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KEY POINTS
- Corporation tax rate cuts are welcome.
- National Insurance reductions for some.
- Plans to reform corporation tax.
- Capital allowances take a hit.
- Barriers for international investors still exist.
In the eye of the deficit storm we always knew this was going to be a tough Budget.
For business it proved to be something of a ‘Marmite event’, which some will like – primarily because it provides more help than was expected after the gloomy build-up – and others will dislike because of the depth and speed of the pain. This article looks at the two sides to the story.
The good news
Bucking the expected trend for most taxes (that they are going up), corporation tax rates are going to go down. The small companies rate will fall 1% to 20% and the main corporation tax rate from 28% to 27% with effect from 1 April 2011.
The direction of travel for the mainstream rate will continue downwards, with a further 1% cut due each year of the hoped for length of this Parliament, falling to 24% in 2014/15.
For smaller businesses that have not yet chosen to incorporate, the combination of falling corporation tax and rising personal taxes for those on higher incomes will be yet another pull towards looking at becoming a company.
Using a simple example for effect, if an individual was taxed on £175,000 of business profits, she would pay tax and National Insurance of £72,400. Compare this to a company that has taxable income of £175,000. It would pay total tax, including corporation tax, of £62,365, assuming there is no salary paid and hence no National Insurance costs.
A cut in corporation tax is not cheap. The Budget Red Book shows a cost of £2,200 million in 2012/13 alone. It is therefore no surprise to see action being taken to raise funds elsewhere, and one key mechanism is a change to capital allowances, which is covered later in this article.
NIC holiday
One of the contentious issues in the election was around so-called job taxes, which were the proposed National Insurance increases due from next April. The extra 1% increase is still coming in, subject to minor changes, but there was a targeted measure in the Budget aimed squarely at start-ups.
A National Insurance regional holiday will be implemented for new businesses that establish themselves outside of the London, south-east and east regions.
A three-year scheme will be implemented for new firms set up in the target areas identified as Scotland, Wales, Northern Ireland, the North East, Yorkshire and the Humber, the North West, the East Midlands, the West Midlands and the South West.
The scheme will exempt employers from up to £5,000 of Class 1 employers’ National Insurance for each employee, in relation to the first ten employees to be hired in the first year of business. This could be worth up to £50,000 in tax relief. It is hoped that the scheme will be established by September 2010.
However, any qualifying businesses set up from 22 June 2010 will be able to benefit.
A broader business review
Perhaps the most interesting item for the future is the Government’s stated commitment to a detailed ‘programme for reform’ of the corporate tax system. We can expect further detail in the autumn.
We already know that this review will include close scrutiny of the much disliked IR35 rules which have been in place for over a decade and still give rise to much controversy.
Small business minister Mark Prisk MP has been quoted in the papers as stating that IR35 will be abolished as part of a broad review of small business taxation. If this occurs I will be hosting a small party to celebrate.
But the review of corporate tax will go further than small business. The new information provided on Budget day was the following statement:
‘The Government will provide greater certainty for business by committing to principles for corporate tax reforms. In particular, it intends to develop its view that in general a broad tax base, a low rate and a more territorial approach will improve competitiveness. It will establish a business forum, chaired by the Exchequer Secretary, to consult with multinational businesses on the UK’s tax competitiveness, including the long-term aims of reform of the corporate tax system.’
There is also considerable information in the Budget about potential ways that businesses might get better access to funding and the Budget Red Book lists these at paragraphs 1.70 to 1.74.
The most important may prove to be new principles to encourage high street banks to improve their lending to small and medium-sized enterprises.
The bad news
The Chancellor has targeted capital allowances in order to fund the announced reduction in the headline rates of corporation tax.
However, businesses have some breathing space as these changes will not take effect until April 2012.
The announcement sees a reduction in the rate of writing-down allowances (WDAs) from 20% to 18% for all assets other than those in the special rate pool. This is the second recent cutback in this WDA, following the reduction from 25% to 20% in April 2008.
The WDA for assets in the special rate pool, e.g. integral features, long life assets and cars acquired after 1 April 2009 with carbon emissions of more than 160g/km, will also be reduced from 10% to 8%.
The annual investment allowance, which broadly entitles businesses to claim 100% of the cost of qualifying plant and machinery (except for cars) as a deduction from their profits will be slashed to £25,000 from April 2012. This was only increased from £50,000 to £100,000 in the April 2010 Budget by the previous Chancellor.
Although these changes only defer the tax relief available to businesses, it may prove to be an incentive for them to accelerate their planned capital expenditure in order to take advantage of the current higher rates while they still remain.
The Chancellor also confirmed the introduction of 100% first year allowance for zero-emission vans, originally announced in April 2010 Budget. However, in order to comply with European law, this will not be available to businesses in difficulty.
VAT bleak midwinter
The VAT increase to 20% from next January could prove to be challenging to some businesses. The standard rate of VAT is to be increased from 17.5% to 20% with effect from 4 January 2011. It is estimated that the change will generate around £13 billion of additional revenue a year.
Although the increase was widely predicted, the delayed introduction may be a surprise to some. By delaying the change for six months, the Chancellor has effectively foregone the £6.5 billion of revenue that could have been raised during the remainder of this year.
However, additional VAT revenue may still be generated during the next six months as some businesses and consumers try to avoid the effect of the increase by bringing forward their spending plans.
Businesses will have some concerns about the administrative and commercial costs of having to adapt to another rate change. Those that cannot recover all of the VAT that they incur, e.g. those in the charity and not-for-profit sector, will be hardest hit as the increase will represent a real increase in their operating costs.
Even those that can fully recover the VAT incurred on eligible costs will need to be aware of the cash flow implications if they have to pay their suppliers before the VAT can be recovered from HMRC.
There is also a word of warning for businesses making supplies on or around the time of a VAT rate change. Although there are transitional rules for such transactions, new legislation will be introduced to prevent the widespread abuse of those provisions.
Finally, in order to address another consequence of the rate increase, the rates used by smaller businesses to account for VAT under the optional flat rate scheme and the thresholds for joining and leaving it are to be increased from the date of the rate rise. For more details on VAT changes, see Neil Warren’s article A 'Twenty20' system.
Open for business?
Even with the reduction in the headline rate of corporation tax, there are still barriers preventing international investors using the UK as a base for their operations, and leading to companies relocating outside the UK.
The main factor is the unwelcome delay in the overhaul of the controlled foreign company provisions, which has been continuing for a number of years now and is held up yet again. It will now not come into effect until 2012.
However, there has been confirmation in respect of the relaxation of the research and development tax relief and the worldwide debt cap provisions, as previously announced.
Other areas clarified at the March 2010 Budget in respect of capital distributions and consortium relief have also been confirmed as have the extensions to the enterprise management incentives, and venture capital schemes.
While we are making our way to the top of the G20 league of low tax rates we still appear to have some way to climb to get to the top of the list of attractive countries in which to locate businesses.
Francesca Lagerberg is head of tax at Grant Thornton UK LLP.
