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The 100% first year capital allowance available to small enterprises for expenditure on computers and communication technology has been extended until 31 March 2004. This measure will be welcomed by many businesses especially those which will be redesignated as "small" enterprises when the definition is realigned later in the year. The definition of "small and medium sized enterprises" is also set to change, extending the availability of the 40% first year allowance on most plant and machinery. Expenditure incurred on or after 1 April 2003 on specifically defined plant and machinery designed to conserve water and improve its quality will qualify for a new 100% first year allowance.
Pointer:
Interest on borrowing for business purposes usually qualifies for a 100% tax write-off. Personal borrowing qualifies for none. Consider borrowing first for business purposes, and when times are better repaying personal borrowings first. You also need to compare interest rates and early redemption terms.
An anti-avoidance measure has also been introduced to prevent businesses claiming excessive balancing allowances on the disposal of assets on which capital allowances had been claimed, by entering into artificial transactions at below market value. The provision applies to industrial buildings, mineral extraction, flat conversions, agricultural buildings and assured tenancies. Since this measure was publicised in the Pre-Budget Report, it will apply to events occurring on or after 27 November 2002.
It has been possible for people such as nannies and gardeners working for private individuals to set up service companies and thus avoid PAYE and NI by paying themselves via a dividend. This created an anomaly in that individuals supplying such services to a business would have been caught under IR35. The Chancellor has announced measures which broadly speaking will bring such individuals within the IR35 regime. The new rules would apply to services provided after 9 April 2003.
In the Pre-Budget Report, an anti-avoidance provision had been announced to prevent employers obtaining a corporation tax deduction for contributions made to an employee benefit trust, until payments are made to employees which are liable to income tax and National Insurance contributions. This measure is backdated to 27 November 2002. Further anti-avoidance measures have been introduced in respect of company share option plans which allow employees to exercise options within three years of grant. The new measures will effectively treat such plans as though they were unapproved share option schemes. National Insurance contributions will also become payable on the exercise of options under these plans which had been granted prior to April 1999 and where there was evidence of manipulation of the share values. These measures come into operation on 9 and 10 April 2003 respectively. Further announcements include the removal of the "second three year rule", for company share option plans which prevented tax free exercise of an option within three years of a previous exercise. Employees who leave a company share option plan through no fault of their own, such as injury, will now be allowed the same favourable treatment as those under save as you earn and share incentive plans. These two changes take effect from Budget Day. There are also a number of other measures dealing with the definition of "market value" and "material interests" in company share option plans.
Pointer:
Watch the timing of capital expenditure, as this will affect the timing and extent of tax reliefs and your VAT recovery.
A number of amendments are proposed to the current rules for claiming R&D tax credits. These include:
The de minimis level of qualifying R&D expenditure to claim R&D tax credit is reduced from £25,000 to £10,000 for an accounting period. Qualifying expenditure on staffing costs is extended to include workers paid through a third party and not employed by the R&D company. Previously, costs for staff working less than 20% of the time on R&D did not qualify for relief and staff working more than 80% of the time qualified for 100% relief. With effect from a date to be confirmed, staff costs can simply be apportioned. SMEs receiving grants or other state aid towards an R&D project are prevented from receiving SME R&D tax credit on the project. In certain circumstances, SMEs have been able to claim the large company R&D tax credit (not a state aid). From a date to be announced, SMEs will be able to claim large company R&D tax credit in the circumstances outlined.
For large companies the changes apply from 9 April 2003. For SMEs, the rules are dependent on approval from the European Commission and will commence from a date to be announced.
A consultation document to be issued by the DTI and Treasury is to review the definition of research and development and will consider the development end of R&D, innovative elements of design, the uniqueness of the R&D being undertaken, software development and the definition of consumable stores. The consultation document will also review the extension of R&D tax credit relief to software licences in respect of short life, advanced software.
The Chancellor has announced a number of consultations aimed at helping business, including access to capital for small businesses, reducing regulation and compliance costs by reducing accounting and reporting requirements for small companies and raising the audit threshold. Other areas which will come under review are regulatory enforcement, reducing the burden of statistical surveys, simplifying compliance with the Data Protection Act and reforming the construction industry scheme.
Pointer:
Current tax and NIC rates are an incentive for a small business to trade as a limited company. There are problems as well as advantages, not all tax related, so seek advice before acting.
New tax rules will apply to companies in liquidation and administration under the insolvency measures in the Enterprise Act 2002. The rules will come into effect on the same date as the company law changes come into effect. For any liquidation ending on or after that date, if the company ceases to be in liquidation without being wound up, an accounting period will end on the date of ceasing to be in liquidation. Where a company goes into administration or leaves administration, this will now result in the commencement of a new accounting period.
During the administration of a company, the administrator of the company will now, under the new rules, be the "proper officer".
The special rules allowing liquidators to settle company liabilities early under self assessment are to be extended to companies in administration.
For any company in liquidation, the special rules applying to loan relationships between connected companies are overridden. This override will, for liquidations in place on or after 9 April 2003, only apply to the period whilst the company remains in liquidation.
The tax rules for deduction of interest paid on overdue tax and NI by employers and contractors in the construction industry are to be codified to reflect current and accepted practice for accounting periods ending on or after 9 April 2003.
Amendments are proposed to the rules with effect from 9 April 2003 governing the transfer of loan relationships and derivative contracts between group companies to prevent profits falling out of charge to tax when mark to market accounting is used. Other rule amendments are proposed in connection with intra-group novated contracts and the connected party rules to prevent deduction for interest (or discount) accrued but never paid.