06 December 2011
The draft Finance Bill published today brings together many of the measures that were announced in Budget 2011 and upon which consultation has taken place over the summer. Central to these consultations has been the proposed reform of the UK’s Controlled Foreign Company rules which, while of no great relevance to most SMEs, is seen as a key component in making the UK attractive to multi-national businesses: the implementation of these proposals contribute a whopping 61 pages of new legislation to the draft Finance Bill! Of greater interest to the SME sector are the improvements made to the research and development and enterprise investment scheme reliefs, the long awaited patent box and a further instalment of simplification measures.
Less welcome, but in the event not as restrictive as feared, is the formalisation of procedures for the agreement of capital allowance claims with respect to fixtures included in buildings.
The deferral of the introduction of a statutory residence test until 2013 is also a disappointment.
Given the Government’s commitment to confirm matters for inclusion in the Finance Bill where possible 3 months in advance of their introduction it was not expected that any new announcements would be made and this proved to be case. However the “cycle of policy making” will only conclude with the Budget announcements next spring and further contributions to the Finance Bill may yet emerge!
The main proposals included in the draft Finance Bill 2012 are summarised below.
Rate of corporation tax
- as previously announced the main rate of corporation tax for financial year 2013 is to reduce to 24%.
Reform of the Controlled Foreign Companies (“CFC”) Rules
The existing CFC legislation is to be repealed and a new CFC regime introduced. The key elements of the new regime are:
- profits of overseas subsidiaries will be outside the scope of the new CFC regime unless they fail to meet specified conditions which seek to identify profits artificially diverted from the UK.
- “safe harbours” for these gateway conditions are to be provided dealing with general commercial business, incidental finance income and some sector specific rules.
- the new regime will also provide for a number of exemptions including an excluded territory exemption, a low profits exemption and a lower level of tax exemption.
The patent box
The patent box provides for a favoured 10% rate of corporation tax to apply to profits attributable to Qualifying IP.
- Qualifying IP includes patents granted by the UK Intellectual Property Office and the European Patent Office.
- the patent box will apply to new and existing IP as well as to acquired IP provided it has been further developed or the product which incorporates it has been so developed.
- the favoured 10% rate will apply to profits derived from royalties or embedded in the sales price of products utilising the IP.
- the regime will apply to other Qualifying IP such as regulatory data protection ("data exclusivity"), supplementary protection certificates (SPCs) and plant variety rights.
- the measure will have effect in relation to profits made on or after 1 April 2013.
Research and Development (R&D) tax relief
As previously announced further improvements are to be made to the small or medium enterprise (SME) scheme:
- the additional deduction is increased to 125% from April 2012 giving relief of 225% in total.
- the rule limiting the repayable R&D tax credit to the amount of a company’s PAYE/NIC liability is to be removed.
- for both the SME and large company schemes the requirement for minimum expenditure of £10,000 a year is removed.
- for both the SME and large company scheme the definition of an “externally provided worker” is broadened.
The rate of payable tax credit for SMEs will be reduced to 11% and vaccine research relief for SME companies is to be withdrawn: both to facilitate State Aid approval for the above enhancements.
The changes are to be given effect for expenditure incurred on or after 1 April 2012.
Enterprise zones: first year allowances (FYAs) for designated areas
100% FYAs are to be introduced for expenditure incurred by trading companies on qualifying plant and machinery for use primarily in designated assisted areas within enterprise zones. The expenditure:
- must be incurred between 1 April 2012 and 31 March 2017.
- must be on unused and not second hand plant and machinery.
- must comprise investment not replacement expenditure.
- the plant and machinery must not be held for use in an area outside of the designated assisted area.
Capital allowances: fixtures
Legislation is to be introduced to curb “late” claims in respect of fixtures: late claims being those made at a time when a single sale value for fixtures can no longer be agreed and brought into account by both purchaser and vendor. The availability of capital allowances to a purchaser of fixtures is to be made conditional upon:
- the expenditure on qualifying fixtures having been pooled (that is claimed) by the vendor prior to the sale to the purchaser.
- the seller and purchaser agreeing the value of the fixtures transferred within two years of the transfer: this by way of a joint election or, exceptionally, by referral to the First Tier Tribunal for an independent determination.
