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The standard rate of corporation tax for the year to 31 March 2005 will be 30% (2004: 30%).
The small companies' rate of corporation tax for the year to 31 March 2005 will be 19% (2004: 19%). The upper and lower limits for calculating marginal relief remain £300,000 and £1,500,000; the marginal relief fraction remains 11/400.
The corporation tax starting rate of 0% (2004: 0%) will apply for the year to 31 March 2005 on taxable profits up to £10,000 (2004: £10,000). The upper and lower limits for calculating marginal relief remain £10,000 and £50,000; the marginal relief fraction remains 19/400. The starting rate and marginal rate relief will only apply to retained profit or profits distributed to other companies. If profits are distributed to non-corporate shareholders, a minimum 19% corporation tax will apply.
All the above limits will be split where there are associated companies. Close investment holding companies will continue to pay corporation tax at the full corporation tax rate.
The Government is introducing a new disclosure measure to counter large scale avoidance of direct taxes. This will require those who devise and market certain avoidance schemes to provide the Inland Revenue with details of these schemes shortly after the scheme is sold.
The Inland Revenue will register these schemes and allocate each a reference number. In most cases, tax payers will be required only to include on their tax return the registration number of the scheme. However, where a UK taxpayer has used a scheme purchased from an offshore promoter or where the scheme has been devised in-house rather than purchased from a promoter, taxpayers themselves will be required to provide details of the scheme to the Inland Revenue shortly after the scheme was purchased or first implemented.
The new disclosure rules will apply where a main benefit is the obtaining of a tax advantage and where they meet further conditions. Full details of these conditions will be published in the Finance Bill.
New legislation will apply from 17 March 2004 to restrict for lessees the rents allowed for tax purposes under existing and new sale and leaseback and lease and leaseback arrangements.
The legislation will apply to lessees who account for the leaseback as a finance lease in their solo accounts or in group consolidated accounts. It will restrict the tax deduction for lease rentals payable by the lessee to the finance charge element shown in the lessee's accounts and in the case of sale and leasebacks to an amount equivalent to the finance charge element and the disposal proceeds brought into account for capital allowances purposes.
In the case of terminations or assignments (by the lessee) on or after Budget day, rules will apply to charge the lessee on a deemed income receipt of an amount equivalent to the lease rentals that would not have been allowable had the lease run to its full term.
For lessees with accounting periods straddling Budget day, transitional provisions, which will apply to existing arrangements, will permit deductions for lease rentals attributable to the period up to Budget day, and allow rentals paid before Budget day to be governed by the old rules.
For lease and leasebacks, lessors entering into such arrangements will be taxed on gross earnings under UK GAAP. For sale and leasebacks, lessors will additionally be taxed on that part of the rental income which recovers the capital expenditure on which capital allowances are available for sale. Similar transitional rules (as for lessees) will apply for accounting periods straddling Budget day.
The changes to the transfer pricing and thin capitalisation legislation proposed in the Pre-Budget Report have been confirmed.
The changes will extend the scope of the transfer pricing legislation, which currently applies to cross-border transactions, to transactions between UK related parties. In addition, the existing thin capitalisation legislation at Section 209 ICTA 1988 will be repealed and replaced by similar rules in the transfer pricing legislation at Schedule 28AA ICTA 1988 with effect from 1 April 2004.
Small and medium-sized enterprises will be exempt from the requirements of Schedule 28AA ICTA 1988 except in relation to transactions with a related business in a territory with which the UK does not have a tax treaty with a suitable non-discrimination article.
The Inland Revenue will however, in exceptional circumstances, be able to apply the new transfer pricing rules to medium-sized enterprises.
Companies that are dormant at 1 April 2004 will also be exempt for as long as they remain dormant.
There will be a temporary relaxation until 31 March 2006 for penalties for failure to keep evidence to demonstrate that a result is arm's length.
Measures have been announced to ensure that companies choosing to adopt International Accounting Standards (IAS) to draw up their accounts receive broadly equivalent tax treatment to companies that continue to use UK GAAP.
The revisions will be effective for periods of account beginning on or after 1 January 2005, and will ensure that IAS accounts are valid for UK tax purposes.
