• At-a-glance
• Administration Of Tax
• Personal Taxation
• Employment Taxation
• Business Tax
• Capital Allowances
• Corporation Tax
• Capital Gains Tax
• Inheritance
• Savings and Investments
  
• Pensions
  
• Charities
  
• Anti-Avoidance
  
• Stamp Taxes
• Value Added Tax
• Excise Duties
• Miscellaneous

CORPORATION TAX

Reduction in Main Rate

Legislation will be introduced in the Finance Act 2011 to reduce the main rate of corporation tax for all non-ring fence profits from 28% to 26% for the financial year beginning 1 April 2011, and from 26% to 25% for the financial year beginning 1 April 2012. The main rate for ring fence profits will remain at 30%.

Reduction in Small Profits Rate

The small profits rate of corporation tax for all non-ring fence profits will be reduced from 21% to 20% for the financial year beginning 1 April 2011. The small profits rate for ring fence profits will remain at 19%.

Reform of Associated Companies Rules

The threshold at which the small profits rate applies is proportionally reduced depending upon the number of associated companies (i.e. companies under common control) there are in a group. For accounting periods ending on or after 1 April 2011, legislation will ensure that when establishing control of a company, HMRC will not attribute to an individual all the rights and powers of a person’s relatives unless there is ‘substantial commercial interdependence’ between the companies in question. This legislation will put a long-standing concession (ESC C9) on to a statutory footing and extend it to all relatives.

Taxation of Foreign Branches

With effect for accounting periods commencing on or after Royal Assent to Finance Act 2011, UK resident companies may opt for their foreign branches to be exempt from UK corporation tax. No relief will be available for foreign branch losses (subject to transitional arrangements that will ensure that any outstanding loss relief claimed in the last six years is recaptured by the Exchequer). The election will apply to all foreign permanent establishments and will be irrevocable.

Other significant features include anti-avoidance provisions, a profit entry limit, and restriction to profits from full treaty partner jurisdictions for small companies. The exemption will apply to some, but not all, life insurance companies.

Research and Development

For expenditure incurred on or after 1 April 2011, and subject to EU state aid approval, the additional corporation tax deduction for qualifying research and development (R&D) expenditure given to small or medium enterprises (SMEs) will increase from 75% to 100% (giving a total deduction of 200%). The rate of Vaccine Research Relief for SMEs will be reduced to 20% from the same date.
The Government also intends from 1 April 2012 to:

• increase the SME relief by a further 25% (to 225%), again subject to state aid approval; and
  
• abolish Vaccine Research Relief for SMEs.
  The Finance Act 2012 will:
  
• simplify R&D tax relief rules for SMEs, including the abolition of the £10,000 minimum expenditure condition and the limitation to PAYE and National Insurance contributions paid; and
  
• make changes to the rules governing the provision of relief for work done by subcontractors under the large company scheme.

Interim Controlled Foreign Company Reform

Legislation will be introduced in Finance Act 2011 to deliver a package of interim improvements to the controlled foreign company rules as a first step to making the rules more competitive ahead of full reform in 2012.

Capital Losses after Change of Ownership (Simplification)

From the date of Royal Assent to Finance Act 2011, capital losses realised before a change in ownership of a company may only be used against gains arising on assets used in the same business that the company conducted before joining the group. (Currently this restriction applies to both realised and unrealised gains and such gains can only be offset against gains on assets used in the same trade.)

Companies will be able to elect whether restricted ‘pre-entry losses’ or other losses have been allowed against gains. The circumstances in which restricted losses may be utilised are to be extended. Once a loss has become subject to restriction then the same restriction continues to apply should the company subsequently join another group.

Where a loss on the disposal of an asset after a company joined a group is subject to restriction under the current rule, then it will be treated as one that arose before the company joined the group for the purposes of the amended rules.

