Corporation tax rates
The 0% starting rate is abolished from 1 April 2006, as announced in the Pre-Budget Report. Companies with profits up to £50,000 will therefore pay 19% tax. All other rates and bands remain the same. The removal of the starting rate means an end to the complex non-corporate distribution rate calculations.
UK real estate investment trusts (REITs)
From 1 January 2007, a new tax regime that gives tax exemption for income and gains from property will be available for companies or groups that meet certain conditions.
Qualifying companies and groups must be UK resident, listed on a recognised stock exchange and distribute at least 90% of their tax-exempt profits. No single shareholder may control 10% or more of share capital or voting rights. The ratio of interest on loans to fund the tax-exempt business in relation to rental income must be less than 1.25:1. Existing companies that switch to the REITs regime will be subject to an entry charge of 2% of the market value of their investment properties. The tax payment can be spread over four years in instalments of 0.50%, 0.53%, 0.56% and 0.60%.
Distributions from the exempt property element will be paid net of 22% tax. Other distributions will be taxed as normal dividends.
REITs will be qualifying investments for ISAs, PEPs and child trust funds.
Reform of film tax relief
A new tax relief will apply to film production companies which start principal photography on qualifying films after 31 March 2006. The relief will give a deduction for UK production expenditure of 100% for films with total qualifying expenditure of £20m or less and 80% for all other films. Where the deduction results in a tax loss, the company may surrender that loss, up to the amount of its qualifying UK expenditure, for a payable tax credit at a rate of 25% of the loss where the 100% deduction applies or 20% otherwise.
Alternative finance arrangements
Certain finance arrangements, including Shari’a compliant arrangements and the alternative finance version of low cost employee loans will be taxed no less favourably than equivalent arrangements that give rise to interest. The changes take effect between 22 March 2006 and 6 April 2006.
The rate of first year allowance for small businesses will be 50% instead of 40%. The increase will apply for one year for spending incurred from 1 April 2006 for companies and from 6 April 2006 for self-employed people and partnerships. The rate for medium-size businesses remains 40%.
A consultation document on tax relief for business expenditure on cars considers modernising the capital allowances regime, with emphasis on providing further incentives for businesses to buy cleaner cars.
Research and development tax relief
Companies with between 250 and 500 employees will benefit from the 50% enhancement of qualifying expenditure instead of the current 25%. The change will take effect if the European Commission grants state aid approval. Further details ofthe proposal will be published later this year.
Companies will have to make, amend or withdraw claims to the enhanced deduction by the first anniversary of the filing date for the tax return instead of within the present six-year time limit.
Group relief is extended, from 1 April 2006, to the losses of foreign subsidiaries that cannot be relieved elsewhere, where the subsidiaries are resident in the European Economic Area (EEA) or have incurred the losses in a permanent establishment in the EEA. Relief is restricted to losses for which there is no possibility of relief in any other country. Provisions to prevent abuse are effective from 20 February 2006. The change follows a decision in the European Court of Justice involving Marks and Spencer PLC.
Corporate capital losses
Three anti-avoidance measures, effective from 5 December 2005, will tackle schemes that enable companies to gain a tax advantage from capital losses. They deter the artificial creation of capital losses, the purchase of capital gains and losses and the conversion of income streams into capital gains.
Securitisation and international accounting standards
The temporary tax regime for securitisation companies is extended by one year to 31 December 2007 to allow time to develop a more permanent regime. In addition, amendments, backdated to 1 January 2005, are being made to the definitions of what are securitisation companies for the temporary regime.
Taxation of leased plant and machinery
New legislation will align the tax treatment of leased plant and machinery with that of plant and machinery acquired with other forms of finance. The change will generally only apply to longer leases that are essentially financing transactions finalised after 31 March 2006.
Controlled foreign companies
Certain companies that became non-UK resident before 1 April 2002 as the result of a double taxation treaty are brought within the controlled foreign companies legislation from 22 March 2006 to prevent them being used for tax avoidance. Companies that became non-resident later are generally already caught.
Trading by charities
The tax exemption for trades carried on by charities is extended to where only part of the trade is carried on for a primary purpose of the charity or carried out by beneficiaries. For periods starting after 21 March 2006, relief will be available on the profits that can reasonably be attributed to that part.
Landlord’s energy saving allowance
The landlord’s energy saving allowance will be extended from 6 April 2006 to include draught- proofing and insulation for hot water systems. The qualifying expenditure is deductible from letting profits that are subject to income tax.
The standard rate of landfill tax will be increased from £18 to £21 per tonne from 1 April 2006. The lower rate remains at £2.