You and your Business

Small companies' corporation tax

The Chancellor had previously announced that the small companies' rate of corporation tax would increase from 21% to 22 % from 1 April 2009. This increase will be deferred for one year until 1 April 2010. This is one of a number of measures to support small companies during the downturn. All companies with profits liable to corporation below £1.5 million will be affected except 'ring fence profits' from oil extraction which will continue to be taxed at 19 percent.

Extension of carry back period for business losses

Companies and unincorporated businesses can normally carry back losses against profits of the previous year although there are special rules allowing a carry back for three years for unincorporated start-ups and also for businesses that cease to trade. The Chancellor announced today that this three year carry back will apply to all losses subject to a maximum loss carry back of £50,000 to the earlier two years of the three year carry back period. This will result in businesses being able to claim refunds of tax paid in the earlier years. For companies this will be effective for losses arising in accounting periods ending in the period between 24 November 2008 and 23 November 2009 and for unincorporated business it will apply to the losses in accounting periods ending between 6 April 2008 and 5 April 2009. HMRC will make repayments arising from such loss relief claims arising under the new rules on or after Budget Day 2009.

Company loan relationships

There has been an anomaly in the application of the 'loan relationship' rules as they apply to connected companies (normally group companies or those under common control). The anomaly has resulted in a creditor receiving no relief for waiving a trade debt which relates to a connected company, whilst the debtor would have been taxable on the release of its obligations. Clearly this left the connected companies overall worse off. Legislation will be introduced to take effect from 1 April 2009 to remove this anomaly and exempt the waiver from tax with regard to the debtor company.

The second proposed change is with regard to the late payment of interest between connected companies. The final decision with regard to changes is still being considered following a consultation period.

Land remediation relief

Companies and other bodies falling under the corporation tax umbrella that are involved in cleaning up polluted land or infestations of Japanese knotweed, so that the land can be brought into productive use, will now have greater clarity on the categories of expenditure which will rank for the 150% tax deduction. The announcement specifies certain specific structures which will be eligible as well as directly referring to Japanese knotweed radon and arsenic as contaminants which may cause the 'market failure' of the site. These changes will be introduced in the Finance Act 2009 and will have effect from 1 April 2009.

Capital allowances on 'expensive cars'

In the 2008 Budget the Chancellor announced that the capital allowances for cars (those costing over £12,000) would be based on an 'environmentally based pooling system'. The distinction between cars costing more or less than £12,000 will end with the commencement of the new rules, under which, the tax allowances will be linked to CO₂ emissions. The new rules will take effect on 1 April 2009 for companies and 6 April 2009 for unincorporated businesses. Under the new rules qualifying expenditure incurred after the effective dates will be allocated to the one of the two general plant and machinery pools. If the car's CO₂ emissions are over 160g/km then it will be allocated to the special rate pool and will only attract a 10 percent writing down allowance. Cars with emissions below this level will be added to the main capital allowance pool with a 20 percent writing down allowance. Cars with private use will continue to be held in individual pools but with the above criteria determining the rate of capital allowances.

Also from the above dates the rules affecting the tax relief on leased cars will be reformed so that a flat rate disallowance of 15 percent of the leasing payments will be applied for cars emitting more than 160g/km of CO₂.

For expenditure on expensive cars before the effective dates a transitional five year period will be applied in accordance with a technical note to be released. This means that cars on fleet as at the date of change will be subject to the existing rules.

Lloyds corporates

Corporate Lloyds members will in future benefit from the same relief that insurance companies currently enjoy in being able to 'equalise claims' by setting aside provisions for certain volatile and uncertain risks. The corporate members will be able to take advantage of this relief for profits arising in the year ended 31 December 2008.

Anti-avoidance

As always the Chancellor has used the Pre Budget Report to announce a number of anti-avoidance measures. Leasing is always under scrutiny and this occasion is no exception. Today's announcement plugs a weakness in the 'Sale of Lessor Company' legislation introduced in the Finance Act 2006. An existing avoidance scheme exploited a sale and leaseback arrangement to transform a lessor into an intermediate lessor with no legal title to the leased asset thus allowing it to fall outside of the existing anti-anti-avoidance rules. The change in the rules announced today will catch all plant or machinery where the lesssor has entitlement to capital allowances rather than legal title. This takes effect retrospectively from 13 November 2008.

