Business taxes
Corporation tax rates
The 0% starting rate is abolished from 1 April 2006, as announced
in the Pre-Budget Report. Companies with profits up to £50,000
will therefore pay 19% tax. All other rates and bands remain the
same. The removal of the starting rate means an end to the complex
non-corporate distribution rate calculations.
Capital allowances
The rate of first year allowance for small businesses will be
50% instead of 40%. The increase will apply for one year for spending
incurred from 1 April 2006 for companies and from 6 April 2006 for
self-employed people and partnerships. The rate for medium-sized
businesses remains 40%.
A consultation document on tax relief for business expenditure
on cars considers modernising the capital allowances regime, with
emphasis on providing further incentives for businesses to buy cleaner
cars.
Research and development tax relief
Companies with between 250 and 500 employees will benefit from
the 50% enhancement of qualifying expenditure instead of the current
25%. The change will take effect if the European Commission grants
state aid approval. Further details of the proposal will be published
later this year.
Companies will have to make, amend or withdraw claims to the enhanced
deduction by the first anniversary of the filing date for the tax
return instead of within the present six-year time limit.
Group relief
Group relief is extended, from 1 April 2006, to the losses of
foreign subsidiaries that cannot be relieved elsewhere, where the
subsidiaries are resident in the European Economic Area (EEA) or
have incurred the losses in a permanent establishment in the EEA.
Relief is restricted to losses for which there is no possibility
of relief in any other country. Provisions to prevent abuse are
effective from 20 February 2006. The change follows a decision in
the European Court of Justice involving Marks and Spencer PLC.
Corporate capital losses
Three anti-avoidance measures, effective from 5 December 2005,
will tackle schemes that enable companies to gain a tax advantage
from capital losses. They deter the artificial creation of capital
losses, the purchase of capital gains and losses and the conversion
of income streams into capital gains.
Taxation of leased plant and machinery
New legislation will align the tax treatment of leased plant and
machinery with that of plant and machinery acquired with other forms
of finance. The change will generally only apply to longer leases
that are essentially financing transactions finalised after 31 March
2006.
Trading by charities
The tax exemption for trades carried on by charities is extended
to where only part of the trade is carried on for a primary purpose
of the charity or carried out by beneficiaries. For periods starting
after 21 March 2006, relief will be available on the profits that
can reasonably be attributed to that part.
Landlord’s energy saving allowance
The landlord’s energy saving allowance will be extended
from 6 April 2006 to include draught-proofing and insulation for
hot water systems. The qualifying expenditure is deductible from
letting profits that are subject to income tax.
Landfill tax
The standard rate of landfill tax will be increased from £18
to £21 per tonne from 1 April 2006. The lower rate remains
at £2.
UK real estate investment trusts (REITs)
From 1 January 2007, a new tax regime that gives tax exemption
for income and gains from property will be available for companies
or groups that meet certain conditions.
Qualifying companies and groups must be UK resident, listed on
a recognised stock exchange and distribute at least 90% of their
tax-exempt profits. No single shareholder may control 10% or more
of share capital or voting rights. The ratio of interest on loans
to fund the tax-exempt business in relation to rental income must
be less than 1.25:1. Existing companies that switch to the REITs
regime will be subject to an entry charge of 2% of the market value
of their investment properties. The tax payment can be spread over
four years in instalments of 0.50%, 0.53%, 0.56% and 0.60%.
Distributions from the exempt property element will be paid net
of 22% tax. Other distributions will be taxed as normal dividends.
REITs will be qualifying investments for ISAs, PEPs and child
trust funds.
Reform of film tax relief
A new tax relief will apply to film production companies which
start principal photography on qualifying films after 31 March 2006.
The relief will give a deduction for UK production expenditure of
100% for films with total qualifying expenditure of £20m or
less and 80% for all other films. Where the deduction results in
a tax loss, the company may surrender that loss, up to the amount
of its qualifying UK expenditure, for a payable tax credit at a
rate of 25% of the loss where the 100% deduction applies or 20%
otherwise.
Alternative finance arrangements
Certain finance arrangements, including Shari’a compliant
arrangements and the alternative finance version of low cost employee
loans, will be taxed no less favourably than equivalent arrangements
that give rise to interest. The changes take effect between 22 March
2006 and 6 April 2006.
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