Corporation tax rates
From 1 April 2015 the main rate of corporation tax, currently 21%, will be reduced to 20%.
As the small profits rate is already 20%, the need for this separate code of taxation disappears. The small profits rate will therefore be unified with the main rate.
It is proposed that the rate of corporation tax will continue at 20% for the financial year beginning on 1 April 2016.
Annual Investment Allowance (AIA)
The AIA provides a 100% deduction for the cost of most plant and machinery (not cars) purchased by a business up to an annual limit and is available to most businesses. Where businesses spend more than the annual limit, any additional qualifying expenditure generally attracts an annual writing down allowance of only 18% or 8% depending on the type of asset.
The maximum annual amount of the AIA was increased to £500,000 from 1 April 2014 for companies or 6 April 2014 for unincorporated businesses until 31 December 2015. However it was due to return to £25,000 after this date. The Chancellor announced that following conversations with business groups this would be addressed in the Autumn Statement and would be set at a much more generous rate.
Research and Development (R&D) tax credits
As previously announced, the government will increase the rate of the ‘above the line’ credit from 10% to 11% and will increase the rate of the SME scheme from 225% to 230% from 1 April 2015.
It is proposed to restrict qualifying expenditure for R&D tax credits from 1 April 2015 so that the costs of consumable items incorporated in products that are sold are not eligible. Following consultation the restriction will not apply where the product of the R&D is transferred as waste, or where it is transferred but no consideration is received.
A new voluntary advance assurance service lasting three years will be introduced for small companies making their first claim from autumn 2015. From 2016 the time taken to process a claim will be reduced. New guidance will be issued by HMRC aimed specifically at smaller companies, backed by a two year publicity strategy to raise awareness of R&D tax credits. HMRC will publish a document in the summer setting out a roadmap for further improvements to the scheme over the next two years.
Construction Industry Scheme (CIS) improvements
At Autumn Statement the government announced it would make a number of changes to the CIS. The aim of the changes is to reduce the administrative burden and related cost burden on construction businesses. The measures should result in more subcontracting businesses being able to achieve and maintain gross payment status, thus improving their cashflow. These changes are to be implemented in stages by the issue of Statutory Instruments.
From 6 April 2015 amendments will be made to the system including:
The requirement for a contractor to make a return to HMRC even if the contractor has not made any payments in a tax month is removed.
The requirements for joint ventures to gain gross payment status will be relaxed where one member already has this status and where that firm or company has a right to at least 50% of the assets or the income or holds at least 50% of the shares or the voting power in the joint venture.
From 6 April 2016 further changes are proposed:
Mandatory online filing of CIS returns will be introduced with the offer of alternative filing arrangements for those unable to access an online channel by reason of age, disability, remote location or religious objection.
The directors’ self assessment filing requirements will be removed from the initial and annual compliance tests.
The threshold for the turnover test will be reduced to £100,000 in multiple directorship situations.
From 6 April 2017 mandatory online verification of subcontractors will be introduced.
About two thirds of CIS contractors are also employers who therefore file Real Time Information PAYE returns online. It is no surprise that the government wants to extend the scope of mandatory online filing. The improvements to the online verification process would be welcome but the government is also proposing to remove the option of verifying subcontractors by telephone.
Class 2 National Insurance contributions (NIC)
From 6 April 2015 liability to pay Class 2 NIC will arise at the end of each year. Currently a liability to Class 2 NIC arises on a weekly basis.
The amount of Class 2 NIC due will still be calculated based on the number of weeks of self-employment in the year, but will be determined when the individual completes their self assessment return. It will therefore be paid alongside their income tax and Class 4 NIC. For those who wish to spread the cost of their Class 2 NIC, HMRC will retain a facility for them to make regular payments throughout the year. The current six monthly billing system will cease from 6 April 2015.
Those with profits below a threshold will no longer have to apply in advance for an exception from paying Class 2 NIC. Instead they will have the option to pay Class 2 NIC voluntarily at the end of the year so that they may protect their benefit rights.
The government has announced that Class 2 NIC will be abolished in the next Parliament and will reform Class 4 NIC to include a contributory benefit test. Consultation on these matters will take place later in 2015.
Corporation tax relief for goodwill on incorporation
Corporation tax relief may be available to companies when goodwill and intangible assets are recognised in the financial accounts. Relief is normally given on the cost of the asset as the expenditure is written off in accordance with Generally Accepted Accounting Practice or at a fixed 4% rate, following an election.
An anti-avoidance measure was announced at Autumn Statement to restrict corporation tax relief. The restriction applies where a company acquires internally-generated goodwill and certain other intangible assets used in a business from ‘related persons’. In particular, related persons includes individuals who are shareholders in the company.
In addition, individuals will be prevented from claiming Entrepreneurs’ Relief (ER) on disposals of goodwill when they transfer the business to a related company. Capital gains tax will be payable on the gain at the normal rates of 18% or 28% rather than 10%. Following consultation, the legislation will be revised to allow ER to be claimed by partners in a firm who do not hold or acquire any stake in the successor company.
These measures apply to all transfers on or after 3 December 2014 unless made pursuant to an unconditional obligation entered into before that date.
Prior to this announcement it was possible, for example, on incorporation of a sole trader’s business to a company which is owned by the sole trader, for the company to obtain corporation tax relief on the market value of goodwill at the time of incorporation. The disposal by the sole trader would qualify for a low rate of capital gains tax.
The government considers this is unfair to a business that has always operated as a company.
Diverted profits tax
At Autumn Statement, a new tax to counter the use of aggressive tax planning techniques by multinational enterprises to divert profits from the UK was announced. Legislation will be introduced in Finance Bill 2015 for a new Diverted Profits Tax using a proposed rate of 25% to apply from 1 April 2015.
The government will extend the period over which self-employed farmers can average their profits for income tax purposes from two years to five years. A consultation will be held later this year and the legislation to be introduced in a future Finance Bill will come into effect from 6 April 2016.
Changes to venture capital schemes
The government will make amendments to the Seed Enterprise Investment Scheme (SEIS), Enterprise Investment Scheme (EIS), and Venture Capital Trusts (VCTs).
The government will, subject to EU State aid approval:
Require that companies must be less than 12 years old when receiving their first EIS or VCT investment, except where the investment will lead to a substantial change in the company’s activity.
Introduce a cap on total investment received under the tax-advantaged venture capital schemes of £15 million, increasing to £20 million for knowledge-intensive companies.
Increase the employee limit for knowledge-intensive companies to 499 employees, from the current limit of 249 employees.
The government will encourage the transition from SEIS to the other venture capital schemes by removing the requirement that 70% of the funds raised under SEIS must have been spent before EIS or VCT funding can be raised.
Business rates – England
Shortly before the Budget the government launched a wide-ranging review of national business rates in England.
The review, set to report back by Budget 2016, will examine the structure of the current system. The review will look at how businesses use property and how to modernise the system so it better reflects changes in the value of property.