24.03.2011

Fiscally neutral with tax reductions for some and levies increased for banks and others, the main news is the alignment of income tax with National Insurance.

Budget at a glance, click on the headlines below to read more

Budget 2011 Opinion 

Changes to personal tax and allowances 

• For 2011/12 the basic rate of income tax will remain at 20%, the higher rate at 40% and the additional rate at 50% >more 
• Mixed news for non-domiciled individuals but overall there seems to be an acceptance by the Government of the positive impact their inward investment brings to the UK >more 
• The annual CGT exempt amount (£10,600 for 2011/12) will in future be raised in line with the CPI, rather than the RPI >more 
• The CGT Entrepreneurs' relief is subject to a lifetime limit which will be increased from £5 million to £10 million from 6 April 2011 >more 
• Furnished holiday letting - Many taxpayers will be worse off as a result of the changes to the relief, principally because of the inability to set off losses against other income >more 
• Qualifying time deposits - It is proposed that basic rate income tax will be deducted at source from all new time deposits with effect from 6 April 2012 >more 
• MP Expenses - From 1 November 2010, the existing tax exemption for MPs’ expenses is to be extended to amounts that are paid directly to another person >more 

Tax-efficient investments 

• The annual allowance for pensions savings eligible for tax relief is to be reduced from £255,000 to £50,000 from 2011/12, and the lifetime allowance from £1.8 million to £1.5 million from 6 April 2012 >more 
• Pension annuitisation - From 6 April 2011 the rules requiring a member of a scheme to secure a pension income by the age of 75, either by means of an annuity or an ASP, are to be removed for both new and existing pensioners >more 
• The National Employment Savings Trust (NEST) is being set up under the Pensions Act 2008 as a registered pension scheme >more 
• To encourage greater investment in smaller companies, the Government has announced a package of measures to make such investments more attractive >more 

Employment taxes 

• As part of the Government’s strategy of introducing greater transparency and understanding of the tax system, the basis for increasing NIC rates, limits and thresholds will be linked to the CPI from 6 April 2012 >more 
• From 6 April 2011, the approved mileage rate for cars and vans will increase from 40p per mile to 45p per mile for the first 10,000 miles. The rate beyond 10,000 miles will remain at 25p per mile >more 
• Employers may provide childcare for employees without giving rise to an income tax or national insurance charge on a benefit in kind, either by providing childcare vouchers or by contracting directly with an independent supplier >more 
• The Chancellor confirmed that employees paying the 40% higher rate of income tax who join employer-supported childcare schemes, such as child care vouchers, after 6 April 2011 will receive tax relief at the basic rate only >more 

Business tax 

• In a surprise move, the Chancellor announced that the main rate of corporation tax will be reduced from 28% to 26% from 1 April 2011 >more 
• Associated companies for the purposes of the small profits rate - Where there are associated companies (i.e. companies under common control) the limits for the application of the SPR and the related marginal relief are split between them >more 
• In another measure aimed at supporting long term economic growth, legislation will be introduced in Finance Bill 2011 to increase the period over which expenditure on plant or machinery can be given “short-life asset” treatment >more 
• The rate of writing down allowance for the main pool of plant and machinery expenditure is to be reduced from 20% to 18% from 1 April 2012 (for companies) or 6 April 2012 (for businesses liable to income tax) >more 
• Annual investment allowance - From 1 April 2012 (for corporation tax) or 6 April 2012 (for income tax) the limit will be reduced from £100,000 to £25,000 per year >more 
• The Chancellor announced a number of changes to R&D tax reliefs for small and medium-sized business >more   
• Legislation will be introduced in the 2011 Finance Bill to exempt from corporation tax profits arising in foreign branches of UK resident companies >more 
• Controlled foreign companies - As previously announced, the Government intends to introduce a full reform of rules in 2012 >more 
• Bank Levy - In a further measure to raise revenue from the much maligned banking sector, the rate of the Bank Levy, intended ‘to ensure that the banking sector makes a fair contribution’, will increase from 1 January 2012 to 0.078% for short-term chargeable liabilities and 0.039% for long-term chargeable equity and liabilities >more
• Oil and gas exploration companies - Legislation is to be included in the 2011 Finance Bill, to take effect from Budget day >more 

Charities and charitable giving 

• Donor Benefits - the maximum benefit an individual or company can receive is £500 for a donation of more than £10,000 under the Gift Aid scheme >more  
• A new inheritance tax relief will apply where death occurs on or after 6 April 2012 and 10% or more of the deceased’s estate (after all applicable exemptions, reliefs and the nil rate band) is left to charity. The relief will reduce the tax rate on the estate from 40% to 36% >more 
• The Government intends to relax record-keeping requirements for small donations of £10 or less so that gift aid declarations will no longer be required where a charity has been operating gift aid for three years and has a good tax compliance record >more 

VAT and indirect taxes  

• The VAT registration threshol    d will increase from £70,000 to £73,000 from 1 April 2011 >more 
• Fuel Duty - rates for unleaded petrol, diesel, biodiesel and bioethanol will be reduced by 1p per litre from 6.00 p.m. on 23 March 2011 >more  
• Alcohol & Tobacco - Alcohol duty rates will increase by 2 percentage points above inflation on 28 March 2011 >more 

Powers and administration 

• Legislation will be introduced to enable HMRC to make regulations under which they may require security from employers for PAYE that is seriously at risk >more 
• The Office of Tax Simplification (OTS) published the final report of its review of tax reliefs on 3 March >more 

Click here to read our Green Energy issues from the Budget 2011 

Budget 2011: What does it mean for you? 

