The Budget 2005

• Introduction

• Personal tax

• Employment issues

• Corporate & Business Tax

• Capital taxes and Trusts

• Stamp duty land tax

• VAT, Excise & other duties

Corporate and Business Tax

Corporation tax rates

The corporation tax rates continue to be a 0% starting rate, a 19% small companies rate and a main rate of 30%. The profits limits used to determine the appropriate rate of tax are reduced for a company that is part of a group or has associated companies.

Comment
The benefit of the 0% rate is not available to companies whose profits are distributed to non-company shareholders. This follows a change in the rules made in 2004 so that a minimum rate of 19% applies where profits are distributed in this way.

Corporation tax reform

A Technical Note published last December gave details of further legislative proposals on the reform of corporation tax. This followed the two measures (extension of relief for management expenses and reform of the rules on transfer pricing and thin capitalisation) included in Finance Act 2004. The note covered topics addressed in previous consultation documents:

• the reform of the schedular system for companies

• the tax treatment of capital assets

• the taxation of leasing transactions

• tax differences between trading and investment companies.

Comment
It was surprising that there was no further detail in this area and no indication of a likely timescale.

Landlords Energy Saving Allowance (LESA)

The LESA was introduced from 6 April 2004 where landlords who pay income tax incur expenditure on installing cavity wall or loft insulation. It provides immediate tax relief on expenditure up to £1,500 per building. This is extended from 7 April 2005 to include the installation of solid wall insulation.

Comment
Insulation costs would normally be treated as a capital expense and so no tax relief would be available until the property was sold. This accelerated relief is part of the government’s package of environmentally friendly policies.

Business Premises Renovation Allowance (BPRA)

As part of last December’s Pre-Budget Report the government issued a consultation document on the proposed new BPRA scheme. The stated aim is to raise investment in disadvantaged areas.

The scheme will provide 100% first year capital allowances for costs of converting or renovating business property in the designated disadvantaged areas. To qualify:

• the property may be owned or leased

• the property must have previously been vacant for 12 months or more and

• the costs must be incurred in order to bring it back into business use.

The allowance will be given through the normal capital allowances system and is due to be introduced when state aid approval has been obtained.

Comment
The relief is available to traders and landlords irrespective of the size of the business. The proposed rules will in some cases simply give tax relief sooner than it is currently due. In other cases the new allowance will give full tax relief where none would otherwise have been due.

Researchers acquiring shares in spinout companies

Universities and public sector research establishments which own intellectual property (IP) often develop that IP further through companies created in association with the researcher who helped create it. This allows the researcher to benefit where the IP is subsequently exploited. The shares in the spinout company held by the researcher increase in value on introduction of the IP into the company. This creates immediate income tax and NIC charges on the value of the benefit before cash is available to meet the bill. The government is concerned that this has significantly reduced the creation of new spinout companies.

Legislation has been introduced, which is effective from 2 December 2004, to remove the income tax and NIC charges if certain conditions apply. In general terms the rules work by ignoring the effect of the transfer of IP into the company on the researcher’s shares in the spinout company.

Spinout companies set up before 2 December 2004 will be able to elect, no later than 15 October 2005, that income tax and NICs will not be payable unless and until the company is successful.

Comment
To what extent the removal of the tax and NIC charges will encourage the set-up of such companies remains to be seen but the move is a welcome one nonetheless.

Intangible assets

A new regime for intangible assets, for example goodwill and brand names, was introduced for companies in 2002. A new class of asset, namely payment entitlement under the single payment scheme for farmers, will be brought within this regime for acquisitions on or after 22 March 2005.

Two further changes are made from 16 March 2005 to ensure that the rules work as intended:

• the closure of a loophole in the rules designed to prevent relief on transactions between related parties

• amendment of the rules so that interaction with other taxes, such as income tax and capital gains tax, work as intended.

Comment
Once again, the last two changes have been brought to the Inland Revenue’s attention because of the disclosure rules on anti-avoidance.

Tax relief for British films

The Chancellor has extended the current tax relief for low budget films until 31 March 2006. A series of measures to counter tax avoidance schemes has also been introduced.

Comment
The existing reliefs for low budget films were originally due to expire in July 2005. The film industry has expressed concerns about the proposed replacement relief which explains why the current reliefs have been extended.

International Accounting Standards (IAS)

Some companies will adopt IAS from 1 January 2005. The government has considered the transitional adjustments arising from the change and announced in the Pre-Budget Report last December that any tax effects arising would be deferred until the impact could be determined and managed. This was intended to ‘relieve companies of a considerable degree of uncertainty following their representations’.

However shortly after last December’s Pre-Budget Report the government announced changes, effective from 14 December 2004, to ensure that companies do not get relief for losses arising on transactions designed solely to accelerate relief that would otherwise be deferred until 2006 at the earliest.

In addition a number of technical amendments have been made to the legislation introduced last year. These reflect developments in both IAS and UK Generally Accepted Accounting Practice as well as correcting some errors and omissions. 

Corporation tax: anti-avoidance

The government has taken action in an attempt to prevent corporation tax avoidance by companies in specific areas:

• use by companies of capital redemption bonds to generate artificial losses

• exploitation of the loss buying rules in relation to the carry forward of non-trading losses on debt where there is a change in ownership of a company.

The measures are effective from 10 February 2005.

Further legislation was introduced on 16 March 2005 to address arrangements:

• seeking to bypass the controlled foreign company rules

• obtaining credit for foreign tax on income treated as dividends in the UK but for which the payer gets a deduction as interest

• using arbitrage schemes that involve hybrid entities or instruments.

Double Tax Relief (DTR)

DTR is designed to prevent double tax arising where income is taxed both in the UK and abroad. DTR should not exceed the amount of UK tax due on the sum already taxed overseas. Where tax is charged on profits, it is necessary to determine exactly which profits are attributable to the transaction that gave rise to the foreign tax. The new rules, effective from 16 March 2005 for companies and 6 April 2005 for individuals, clarify how this calculation of profit should be done.

In addition any company, individual or partnership that enters into an arrangement in specified situations in order to claim DTR, where tax avoidance is one of the main purposes, will be subject to anti-avoidance rules. The Inland Revenue will be able to deny the increase in DTR resulting from the scheme. These measures generally take effect from 16 March 2005 and give effect to the announcement made on 10 February 2005 that DTR will be denied where income was acquired to secure excessive DTR.

Comment
The introduction of these measures is due at least in part to the disclosure rules introduced last year whereby, broadly, tax scheme promoters must provide details of their schemes to the Inland Revenue. In the government’s words ‘these rules provide early warning of avoidance schemes…..(and) enable the government…..to respond to tax avoidance’.

Transfer pricing

The transfer pricing rules require the market value of transactions between connected businesses to be recognised for tax purposes. In April 2004 the rules were extended to apply to purely domestic transactions. Further changes announced on, and effective from, 4 March 2005 extend the rules further to apply where parties who collectively could control a business act together to finance that business.

Comment
This measure is intended to ensure businesses cannot increase tax relief for their financing costs simply by arranging their finance in a particular way.

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Disclaimer - for information of users
This summary is published for the information of clients. It provides only an overview of the main proposals announced by the Chancellor of the Exchequer in his Budget Statement, and no action should be taken without seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this summary can be accepted by the authors or the firm.