In particular:
changes will ensure that where tax relief for amortisation of goodwill has been claimed, relief will not be allowed again if the goodwill is recognised and written off again under IAS;
R&D tax relief will not be deferred even where under IAS a company is required to carry forward R&D expenditure in its balance sheet;
the loan relationships and derivatives legislation is to be amended to remove the concept of separate authorised accounting methods and simply require use of accepted accounting practice (whether under UK GAAP or IAS); and
the legislation will be adapted to cater for cases where the presentation currency differs from the functional currency.
Further detailed legislative proposals will be published later this year, focusing on areas of the existing tax system that may create unjustified barriers to modern commercial activity. While the Government has concluded that capital allowances will be retained it will consider whether the capital allowances system should be modernised, along with possible changes to the taxation of leasing transactions. The Government will also continue to consult on international tax issues with a view to maintaining the competitiveness and fairness of the UK corporation tax system and to ensure it remains robust.
From 1 April 2004 relief for expenses of managing investments will be available to companies with investment business, including life assurance companies and UK permanent establishments of foreign resident companies, whether or not they currently qualify as investment companies. The timing of relief for management expenses will now follow the accounting treatment, with capital expenditure specifically excluded from relief.
The Chancellor has today confirmed previously announced proposals to improve both the large company and the SME R&D tax relief regimes, and also the vaccines research relief:
the `consumable stores' category of qualifying expenditure is to be expanded to cover all expenditure on consumable or transformable materials;
relief will be given for the cost of software licences, where the software is used directly and actively in the R&D; and
relief will be available for expenditure on power, fuel and water used in the R&D.
The changes for the SME relief and for the vaccines research relief will take effect as soon as approval has been obtained from the European Commission. For large companies the changes will take effect from 1 April 2004.
An unintended consequence of the Income Tax (Earnings and Pensions) Act 2003 has been corrected, such that R&D tax relief will no longer be available for benefits in kind. This correction will apply for expenditure incurred on or after 1 April 2004.
In addition to the changes announced in the Budget, the DTI has recently published revised guidelines on the meaning of research and development for tax purposes, which apply for periods ending on or after 1 April 2004. The new guidelines are not intended either to widen or to narrow the definition of R&D, but are clearer. These guidelines can be used by companies to help interpret the previous guidelines.
The Inland Revenue is moving to counteract tax avoidance through the use of financial reinsurance by life insurance companies. The target of the measure is temporary reinsurances and reinsurances where further payments may be made to the reinsurer to allow the reinsurer to meet its obligations. The measure will reverse the reduction in future years of the taxable profits of the life insurer. This measure will take effect for accounting periods ending on or after 17 March 2004.
A second measure partly relaxes last year's changes to the rules for transfers of business. Under those rules a tax charge could result where some of the long term insurance fund assets were retained by the transferor. Going forward, there will be an exemption from the charge where certain liabilities are also retained by the transferor. This measure will apply to transfers on or after 17 March 2004.
New measures will be introduced to assist individual members of Lloyd's (`Names') who wish to convert to limited liability underwriting. At present most sole traders who transfer a business to a company can carry forward income tax losses and defer capital gains, but Names cannot use these reliefs because of the extended period of time over which the transfer takes place.
The new measures will extend these reliefs to Names for transfers taking place on or after 6 April 2004. They will apply where the Name owns more than 50% of the company's ordinary share capital and controls the company. Losses will be set against company income. Gains on transfer of assets held to back the Name's business and syndicate capacity will be deducted from the cost of the shares. Loss relief will also apply where the business is transferred to a Scottish Limited Partnership.
The Treasury has published a Consultation Paper in relation to the introduction of UK Property Investment Funds (PIFs). The Treasury seeks to develop a more efficient and flexible property market through PIFs. The paper indicates no clear preferences for the legal form or tax attributes of a PIF. The consultation period ends on 16 July 2004.
Draft regulations will be published shortly on the Inland Revenue's website in relation to the taxation of property derivatives. Comments will be invited on this draft.
Where the company is a party to a property derivative contract for the purposes of its trade, the profit or loss would be brought into account in the same way as amounts from derivative contracts that are currently within the Finance Act 2002.
In other cases, the mechanics of the derivative contracts legislation in Finance Act 2002 would be used to identify and quantify the gain or loss arising on a property derivative, and the resulting gain or loss would be treated as a chargeable gain for tax purposes.
The new rules would apply to contracts entered into on or after the date the regulations come into effect. Such regulations cannot be made before Royal Assent.
