Corporation tax deductions for employee shares
Corporation tax relief may be available in connection with share options and awards granted to employees. The relief is based on the amount that is chargeable to income tax when the shares are acquired by the employee or the amount that would be chargeable if the employee was UK resident or if any relevant tax advantages did not apply. Legislation is to be introduced to clarify the rules that where that relief is claimed any other corporation tax relief cannot be claimed in connection with the same provision of shares other than where specifically stated. The legislation will generally have effect for accounting periods ending on or after Budget day.
Corporation tax exit charges
Certain corporation tax charges known as exit charges can arise on unrealised profits and gains when a company ceases to be UK tax resident or as a consequence of a transfer of their place of management to another EU or EEA member state. The rules also apply when a non UK resident company ceases all or part of its trading operation in the UK. A measure is to be introduced to allow the deferred payment of such charges subject to certain conditions to ensure that HMRC will receive the full payment over time. The deferment is by election and can apply to exit charges arising on or after 11 December 2012.
Closure of 'loss loopholes'
Legislation is to be introduced to prevent certain arrangements for the relief of certain company losses for accounting periods ending on or after Budget day. There are two objectives of the proposals. One is to prevent 'loss buying' where companies seek to pass certain unused losses to unconnected third parties on a change of company ownership. The other relates to a specific aspect of the surrender of losses for group relief.
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