Further measures announced today that are also effective from 13 November 2008 negate any tax advantage on a sale and leaseback of plant and machinery where:

• The leaseback results in more relief than a loan finance arrangement would have done
• There is an avoidance of tax through a long funding lease
• At the end of a long funding lease it is clear that the relief obtained has not been appropriate.

Large multinational businesses have been subject to an anomaly on the taxation of exchange gains and losses which arose under the loan relationship and derivative contracts (change of accounting practice) regulations 2004. These were enacted to enable the introduction of International Accounting Standards for large companies. Broadly these rules spread the transitional adjustments over 10 years for tax purposes. However an anomaly has arisen where foreign exchange gains or losses reversed on certain foreign denominated financial instruments. This proposed change will ensure that double relief or double taxation are eliminated on or after 1 January 2009.

Simplification of anti-avoidance measures

Two anti-avoidance rules are being amended from the date that Finance Bill 2009 receives Royal Assent.

• Transactions between a dealing company and an associated company were being exploited so that the dealing company received a tax deduction, and the associated company was not taxed on the other side of the same transaction. The resulting 1960 anti-avoidance legislation is no longer required, as it has been superceded by subsequent legislation.

Anti-avoidance rules applying on the acquisition by an employee of employment related securities at less than market value are being simplified.

• In cases where the shares are being paid for by the employee in instalments, a tax charge can arise if the shares are sold before all the instalments are paid for, even if no overall profit has been made. This tax charge will be withdrawn, providing that the employee continues paying the instalments.
• A tax charge can also arise if an employee disposes of nil or partly paid shares, even though an overall profit has not been made. That tax charge will also be withdrawn.
• On occasion an employee will receive a scrip or bonus issue on his employee shares. This can lead to a tax charge even though the overall value of the shareholding is unchanged. Such a charge, which may be nil, will now be correct.

Stock lending arrangements - Chargeable gains and stamp duty

Under the current legislation, when transfers of securities by way of stock lending are not returned, then the lender is treated as making a chargeable disposal at market value.

The stock borrower normally provides collateral that can be used in default. Providing that the lender uses the collateral to purchase equivalent replacement securities, then legislation will be introduced in Finance Bill 2009 to remove the tax charge arising where the borrower becomes insolvent on or after 24 November 2008, and to relieve the associated charge to stamp duty or stamp duty reserve tax. It will also be possible to elect for these changes to apply from 1 September 2008 to 24 November 2008.

Leasing tax avoidance by film partnerships

Under the prevailing rules before 1 January 2007, businesses could claim tax relief for the cost of producing or acquiring a film. The films were then leased to companies who exploited them commercially. The rents received from the leases should then be taxed in full, but this has not always been the case, as the taxable income was being turned into non-taxable income by use of long funding leases intended for pant and machinery leases.

Anti avoidance legislation will be introduced in Finance Bill 2009 to ensure that such rental income is taxable in full. The law will apply to all long funding leases of films entered into on or after 13 November 2008, and to rents payable on such leases entered into before that date, that are payable, and due, thereafter.

Disclosure of tax avoidance schemes - Reporting scheme reference numbers [SRN]

The promoter of the tax avoidance scheme provides the SRN to the scheme users, and those users currently have to report the SRN to HMRC in the year or accounting period when the SRN is received.

For tax return periods commencing on or after 1 April 2009, the SRN has to be reported in the tax return for the year or accounting period in which the scheme is implemented.

It will continue to be necessary to report a SRN for each successive year until the tax advantage is no longer available.

UK Real Estate Investment Trusts (REITS)

The Finance Bill 2009 will effect changes to take effect for accounting periods beginning on and after 1 April 2009. Two of the conditions that a company or group has to meet to be a REITS known as the balance of business tests are to be changed so that the test apply to more companies within a REITS group. The conditions to be met by a company or group in the right regime will be amended, to ensure that they cannot be circumvented by the artificial creation of new group structures for REITS purposes. The changes will also exclude all owner-occupied property from the tax exempt business.

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