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Contents Income tax |
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Corporation tax rates As announced in the March 1999 Budget, the rates of corporation tax from 1 April 2000 will be as follows: l the main rate of corporation tax will continue to be 30%; l companies with taxable profits of up to £10,000 will be liable to corporation tax at a new starting rate of 10%; l companies with taxable profits between £10,000 and £50,000 will also benefit, through a lower average rate; l the 10% rate will not apply to close investment holding companies. The Chancellor has also confirmed that the small companies’ rate will remain at 20% for the year beginning 1 April 2000 and the main rate will remain at 30% until 31 March 2002. |
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Personal service companies (IR35) In March last year, the Chancellor announced the introduction of new rules to prevent the avoidance of tax and national insurance contributions (NICs) by individuals providing their services to customers via an ‘intermediary’ (a company or partnership for example) rather than directly. Comment The Government’s major concern is the potential - in the case of so called ‘personal service companies’ - to extract profits in the form of dividends rather than salary thereby avoiding a liability to NICs and benefiting from a reduced income tax liability. The rules will take effect from 6 April 2000. They will apply to any contract or engagement where, for tax purposes, the individual (‘worker’) would have been treated as an employee of his/her customer had the intermediary not existed. Comment To avoid the rules applying, consider structuring contracts to ensure some or all of the following: provide that a substitute can do the work; tie contracts to specific time scales; build some financial risk into the contract. The services actually performed need to correspond with the terms of the contract. If an individual is caught by the new rules, the effect will be to treat the income received by the company (or partnership) - net of certain expenses (see below) - as though it had been paid to the individual as salary (whether or not it actually has been). This will create a liability to income tax collected under PAYE and Class 1 NICs. The allowable expenses are: normal employment expenses paid by the company - eg travel; pension contributions paid by the company; employer’s NICs; 5% of the gross income to cover all other expenses (of running the company etc). Comment Many companies will be affected by the new rules, particularly those in the IT industry. Price increases to customers will help to cushion the blow of the increased tax and NIC liabilities arising. A further consequence of the rules applying is that there will be very little, if any, taxable profit left in the company - hence the benefit of the new 10% corporation tax starting rate will be lost. |
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Capital allowances First year allowances (FYAs) The existing FYAs for investments in plant and machinery by small and medium-sized businesses will be replaced by permanent FYAs. The rate remains unchanged at 40%. IT equipment Small businesses that invest in computers, software and internet-enabled mobile phones will be able to claim 100% FYAs. The relief covers expenditure during the three years beginning on 1 April 2000. ‘Cheap’ cars At present expenditure on cars costing less than £12,000 goes into a separate pool for computing capital allowances. This separate pool will be abolished from the start of the accounting period that includes 1 April 2000 (for corporation tax) or 6 April 2000 (for income tax). Businesses will be able to delay the abolition of the separate pool if that is of benefit to them. Other provisions A number of other measures aimed at clarifying aspects of the capital allowances system were announced by the Chancellor. These include: - allowances claimed by a lessor on a sale and leaseback will be based on the lower of cost to and sale by the lessee without regard to open market value, provided certain conditions are met; - notification of expenditure on plant and machinery within fixed time limits will no longer be required; - clarification of the entitlement to capital allowances for non-residents; - extend the herd basis to shares in production animals and confirm that capital allowances are not due. |
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Group relief Group relief allows a company to claim the benefit of trading losses and certain other reliefs of another company if both companies are members of the same group. UK tax law restricted the relief to a group where the holding company was UK resident. From 1 April 2000 it will be possible to establish a group or consortium for group relief purposes through a company resident anywhere in the world. Comment The Revenue announced in February 1999 that, following the decision of the European Court of Justice in the case of ICI v Colmer, group relief would be available where the existence of a group was established through companies resident in the European Union or the European Economic Area. The changes announced go much further, by completely removing any restriction on the residence of companies. |
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Corporate venturing As announced in the March 1999 Budget, a new tax incentive is to be introduced to encourage the establishment of corporate venturing relationships and to increase the supply of venture capital to small companies. The scheme will apply to shares issued on or after 1 April 2000. It will allow companies investing in small higher-risk unquoted trading companies to obtain up front corporation tax relief at 20% so long as the investment is held for three years. “Small” will mean gross assets of up to £15 million and “higher-risk” will exclude trades backed by property and some other lower risk activities which are excluded from the existing venture capital schemes. The investing company must not hold more than 30% of the issuing company’s ordinary share capital. If the investment produces a gain, a deferral of tax is possible if the gain is reinvested in another qualifying company. Capital losses on the other hand can be relieved against the investing company’s income. |
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Research and development (R & D) Companies with turnover of up to £25 million will be able to benefit from a new R & D tax credit due to take effect in April 2000. Companies spending at least £25,000 a year on R & D will benefit from the new tax credit package: tax relief will be given for 150% of the R & D cost; this will reduce the cash cost of R & D by 30% for a company benefiting from the small companies rate; companies not yet in profit will instead be able to take the relief up front and reduce their cash cost of R & D by 24%. |
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Chargeable gains of companies No gain / no loss transfers Companies are presently able to transfer assets from one to another on a no gain / no loss basis when they are members of the same group of UK resident companies. In future, membership of a group will no longer be restricted to UK companies. Provided the assets remain within the scope of corporation tax on chargeable gains, no gain / no loss transfers will be possible within the worldwide group of companies. Notional transfers From 1 April 2000 two members of a group of companies may jointly elect that an asset, which has been disposed of outside of the group by one of them, may be treated as if it had been transferred between them immediately before that disposal. Comment The no gain / no loss rules are used to bring together capital gains and losses in a single company. The notional transfer rules will allow a matching process without incurring legal and administrative costs. |
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Other business measures Other business measures include the following: an increase in the quarterly payment threshold for PAYE and NIC from £1,000 to £1,500 per month; a reduction in the rate of interest (by 1%) charged on underpayments of corporation tax under the quarterly instalment arrangements; changes to the UK’s system of double taxation relief in order to improve its effectiveness and fairness; anti-avoidance rules on rent factoring schemes. In substance, the schemes are equivalent to bank loans but are structured to obtain an advantageous tax allowance; further anti-avoidance rules for Controlled Foreign Companies. Top of page / contents |