First year allowances available to small enterprises will be increased from 40% to 50%, for one year.
The increase is effective on or after 1 April 2004 for businesses within the charge to corporation tax, and on or after 6 April 2004 for businesses within the charge to income tax.
The rate of first year allowances for medium sized enterprises remains unchanged at 40%.
The Chancellor has not extended the 100% first year allowances for small enterprises investing in ICT and consequently the regime runs out on 31 March 2004.
100% first year allowances were introduced in the last Budget for capital expenditure incurred from 1 April 2003 on water efficient technology and energy saving technology.
The list of qualifying assets will be extended to introduce new products in the summer of 2004, subject to EU state aid approval.
There are changes to the loan relationships and derivative contracts legislation so that the regime operates as intended, to provide greater certainty for business. Also measures apply with effect from Budget day to remove opportunities for avoidance in certain circumstances where the contracts are taken outside the UK tax net.
Effective from Budget day, two PRT measures will be introduced to prevent:
the generation of artificial costs through the trading of assets at artificially high prices between connected parties; and the creation or enhancement of PRT losses, which can be used to offset the PRT liability in another field, as a result of successive transfers of field interests late in field life.
Companies undertaking oil or gas exploration and appraisal (E&A) activities in the UK or on the UK continental shelf, which are not yet trading or do not have a tax liability sufficient to use 100% capital allowances can claim the Exploration Expenditure Supplement (EES), on expenditure incurred on or after 1 January 2004. The EES applies to companies subject to the special ring-fence corporation tax rules and represents a cumulative annual 6% uplift in the value of unused capital allowances for a maximum of six accounting periods which need not be consecutive. It will help maintain the value of capital allowances during the period before such companies first generate taxable profits.
The Government is considering further anti-avoidance measures where loans are made to shareholder directors of close companies.
From 17 March 2004, if a company realises capital from a partnership above the amount it has contributed or invested, and some or all of the increase in the company's partnership capital has been derived from profits, arising on or after 17 March 2004, that would have been taxable on the company if allocated to it in proportion to its share of partnership capital, that company will be subject to corporation tax on the lower of the capital realised and those underlying profits.
Completion of Form CT41G which provides basic tax information on newly incorporated companies and their directors will become compulsory.
Finance Bill 2005 will include rules to deal with the new European Company Statute (ECS) EU regulation which comes into force on 8 October 2004. The ECS permits the formation of a `European Company' which is subject to the tax law of its country of residence. There will be a period of consultation in the light of possible changes in other EU legislation e.g. the Mergers Directive that may affect such companies.
The directive, which is intended to eliminate withholding tax on interest and royalty payments made between associated companies in different Member States, will be implemented with effect from 1 January 2004.
From 8 September 2003, court actions seeking repayments of tax paid under a mistake of law must be commenced within six years (except in Scotland where the time limit will be five years) of the payment of the direct tax that is the subject of the claim.
The tax treatment of certain payments made within the construction industry will change from April 2006.
The Chancellor has announced the intention to introduce a Derelict Land Tax Credit for future housing. This is to incentivise the development of derelict brownfield land.
The tax threshold below which registered CASCs will pay no corporation tax will be increased.
As from 1 April 2004 CASCs will be exempt from corporation tax on profits derived from trading, if their trading income is less than £300,000, and on profits derived from property, if their gross property income is less than £20,000.
CASCs will not be required to complete a tax return on an annual basis if they do not exceed these thresholds.
From shortly after the Budget, the Inland Revenue is to deploy extra specialist staff and new systems to target both corporate and individual taxpayers who do not comply with their legal obligations or who seek to avoid tax. Key areas to be targeted include avoidance or non-payment of corporation tax, NICs and tax on employment income, late filing of returns and fraud involving concealment of undeclared income or profits offshore. Discussions have also begun with the tax administrations of Australia, Canada and the USA to establish a joint task force to tackle abusive tax transactions.
The tax relief for British qualifying films, which expires on 1 July 2005, will be replaced by a new relief for production expenditure incurred that can either be offset against profits or surrendered for a cash payment. The new relief will typically provide filmmakers with 20% of the production budget. The Government is currently reviewing the treatment of co-productions, with a view to creating a tighter definition of British Qualifying Status. The Government also wishes to improve the proportion of British films produced being distributed. Full details of the new relief will be published in the summer after consultation.