Key 2011 budget proposals affecting businesses are as given below:
Annual investment allowance (AIA) reduced to £25,000 from 1 April 2012 for businesses within the charge to corporation tax and 6 April 2012 for businesses within the charge to income tax. AIA gives businesses relief from full tax on most plant and machinery expenditure in the year it is incurred.
Writing down allowance (WDA) reduced from 20% to 18% on the main rate pool of plant and machinery expenditure and from 10% to 8% on the special rate pool of plant and machinery expenditure incurred during chargeable periods ending on or after 1 April 2012 for corporation tax, and on or after 6 April 2012 for income tax.
Short-life assets: Businesses incurring expenditure on an item of plant or machinery from April 2011 onwards could elect that item as a short-life asset if they expect to sell or scrap it within an eight-year cut-off period. Enhanced capital allowances for energy-saving technologies extended to include certain energy-efficient hand dryers.
IR35 review: Administrative changes to be introduced to provide greater pre-transaction certainty and better clarity through published guidance.
Corporation tax: Main corporation tax rate for all non-ring fence profits reduced from 28% to 26% for the financial year beginning 1 April 2011, and from 26% to 25% for the financial year beginning 1 April 2012. Small profits rate of corporation tax for all non-ring fence profits will be reduced from 21% to 20% for the financial year beginning 1 April 2011. The small profits rate for ring fence profits will remain at 19%.
Associated companies: For accounting periods ending on or after 1 April 2011 ‘attribution’ of rights held by ‘associates’ of participators only applies where there is ‘substantial commercial interdependence’ between two or more companies concerned and not where the “association” is an accident of circumstance, including circumstance of family relationships that do not extend into business.
Taxation of foreign branches: UK resident companies could now elect their foreign branches to be exempt from UK corporation tax; the election will apply to all foreign permanent establishments and will be irrevocable.
Research and development: the additional corporation tax deduction for qualifying research and development (R&D) expenditure given to small or medium enterprises (SMEs) will increase from 75% to 100% (giving a total deduction of 200%) for expenditure incurred on or after 1 April 2011, subject to EU state aid approval.
Controlled Foreign Companies (CFC) rules reform: interim improvements to be introduced to the CFC rules to exempt commercially justified activities that both businesses and HMRC agree do not erode the UK tax base. Other improvements will also be introduced that will help UK businesses that wish to undertake overseas acquisitions and reorganisations and non-UK businesses that want to invest or locate in the UK.
Capital losses after change of ownership: capital losses realised before a change in ownership of a company may only be used against gains arising on assets used in the same business that the company conducted before joining the group. Companies will be able to elect whether restricted ‘pre-entry losses’ or other losses have been allowed against gains. Where a loss on the disposal of an asset after a company joined a group is subject to restriction under the current rule, then it will be treated as one that arose before the company joined the group for the purposes of the amended rules.
De-grouping Charge: Changes have been made to the operation of de-grouping charge for companies leaving groups with anti-avoidance provisions applying where a company leaves a group on or after 23 March 2011. These provisions target avoidance using the current associated companies’ exception, and will ensure that the de-grouping charge cannot be avoided by a series of transactions undertaken within a group before a disposal.
Corporate capital gains: Rules will be introduced to simplify anti-avoidance rules applying to the computation of corporate capital gains and losses to replace existing value shifting provisions with a new targeted anti-avoidance rule. It will also only require a loss computation on a company share disposal for the effect of depreciatory transactions if it takes place less than six years before the sale.
Debt cap rules: Legislation to be introduced to allow businesses to more easily apply the debt cap rules.
Devolving corporate taxation to Northern Ireland: A consultation paper to be published exploring mechanisms for devolving the rate of corporation tax to the Northern Ireland Executive.
Patent box: proposal to introduce a 10% rate of corporation tax for profits arising from patents, effective from 1 April 2013, consultation to begin in May 2011.