Feed-in Tariffs and the renewable heat incentive
The capital allowances treatment of expenditure on plant and machinery to generate renewable electricity or heat is to be amended to:
- redesignate expenditure on solar panels as special rate expenditure qualifying only for 8% writing down allowances (WDAs).
- to remove enhanced capital allowances (that is 100% FYAs) in respect of plant and machinery generating electricity or heat that attract tariff payments under the feed in tariff and renewable heat incentive scheme.
These changes have effect from April 2012.
Real Estate Investment Trusts (REIT)
Improvements are to be made to the REITs regime to include:
- the abolition of the entry charge paid by companies joining the regime.
- the requirement to be listed on a recognised Stock Exchange is to be relaxed to include AIM, Plus and their foreign equivalents.
- the diverse ownership requirement (the non-close company requirement) is to be relaxed to allow a new REIT time to meet this requirement.
- other minor improvements are made to the REIT conditions.
Bank Levy
The Government intends that the Bank Levy should raise at least £2.5 billion each year. To meet this target the full rate of the Bank Levy is to be increased to 0.088% from 1 January 2012.
Seed Enterprise Investment Scheme (SEIS)
An enhanced version of EIS will be introduced to help support investment in small start-up companies. From 6 April 2012:
- Income tax relief of 50% of the amount invested will be available
- eligible companies will be those with 25 or fewer employees and assets of up to £200k.
- individuals can invest up to £100,000 per year under SEIS
- capital gains arising in 2012/13 which are reinvested in SEIS qualifying companies will be exempt from CGT. This is an extension of the current EIS rules which allow for the deferral of reinvested gains.
- individuals, including company directors, can own up to 30% of the shares (also see below for reform of the loan capital rules).
- part of the investment can be carried back to the previous year if, for example, an investor cannot obtain full income tax relief in the year of the investment. However it cannot be carried back in the first year.
- relief will end in 2017 unless it is extended by Treasury order.
EIS/VCT reforms
A number of amendments to EIS/VCT fundraising will be enacted from April 2012.
- fundraising in order to purchase shares in another company will no longer be regarded as a qualifying activity.
- companies receiving Feed-in Tariffs will also not be regarded as qualifying.
- non-cumulative preference shares will qualify as share capital for EIS and VCT companies.
- loan capital will be disregarded when calculating the maximum amount of the company’s capital an individual investor can hold without being regarded as “connected” to the company.
Reforms to EIS/VCT thresholds
From April 2012 the amount that an individual can invest under EIS will be increased to £1m per annum.
Other changes, subject to state aid approval:
- companies with up to 250 employees will be permitted to raise funds under EIS (currently the limit is 50).
- the gross assets test will increase to £15m before investment and £16m after (currently this is £7m and £8m respectively).
- loan capital will be disregarded when calculating the maximum amount of the company’s capital an individual investor can hold without being regarded as “connected” to the company.
Non-domiciled individuals
Building on the current £30,000 charge for anyone resident for at least seven of the previous nine tax years:
- an increased remittance basis charge will be introduced for non-domiciles who have been resident in the UK for at least 12 of the previous 14 years.
- the rate will be £50,000 per year and will operate in exactly the same way as the current charge.
- non-domiciles can still choose each year whether to be taxed on the arising basis or to pay the charge.
Tax-free remittance for investment purposes
To encourage investment by non-domiciles the rules will be changed from April 2012 to allow for the tax-free remittance of income or gains where the proceeds are used to invest in unlisted trading companies or companies involved in developing or letting commercial property.
Statutory residence test
Following a consultation exercise on the introduction of a statutory residence test, the new rules will be delayed by a further year. Commencement of the new rules will now start from 6 April 2013. A further consultation will take place.
Inheritance Tax nil rate band
- remains frozen at £325,000 until 2014/15 – this had already been announced.
- from April 2015 it will be indexed in line with the consumer prices index (CPI) which is historically lower than the retail prices index (RPI).
- this brings IHT into line with the other rates and benefits which now use CPI inflation.
Capital Gains Tax annual exempt amount
- for 2012/13 the annual amount will be frozen at £10,600.
- as with inheritance tax it will then be increased in line with CPI.
Income Tax rates and allowances
- the income tax personal allowance will increase to £8,105 for 2012/13.
- to ensure that only basic rate taxpayers benefit from this change, the basic rate threshold will reduce to £34,370. This means that the 40% higher rate tax applies to taxable income over £42,475.
- the 50% threshold remains at £150,000.
