Business Taxes

Corporation tax rates

Corporation tax rates are changing as part of a package of significant reforms to the business tax system. The main rate of corporation tax will fall by 2% to 28% from 1 April 2008. The small companies’ rate will increase by 1% to 20% in 2007/08, to 21% in 2008/09 and to 22% in 2009/10. These increases are aimed at reducing the tax benefits of incorporation for small businesses.

Capital allowances – plant and machinery

The 50% rate of first-year capital allowances for small business' expenditure on most plant and machinery will be extended for another year to 31 March 2008 for businesses charged to corporation tax, and to 5 April 2008 for income tax. There will be a new annual investment allowance for the first £50,000 of expenditure on plant and machinery starting from 2008/09. The government will consult on the details. Writing-down allowances will also change from 2008/09:

• For most plant and machinery, the rate will fall to 20% from 25%.
• For long-life assets, the rate will increase from 6% to 10%.
• Certain fixtures integral to a building will be written down at 10% a year. The details of what constitute integral fixtures will be the subject of consultation.

Tax Tip Buy green equipment and save tax. Choose an energy-efficient or water-efficient item, and even basic fittings such as lighting, heat pumps or toilets could qualify for an enhanced capital allowance. You could then set the full cost of the new equipment against your taxable profits in the year you bought it. Check which items qualify on www.eca.gov.uk.

Industrial and agricultural buildings allowances (IBAs and ABAs)

IBAs and ABAs will be phased out over the four years to 2010/11, falling from 4% in 2007/08 to 3% in 2008/09, to 2% in 2009/10, 1% in 2010/11 and abolished thereafter. The first stage, effectively from 21 March 2007, is the withdrawal of balancing adjustments and the recalculation of writing-down allowances when buildings change hands or cease to qualify for allowances.

Business premises renovation allowance

The scheme for tax relief for capital expenditure on renovating certain business premises will come into effect from 11 April 2007. The provisions, which were introduced in the Finance Act 2005, will give 100% relief on the conversion or renovation of properties in designated disadvantaged areas that have been vacant for at least a year.

Research and development (R&D) tax relief scheme

The rates of R&D relief will increase from 2008/09 to 130% for large companies and (subject to state aid approval) to 175% for small and medium-sized enterprises (SMEs). The SME R&D relief scheme is to be extended to large companies with fewer than 500 employees from a date to be announced.

Venture capital schemes

Technical changes will be made to the rules for the enterprise investment scheme (EIS), the corporate venturing scheme (CVS) and the venture capital trust (VCT) scheme. These include two new limits for companies receiving EIS, CVS or VCT investment. The changes generally take effect from 6 April 2007, subject to limited transitional reliefs.

The maximum amount raised from all three schemes must not be more than £2 million in any 12-month period. A company or group of companies must have no more than 50 full-time employees (or their equivalent) at the date on which the relevant shares or securities are issued.

Managed service companies (MSCs)

Legislation will deem income to be employment income where individuals provide their services through MSCs and their income is not already treated as employment income. This means MSCs will have to operate and account for PAYE on all payments that individuals receive for services provided through the MSC. If the MSC does not pay the tax and national insurance contributions, HMRC will be able to recover them from others, principally the MSC’s director and the person who provided the company to the individual.

MSCs are mass-marketed service companies that allow individuals who have shares in the companies and provide services to pay less tax because they receive most of their income in the form of dividends. HMRC has found it difficult to apply the existing rules on personal service companies to MSCs. The requirement to operate PAYE starts on 6 April 2007 and the other powers come into effect at various dates during 2007/08.

Employer benefit trusts

Employers making employee benefit contributions by declaration trust will have their deduction against taxable profits restricted to the level actually paid to an employee in a taxable form within nine months of the end of the relevant accounting period. This applies from 21 March 2007.

Capital loss and gain buying

From 21 March 2007, legislation will aim to stop schemes that exploit an exception in existing anti-avoidance rules. These are intended to prevent groups of companies obtaining a tax advantage where a company changes ownership and one of the main purposes of the arrangements is for the new owners to gain access to the company’s capital losses or gains.

Tax Tip Arrange for your company to buy your shares to help solve your business succession problem. When you retire from your own company, you would probably like cash in return for your shares, but your younger colleagues may not have the resources. The company itself could buy your shares and then cancel them, leaving the remaining shareholders controlling the company. You would end up with the cash on which the capital gain should be taxed at no more than 10%.

Secondments to charities and educational institutions

Employers subject to income tax will be able to obtain the correct deduction for salary costs of employees seconded to a charity or educational institution. The change will be effective from 6 April 2007 and corrects errors made when the law was redrafted in 2005.

Landfill tax

The standard rate of landfill tax will increase from £21 to £24 per tonne from 1 April 2007 and to £32 per tonne from 1 April 2008. The lower rate for inactive waste will increase from £2 to £2.50 per tonne from 1 April 2008.

Empty business property relief

The empty business property relief on national non-domestic rates will be reduced from 1 April 2008. Office and retail premises will receive 100% relief for a three-month period, and industrial and warehouse premises will receive 100% relief for a six-month period after they first fall empty. Relief will end for property remaining empty beyond these periods. Charities will be exempt from the effects of this reform.