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2005 PRE-BUDGET REPORT SUMMARY
Corporate and Business Tax
Better working with business
In the 2005 Budget, the Revenue announced a consultation with small and medium-sized businesses (SMEs) ‘Working Towards a New Relationship’. The newly integrated HM Revenue and Customs (HMRC) published its report on the consultation at the end of November and has announced:
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a consultation on companies providing information only once to HMRC and Companies House including consideration of the alignment of filing dates for accounts and returns
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improvements to the Employer’s CD-Rom including further calculators for statutory payments and an interactive P11
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a reduction in the reporting requirements for Form 42 (the form on which employers report their transactions in employment-related securities, mainly shares and share options) by no longer requiring a form for the first issue of shares in the majority of cases.
HMRC continues to work on:
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the ‘Whole Customer View’, in particular developing a single point of contact for business with HMRC and
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reducing compliance costs for business.
HMRC will set a target for reducing administrative burdens in the tax system in Budget 2006 and, as a first step towards this target, plans have been announced for £300 million savings for business through reforms to tax administration.
Income recognition and accounting standards
UITF 40 ‘Revenue recognition and service contracts’ was issued in March 2005 to give guidance on income recognition for contracts for services such as those rendered by accountants and solicitors. In brief, it requires income to be recognised as a contract for services progresses.
This will mean that many businesses will be recognising income before an invoice has been issued to a customer and therefore before payment has been received.
The government will legislate in Finance Bill 2006 to enable most businesses affected by the March 2005 changes in the income recognition rules to spread any extra tax charge over three years. Those businesses most severely affected will be able to spread the charge over six years.
Taxation of small companies
A starting rate of corporation tax of 0% was introduced in 2002 and applies to companies with taxable profits of £10,000 or less. Companies with profits between £10,000 and £50,000 enjoy a marginal relief from the small companies’ rate of 19%. The zero rate was introduced to encourage the creation of small businesses and to allow them to grow.
In 2004, the government thought the system was being ‘abused’ and introduced a ‘non-corporate distribution rate’ of 19% on companies to the extent that profits were distributed.
The result has been a complex system and the government has concluded that many self-employed and employed people are still being advised to incorporate simply to reduce their tax and national insurance liabilities.
The government has therefore decided to replace the non-corporate distribution and zero rates with a new single banding set at the current small companies' rate of 19%.
Capital allowances
To ensure that small businesses are provided with incentives to invest for growth, the government will extend the first-year capital allowances to 50% in the year from April 2006.
Research and development (R&D) credits
In 2000, an R&D tax credit was introduced for small and medium-sized companies (SMEs). This enables SMEs to claim tax relief on 150% of qualifying R&D costs. Companies not in profit can take the relief up front as a payable R&D tax credit. They can surrender the loss attributable to the R&D and receive a cash payment of £24 for every £100 spent on qualifying R&D. The scheme was extended to large companies in 2002 enabling them to claim tax relief on 125% of qualifying R&D costs although the cash repayment option is not available to them.
Earlier this year, the Revenue published a discussion document and commissioned market research to determine whether the credits were working and to seek views on changes that could be made.
To date the R&D tax credit regime has suffered from a lack of expertise within the Revenue to determine whether activities qualify. To help deal with this the Revenue will create dedicated teams to deal with claims.
Other proposed improvements include:
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a statement of practice to explain how claims from small companies will be dealt with; in particular ensuring that claims for repayments are dealt with promptly and consistently
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an expansion of qualifying costs to include payments to clinical trial volunteers and allowing some small company projects classified as capital expenditure for tax purposes to qualify for relief
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a harmonisation of time limits and claims procedures across both the payable tax credit and enhanced relief.
Film Tax Relief
In Budget 2005 the Chancellor announced an extension to the current tax reliefs for low budget films until 31 March 2006. The current reliefs were originally due to expire in July 2005. The extension is due, at least in part, to the concerns expressed by the film industry about the proposed replacement relief.
Following a period of consultation, the government has now given details of the proposed new tax incentives for British films. The legislation will be published in Finance Bill 2006. The key features of the proposals are:
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the regime will apply to ‘film production companies’. These are companies which have an active involvement in the process of film making
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partnerships can no longer become involved in film production to shelter their members’ income from tax
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small budget films (films costing £20 million or less) will receive an enhanced tax deduction of 100% with a payable cash element of 25%, amounting to a benefit worth at least 20% of qualifying production costs
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large budget films will receive an enhanced deduction of 80% with a payable cash element of 20%, amounting to a benefit typically worth 16% of qualifying costs
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the new relief will apply to films beginning principal photography on or after 1 April 2006 with some transitional provisions for other cases.
Details of a new cultural test for British films have been released by the Department of Culture, Media and Sport.
UK Real Estate Investment Trusts
(UK-REITs)
UK-REITs have been considered as a means to improve the efficiency of both the commercial and residential property investment markets by providing liquid and publicly available investment vehicles.
The government will bring forward draft legislation to establish UK-REITs for inclusion in the 2006 Finance Bill. Details of the tax proposals will be published by the Revenue before the end of 2005 and will include the following key features:
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the regime will be open to companies, resident in the UK, that are publicly listed on a Recognised Stock Exchange
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companies or groups that meet the UK-REIT eligibility criteria as set out in legislation will not pay corporation tax on qualifying property rental income or qualifying chargeable gains
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a requirement to distribute at least 95% of net taxable profits on rental income to investors, who will then pay tax at their marginal rate.
There will also be an announcement in Budget 2006 of final details of the conversion charge applying to existing companies wanting to join the regime.
The intention is to ensure no overall loss of revenue from the introduction of UK-REIT legislation.
Corporation tax reform
A Technical Note published last December gave details of further legislative proposals on the reform of corporation tax. The Note covered topics addressed in previous consultation documents:
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the partial reform of the schedular system for companies
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the tax treatment of capital assets
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the taxation of leasing transactions
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tax differences between trading and investment companies.
Following discussions with business, the government has no current plans to take forward proposals on partial schedular reform or the taxation of capital assets.
Leasing transactions are now the subject of draft legislation (see below) which will be included in Finance Bill 2006.
A new item in the Technical Note considered modernising the capital allowance regime for business cars. The government is giving further consideration to this by suggesting a new car pool with a range of first year allowances depending on CO2 emissions.
Leased plant and machinery
Currently a lease of plant and machinery is treated as the hire of an asset:
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the lessor brings in the full rentals arising under the lease as income and is entitled to claim capital allowances in respect of its expenditure on the asset and
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the lessee deducts the full amount of the rentals payable over the life of the lease.
Provisions are being introduced, effective from 1 April 2006, to align the tax treatment of leased plant and machinery with that of other forms of finance. Where leases function essentially as financing transactions the new regime will:
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for the lessor bring in only the finance element of the rentals as income
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for the lessee allow a deduction only for the finance element of the rentals
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for the lessee provide entitlement to capital allowances.
The new rules will not apply to certain shorter leases (including all those where the term does not exceed five years) so that the great majority of leases will be unaffected by the changes.
Operating and Financial Review (OFR)
Measures to reduce costs on business by removing unnecessary regulatory burdens include the abolition of OFRs for quoted companies. Instead, quoted companies will be required to produce a Business Review. This will maintain the key reporting requirements and performance indicators necessary for shareholders to monitor business performance.
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