Swiss Tax agreement
The Government announced earlier this year that it had reached agreement with the tax authorities in Switzerland to clamp down on hidden bank accounts. Legislation has been published to give effect to that agreement.
- a one-off levy will be imposed on historic assets and bank accounts which will effectively eliminate all previous undeclared tax liabilities.
- in the future a withholding tax will apply on income and gains held with Swiss institutions by UK residents.
- both these can be avoided if the taxpayer obtains certification that they are disclosing information to the UK tax authorities.
Mineral royalties
The current rule which allows landowners to treat mineral royalties as half income and half gains will be abolished from April 2013 onwards.
- from 2013/14 all receipts will be treated as income.
- capital loss relief and the ability to carry back losses on the land value will still apply for agreements in place before April 2013, but agreements thereafter will not qualify for capital losses.
Late night taxis
The Government has decided not to repeal the tax and NIC exemption for employees where their employer pays for a taxi to take them home after working late at night. Responses to the consultation exercise argued that there were significant safety and security grounds to justify retaining the tax relief, particularly as it was most frequently used by women, and therefore it will not be amongst those repealed as part of the Government’s commitment to simplifying and reducing the tax code.
Draft legislation implementing reforms announced at Budget 2011 and designed to encourage philanthropy include:
Gifts of pre-eminent objects
With effect from a date yet to be announced, a tax reduction (income, capital gains or corporation tax) will be available for lifetime gifts of pre-eminent works of art or historical objects to the nation.
- the donor will make an initial offer to donate an object at a self-assessed value which will be considered by a panel of experts who will decide whether to accept the gift and agree a final value with the donor.
- if agreement is reached and the object is gifted, individuals will be entitled to a tax reduction of 30% of the agreed value and companies will be entitled to a reduction of 20%.
- individuals will be able to spread their reduction over a period of up to five years.
IHT – reduced rate for estates leaving 10% or more to charity
With effect for deaths on or after 6 April 2012
- a reduced rate of IHT will apply where 10% or more of a deceased person’s net estate is left to charity.
- estates are split into components, such as assets owned directly by the deceased immediately prior to death, jointly owned assets and settled property and these components can be considered individually or aggregated in various combinations.
- the IHT rate for an estate (or any component thereof) that meets the 10% condition will be reduced from 40% to 36%.
In year repayments of tax to charity
With effect from 6 April 2012, the HMRC practice of making in-year repayments to charities of tax claimed outside of a tax return will be put on a statutory footing.
Cost sharing exemption
As announced in the Autumn Statement the draft Finance Bill includes legislation to introduce an exemption for organisations which carry out non business activities and/or make exempt supplies. Such organisations will be able to share costs with similar organisations and any charges between members of the cost sharing group will be exempt from VAT if the services are predominantly for the organisation’s non-taxable activities. The draft legislation simply restates the overarching EU legislation without setting out the details of how this exemption will apply in practice. But regulations and guidance will be published later. It will apply from Royal Assent.
Low Value Consignment Relief
- this is being withdrawn for goods imported from the Channel Islands on or after 1 April 2012.
Non UK Established Businesses
- such businesses will be obliged to register for VAT, regardless of whether the value of their taxable supplies exceeds the VAT registration limit with effect from 1 December 2012.
Online VAT Returns
- all VAT returns will have to be submitted online in respect of accounting periods commencing on or after 1 April 2012. At present online return submission is not mandatory for organisations with a turnover below £100,000.
Stamp Duty Land Tax: disclosure of tax avoidance schemes
The Disclosure of Tax Avoidance Schemes (DOTAS) regime for SDLT is to be amended to:
- remove the “grandfathering” rules for SDLT avoidance schemes that incorporate the use of the sub-sale rules. This will require such schemes disclosed before April 2010 to be disclosed by promoters so that new users of such schemes are indentified to HMRC.
- remove the property valuation thresholds (that is commercial property with an aggregate value of £5m or residential property with an aggregate value of £1m) which have limited required disclosure.
Capital allowances: anti-avoidance rules for plant and machinery
The capital allowances anti-avoidance rules are to be strengthened to target transactions involving plant and machinery where there is an avoidance motive. Where such arrangements are identified the effect of the rules will be to deny first year allowances and the annual investment allowance for expenditure on plant and machinery and to restrict the amount of allowances to the “buyer” such that the tax advantage sought is cancelled.