In his 11th Budget speech, Chancellor Gordon Brown talked about continued growth for the economy, increased business investment, incentives to save, and support for families. Brown confirmed his intention to modernise the corporate tax system and announced measures to help combat climate change.
Corporation tax rates
The Chancellor announced a reduction in the full rate of corporation tax for companies with profits above £1.5m from 30% to 28%, taking effect from 1 April, 2008, coupled with an increase in the small companies’ rate of tax from 19% to 20% from 1 April, 2007. The small companies’ rate is set to increase to 21% in 2008 and 22% in 2009. This move is an attempt to align the tax treatment of small companies with that of individuals running their business as a sole trade or partnership.
Significant changes were announced to the capital allowances system, some of which were unexpected. These will affect most businesses, whether sole trade, partnership or company, and are as follows:
l The temporary rate of 50% for first-year capital allowances for small businesses’ expenditure on plant and machinery has been extended for another 12 months
l From 2008/09, there will be a 10% writing-down allowance for certain fixtures integral to a building. This is a decrease from the current rate of 25%
l From 2008/09 the writing-down allowance for expenditure on plant and machinery will be reduced from 25% to 20%
l From 2008/09 there will be an increase in the writing-down allowance for long-life assets from 6% to 10%
l The introduction of an annual investment allowance on the first £50,000 spent on plant and machinery from 2008/09
l With regard to industrial business allowances (IBAs) and agricultural buildings allowances (ABAs), in most cases, balancing adjustments on balancing events are no longer available from 21 March, 2007, and the writing-down allowance for the second user is now based on the ex-owner’s written-down value before sale (rather than after). The aim is for IBAs and ABAs to be phased out over a period of four years.
The reduction in the general writing-down allowance to 20% and the larger reduction to 10% for the allowance available for fixtures integral to a building will be very unpopular with businesses and is likely to cause much debate within industry.
EIS and VCTs
Changes have been announced to the rules in respect of Enterprise Investment Schemes (EIS), Corporate Venture Schemes (CVS) and Venture Capital Trusts (VCTs), and the companies attracting investment under these schemes. A new employee test is to be introduced, so that the company (or group of companies) raising money under EIS or VCT must have fewer than 50 full-time employees at the date on which the shares are issued. Changes have also been made in respect of subsidiaries. Under current rules, where a qualifying trade is carried on by a subsidiary, that company must be a direct 90% subsidiary of the parent company. Changes announced will allow the trade to be carried on by indirect subsidiaries, provided the 90% test is met.
At the moment, the amount of funds that can be raised by EIS, CVS and VCT companies is not limited. The only test that has to be met is in respect of gross assets, which cannot exceed £7 million before the investment and £8 million after. Under the new rules, no more than £2 million can be raised in any scheme in the 12 months ending with the date of the investment.
The employee test and investment limits will not apply in relation to investments made out of funds raised by VCTs raised before 6 April, 2007, nor to EIS or CVS shares issued before the date on which the 2007 Finance Bill receives royal assent. All the remaining measures will have effect on or after 6 April, 2007.
Income tax rates
One announcement made by the Chancellor, which will prove popular, is a reduction in the basic rate of income tax from 22% to 20% from 6 April, 2008. At the same time, the 10% starting rate will be abolished for earnings and pension income. This will, however, continue to be available for savings income and capital gains. The rates for dividends will remain unchanged.
It has been confirmed that the enquiry window for income tax self-assessment and most company tax returns will be one year following the submission of the return, rather than the filing deadline. The changes will apply to income tax self-assessment returns for 2007/08 and subsequent years and for company tax returns for accounting periods ending after 31 March, 2008.
The introduction of different filing dates for paper and online self-assessment tax returns has been confirmed following lobbying by accountants and other agents on original proposals. These new deadlines will apply to tax returns that are issued on or after 5 April 2008 and will relate to the 2007/08 tax year and subsequent years. For paper returns, the new filing deadline will be 31 October. For returns filed online, the deadline will continue to be 31 January. For taxpayers filing paper returns, who want HMRC to calculate their tax liability, the filing deadline will also move from 30 September to 31 October.
VAT fuel scale charges
The fuel scale charge system has been changed and the revised charges, which apply to tax periods beginning on or after 1 May, 2007, are based solely on the CO2 emission levels of the car, mirroring the system used for benefit-in-kind purposes. The new table has 21 bands with 5g/km increments and is intended to broadly replicate the charges arising under the old system.
Overall, the Budget will result in increased complexity with the tax system for owner-managed businesses. These seem to have lost out once again - this time with an increase in the small companies’ corporation tax rate, which is unlikely to be compensated for by the changes to capital allowances. n
? Paula Tallon is director and head of direct tax at tax specialist company Chiltern.