Corporation Tax Rates
From 1 April 2006, the 0% starting rate and the 19% non-corporate distribution rate of tax are to be abolished. The current small companies rate of 19% and full rate of 30% will not be changed nor will there be any changes to the profit limits or marginal relief fractions.

Research and Development Tax Credits
It is proposed that from 1 April 2006, tax relief for qualifying expenditure will be extended to include payments made to clinical trial volunteers. In the case of the SME R&D scheme and vaccines research relief, which are notified state aids, the extension is subject to approval by the EC and will operate from a date to be appointed by Treasury Order.

The time limit for making claims for the enhanced deductions (or amendments or withdrawals) is to be changed to one year after the filing date for the tax return (currently six years after the end of the relevant accounting period). Claims relating to accounting periods ending before 31 March 2006, will need to be made by the earlier of the current time limit and 31 March 2008. This aligns the time limits for claims for enhanced deductions with those for payable credits.

Group Relief
In response to the ECJ judgment in the case of Marks & Spencer plc v Halsey, it is proposed that the UK group relief rules are extended to reflect EC law. The new relief will be available from 1 April 2006 to UK groups with foreign subsidiaries (including indirectly held subsidiaries) which have incurred foreign tax losses that cannot be relieved in the home state (or elsewhere) where those subsidiaries are either resident in the European Economic Area (EEA) or have incurred the relevant losses in a permanent establishment in the EEA. Relief will only be available for the foreign losses or other amounts that may be surrendered, computed under current UK tax rules. No relief will be given for amounts that represent a relieved foreign tax loss.

Measures will also be introduced, with effect from 20 February 2006, to deny loss relief when groups make arrangements one of the main purposes of which is to obtain UK relief where the arrangements either:

• result in losses becoming unrelievable outside the UK that might otherwise be relievable; or
• give rise to unrelievable losses which would not have arisen but for the availability of relief in the UK.

Securitisation and International Accounting Standards
A temporary tax regime for securitisation companies was introduced by Finance Act 2005, to enable such companies to be taxed on the basis of accounting standards in force before the introduction of International Accounting Standards. This regime was due to end on 31 December 2006, but in order to allow more time to develop a more permanent tax regime for securitisation companies, it is being extended to 31 December 2007. Amendments are also being made to the definitions of ‘securitisation companies’ for the purpose of the temporary regime, to ensure that it works as intended. Firstly, companies that issue debt in circumstances other than a securitisation will be excluded from the regime. However, companies which were within the regime on 22 March 2006, or were legally committed to entering into arrangements that would have brought them within the regime, can elect to retain the original rule. Other changes to the regime allow the inclusion of chains of intermediate borrowing companies, and extend the range of permitted activities that a note-issuing company can carry on so as to include the activity of acting as a guarantor.

Sale of Lessors
Where the economic ownership of a company carrying on a business of leasing plant or machinery changes hands after 4 December 2005, it is proposed that a tax charge is imposed on the lessor company on the date of the sale and an equal and opposite relief granted to the lessor company on the day after the sale. The charge would apply in respect of long leases where in the early years of a lease the capital allowances available to the lessor company are greater than the rental income from the lease, giving rise to losses. The charge would broadly equate to the tax benefit of such losses. This is to prevent the lessor company making use of such losses to defer (sometimes indefinitely) the tax on the leasing profits. For example, the losses can be surrendered as group relief and the profits arising in the later years of the lease (when the rental income is greater than the capital allowances) can be sheltered on the sale of the lessor company to a group with tax losses. The charge would thus counter the losses available to the original owner and the corresponding relief would counter the profits passed on to the new owner.

There are provisions to account for partial sales and the measure covers leasing businesses carried on in a consortium and through a partnership. It also covers the deferral of profits sheltered from tax through unusual partnership profit-sharing arrangements, the non-arm’s length transfer of assets between parties and transactions whereby on the sale of a leased asset, the vendor retains all or part of the rental income.

This proposal was published on 5 December 2005 but is to be amended to reflect developments in the reform of the taxation of leasing and comments following the publication of draft legislation. Any beneficial changes (reducing the scope or effect of the measure) will have effect from 5 December 2005; other changes will have effect from 22 March 2006.

Controlled Foreign Companies
Where a company is resident both in the UK and, under double taxation relief arrangements, in a territory outside the UK, it is treated by FA 1994, s 249 as resident outside the UK. However, under ICTA 1988, s 747(1B), where companies became non-resident from 1 April 2002 for other tax purposes, s 249 is disregarded in determining whether a company is UK resident for the purposes of the CFC legislation. It is proposed that from 22 March 2006, this provision will also apply to companies which became non-resident as a result of a double tax treaty before 1 April 2002 so that such companies cannot be used for tax avoidance.

Corporate Capital Losses
As previously announced, anti-avoidance rules are to be introduced to restrict the creation and use of capital losses by companies to genuine commercial transactions. The rules apply from 5 December 2005 and are intended to deter:

• contrived creation of capital losses;
• buying of capital gains and losses; and
• conversion of income streams into capital gains, or creation of capital gains matched by income deductions, where the gains are then wholly or partly covered by allowable losses.

Financial Products Avoidance
The 2006 Finance Bill will block a number of avoidance schemes notified to HMRC under the Finance Act 2004 disclosure rules.

They involve financial products designed to avoid tax including many intra-group arrangements to avoid tax on income arising within the group or create a tax loss when there is no loss to the group as a whole.

Film Tax Relief
A new relief will be available for British films intended for cinema exhibition, starting production on or after 1 April 2006. To be eligible, qualifying UK expenditure must be at least 25% of total production expenditure on the film.

British films will be as defined by revisions to the Films Act 1985. Qualifying UK expenditure must be directly incurred in relation to production, principal photography and post-production activities taking place within the UK. (Other film-related expenditure will be subject to normal tax rules.)

There will also be new treatment for film production companies (FPCs), defined for tax purposes as a company responsible for principal photography, post-production and delivering the completed film. Each film will be treated as a separate trade.

There will be an additional tax deduction for UK production expenditure of:

• 100% for films with total qualifying production expenditure of £20m or less; and
• 80% for all other films.

Where this gives rise to a loss, this can be surrendered for a tax credit calculated at 25% for qualifying expenditure up to £20m and 20% for other films. Alternatively it can be carried forward and set against future income.

The existing relief will continue to apply to qualifying films where principal photography started by 31 March 2006 and is completed by 1 January 2007 or acquisition expenditure where acquisition takes place before 1 October 2007.