Degrouping Charge

For companies leaving groups on or after the date of Royal Assent to Finance Act 2011, the following changes are to be made to the operation of the degrouping charge:

• where a company leaves a group as a result of a disposal of shares by a group company, any degrouping charge will be made by way of an adjustment to the chargeable gain or allowable loss on the share disposal; consequently any exemption or relief that may apply to the share disposal (e.g. substantial shareholding exemption (SSE)) will also apply to the degrouping charge; alongside this amendment the SSE rules will be amended so that (for disposals on or after the date of Royal Assent to Finance Act 2011) they will apply when trading activities are transferred to a newly incorporated group company which is then sold out of a trading group;
  
• the degrouping charge may be reduced where it is just and reasonable to do so, taking into account the amount of share capital of the companies being sold, and the circumstances under which the company leaving the group acquired the asset which gives rise to the charge;
  
• the associated companies exception will be clarified to ensure that no degrouping charge will be triggered in respect of an asset that has been transferred between two companies belonging to the same sub-group if those companies leave the group together (identical provisions will also be introduced for intangible assets);
  
• the facility to roll over a degrouping charge on the acquisition of a replacement asset will be repealed; and
  
• the current rules permitting an election to be made to reallocate a gain or loss to another group company will be extended so that they can also apply to a stand-alone degrouping gain or loss. As a result of this, the specific facility to transfer a degrouping charge between group companies will be repealed.

In addition, anti-avoidance provisions have been announced which will apply where a company leaves a group on or after 23 March 2011. These provisions target avoidance using the current associated companies exception, and will ensure that the degrouping charge cannot be avoided by a series of transactions undertaken within a group before a disposal.

Corporate Capital Gains: Value Shifting (Simplification)

Legislation will be introduced in Finance Act 2011 to simplify anti-avoidance rules applying to the computation of corporate capital gains and losses. Value shifting provisions increase the consideration used to compute a gain or loss on the disposal of an asset if a scheme has reduced the asset’s value and confers a tax advantage. The proposed legislation will replace existing value shifting provisions with a new targeted anti-avoidance rule. It will also only require a loss computation on a company share disposal for the effect of depreciatory transactions if it takes place less than six years before the sale. The measure will have effect where companies dispose of shares or securities on or after the date that Finance Act 2011 receives Royal Assent.

Loan Relationships and Derivative Contracts (Disregard) Regulations

The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) Regulations 2004 (SI 2004/3256) provide that, in certain circumstances, the debits and credits on a company’s loan relationships and derivative contracts are not brought into account for tax purposes until some later time. The foreign exchange gains and losses on the loan relationship or derivative contract are matched with the equal and opposite foreign exchange gains and losses on the foreign exchange asset, and are not brought into account until the foreign exchange asset is disposed of. At present, the rules on the matching of share capital do not provide for tax to follow the economic outcome where companies invest in foreign currency assets through a partnership, or where a company sells foreign currency shares but expects to receive the proceeds at a later date.

The Regulations will be amended to allow companies to be taxed on the basis of the economic outcome where they issue foreign currency preference share capital to raise foreign currency finance, invest directly in foreign currency partnerships or in foreign currency assets through a partnership, or agree to sell foreign currency shares and receive the proceeds at some future date. The changes relating to foreign currency preference shares and the net asset value of foreign currency shareholdings will take effect for accounting periods beginning on or after 1 July 2011.

The changes relating to investment in foreign currency partnerships, and the future disposal proceeds of foreign currency shares, will take effect for accounting periods beginning on or after 1 January 2012.

Amendments to the Tax Treatment of Financing Costs and Income

The ongoing consultation on the debt cap rules has identified practical issues with their application that need to be addressed. The Government will conduct informal consultation with stakeholders. Following this further consultation, legislation will be published in draft in autumn 2011 and introduced in Finance Act 2012. The legislation will aim to allow businesses to more easily apply the debt cap rules.

Consultation on Devolving Corporate Taxation to Northern Ireland

The Government is working with the Northern Ireland Executive to rebalance the Northern Ireland economy and on 24 March 2011 will publish a consultation paper looking at mechanisms for devolving the rate of corporation tax to the Northern Ireland Executive.

Patent Box

The Government proposes to introduce a 10% rate of corporation tax for profits arising from patents, effective from 1 April 2013. A consultation document will be published in May 2011.