A guide to the 2006 Budget
Although this year’s Budget speech left the press struggling to say much more than that car tax is going up for some of us, there were some surprises in the Budget press releases and subsequent publications. The biggest surprises were probably on personal tax - some major changes to trusts and the announcement that the Income Tax return filing deadline is to be brought forward.
This article concentrates on some of the key changes affecting businesses. Many of the changes were to be expected, having been the subject of prior consultation, but there were still plenty of new announcements on matters which could affect your business.
Corporation Tax (CT)
There were numerous CT changes in the Budget.
The 0% starting rate, introduced only a few years ago as an encouragement to small businesses, has been abolished as it had resulted in too many businesses incorporating to take advantage of it!
Research & Development tax relief is to be enhanced for certain companies. There are two rates of relief, and more companies will be eligible for the higher rate.
Venture capital schemes (EIS, CVS and VCT) reliefs are to be made more generous but targeted at a smaller range of companies. The maximum annual investment limit is to be doubled and the rate of income tax relief increased to 30%, but the maximum size of company is to be halved to £8 million. Various other limits and other matters are changed as well.
Group relief is being extended to allow losses in foreign companies to be set against UK company profits in certain circumstances. This is in response to a recent European Court decision, but the new circumstances in which relief can be claimed have been restricted very tightly. Basically only losses which can never be used abroad will be eligible for use against UK profits.
Stamp Duty reliefs on company acquisitions and reconstructions are relaxed in two ways: the acquiring company can now be registered anywhere in the world, and slight changes to the proportions of shares owned by each shareholder are now allowed if they are necessary for practical reasons.
First year capital allowances have been increased to 50% for small companies. This is a temporary measure, to last for only one year. Thereafter the allowance will revert to 40%. This is unlikely to influence many investment decisions.
Film tax relief has been completely reformed. The tax relief is now directed at the film production company instead of the shareholders.
There are several anti-avoidance measures, affecting such areas as the sale of plant and machinery, leasing companies, capital losses, and the use of financial instruments. As well as these specific measures there is to be an extension of the requirement to disclose details of avoidance schemes to HM Revenue & Customs at the time of using them. The existing disclosure regime is being extended to cover all of Income Tax, Corporation Tax and Capital Gains Tax. Schemes will be notifiable if they bear certain features, such as confidentiality agreements, premium fees, or artificial creation of losses. The separate regimes for disclosure of SDLT and VAT schemes are unchanged.
Plant and machinery – long leases
The taxation of long leases of plant and machinery has been fundamentally changed. The tax treatment is now the same as for items acquired using other form of finance. For new leases of 5 years or more, it is the lessee who will be able to claim the capital allowances instead of the lessor. This will affect the pricing of such leases, and the overall effect on business which have large amounts of plant will be significant. Leases entered into before 1 April 2006 are unaffected.
Stamp Duty Land Tax (SDLT)
This year’s Finance Bill contains a large number of small changes to SDLT. The general theme of the changes is of tidying up, making the tax clearer and relieving some small matters from tax. Also one tax avoidance scheme (the JPUT scheme) was stopped, however where property is already in a unit trust, future transfers of units will still be free of tax.
Real Estate Investment Trusts (REITs)
The REITs regime will be available from 1 January 2007. REITs are part of the Government’s strategy to encourage investment in property by a wide range of investors. They are intended to allow small investors to invest in property more efficiently and more flexibly than at present, with the same tax result as direct investment in property. Investing in a REIT will have a lower tax cost than investing in an ordinary property company, so many listed property companies are likely to become REITs. For further details on REITs please click here .
VAT
The option to tax rules are being reviewed, and details will be announced in the Summer. The main change will be that it will be possible to revoke options after 20 years, though this cannot have any effect until 2009. Also it is hoped that many current areas of difficulty will be made clearer.
As part of the continuing battle against fraud, the Government intends to apply the reverse charge mechanism to certain supplies over £1,000, so that the purchaser will have to charge itself VAT. This is to prevent the seller from charging VAT but never paying it to HMRC, while the purchaser reclaims it. This will initially apply to mobile phones and computer chips, where fraud is a major problem. European Union approval is needed before this rule can take effect. A separate measure gives HMRC the power to require businesses to keep specific types of records of goods they have traded, and this is likely to be aimed at the sale same types of goods.
Capital Gains
Capital gains are a major cost for individuals or companies disposing of property or shares. The Budget contains several measures to prevent avoidance. The schemes which have been stopped generally involve the creation of capital losses for individuals or companies where no commercial loss exists, or the buying of companies which have losses.
For further information please contact: Alastair Johnston