George Osborne delivered a strong performance in his second Budget on Wednesday, 23 March 2011. And the fact that the forecasts for GDP and public borrowing were prepared by the Office for Budget Responsibility, which has now been put on a permanent statutory footing, significantly increased their credibility.

The Budget was fiscally neutral, with tax reductions (in particular fuel duty and corporation tax) being funded by increased levies on banks and North Sea oil and gas companies, together with further anti-avoidance measures expected to raise about £1bn.

The biggest change announced by the Chancellor, and one which has been widely trailed in the press, concerns the proposed alignment of income tax and national insurance. This is a radical simplification which arguably should have been undertaken decades ago. The merger of two complex areas of taxation will be a significant task, and it will be several years before the alignment is effective.

Personal Tax 

Personal tax allowances
For 2011/12 the basic rate of income tax will remain at 20%, the higher rate at 40% and the additional rate at 50%. The Chancellor was keen to stress the temporary nature of the 50% tax rate, and announced that this will be reviewed when tax receipts have been analysed. Increasing the amount of income an individual can receive tax-free to £10,000 has been a long-standing pledge of the Government. As part of this commitment, from 6 April 2011 the personal allowance for the under-65s increases by £1,000 to £7,475. To ensure that higher rate taxpayers do not benefit from the increase, the basic rate limit will be reduced to £35,000. The limit for the application of the additional rate will remain at £150,000. The income limit above which the personal allowance is reduced remains at £100,000.

The result, broadly, is to take a number of basic rate taxpayers out of charge to tax altogether, and to reduce the tax charge on the remainder, while leaving the position of higher rate and additional rate taxpayers unchanged.

The personal allowance for 2011/12 for those aged 65 to 74 will be £9,940, and for those aged 75 or over £10,090.

As a further move towards the £10,000 personal allowance target, the Chancellor announced that the personal allowance will increase from 6 April 2012 to £8,105 with a corresponding reduction in the basic rate limit to £34,370.

The national insurance upper earnings limit (for Class 1 contributions by employees) and the upper profits limit (for Class 4 contributions by the self-employed) will be reduced by regulations, outside the Finance Bill, to align them with the level at which the 40% income tax rate becomes payable (i.e. the total of the personal allowance and the basic rate limit).

Non-domiciled individuals 
There was mixed news for non-domiciled individuals but overall there seems to be an acceptance by the Government of the positive impact their inward investment brings to the UK.

The bad news is that for non-doms who have been resident in the UK for 12 years or more the existing annual remittance basis charge will increase from £30,000 to £50,000 although not until 6 April 2012.

The good news is that the Government also proposes:

• not to tax foreign income or capital remitted to the UK for the purposes of ‘commercial investment in UK businesses’;
• to simplify some aspects of the current rules for non-doms to remove administrative burdens, which increased significantly from April 2008;
• that no other substantive changes to the rules for non-doms are to be made for the rest of this Parliament.

The Government will issue a consultation document in June 2011 with a view to implementing the changes from 6 April 2012.

CGT annual exemption
The annual exempt amount (£10,600 for 2011/12) will in future be raised in line with the CPI, rather than the RPI. This means that future increases in the annual exemption are likely to be lower than would otherwise be the case. This is expected to result in an additional 40,000 taxpayers having a CGT liability by 2015/16.

CGT entrepreneurs’ relief
Entrepreneurs’ relief enables individuals and, in limited circumstances, trustees who dispose of qualifying business assets to benefit from a lower 10% CGT rate where certain criteria are met.

The relief is subject to a lifetime limit which will be increased from £5 million to £10 million from 6 April 2011. The increased relief results in a maximum tax saving of £1.8 million compared to gains charged at the standard CGT of 28%, making it more important than ever to ensure that business assets qualify for this relief.

Furnished holiday lettings 
Under current rules income from furnished holiday lettings in the UK benefits from being treated for certain purposes as income from a trade, provided a number of conditions are met. Following a ruling of the European Court of Justice, the previous Government extended the rules on a non-statutory basis, from 2009/10, to property in the EEA.

The 2011 Finance Bill will amend the legislation by:

• putting the extension to the EEA on a statutory basis (and treating UK and EEA activities as separate businesses) from 2011/12;
• increasing the minimum period over which a qualifying property must be available for letting to the public from 140 days a year to 210 days a year from 2012/13;
• increasing the minimum period over which it must be actually let to the public from 70 days to 105 days a year (with a ‘period of grace’ allowing a business that unintentionally fails to meet this condition for one or two years to elect to continue to be a qualifying business), from 2012/13;
• allowing losses to be set off only against income from the same UK or EEA furnished holiday lettings business, rather than against other income, from April 2011/12.

Where the taxpayer is a company, references to 2011/12 apply to accounting periods beginning on or after 1 April 2011; and references to 2012/13 apply to accounting periods beginning on or after 1 April 2012.

Many taxpayers will be worse off as a result of the changes to the relief, principally because of the inability to set off losses against other income. Clearly, however, taxpayers will in general benefit from the Coalition Government’s decision not to abolish the relief altogether.

Qualifying time deposits 
Under current legislation, interest is paid gross on qualifying time deposits, broadly defined as those with a value in excess of £50,000. It is proposed that basic rate income tax will be deducted at source from all new time deposits with effect from 6 April 2012.

While this will not impact upon the final tax liability of interest arising on such deposits, the change will have a cash flow impact that needs to be considered.

MPs’ expenses
From 1 November 2010, the existing tax exemption for MPs’ expenses is to be extended to amounts that are paid directly to another person, such as a landlord, rather than being reimbursed to the MP. This reflects an administrative change in the way certain expenses are paid. Corresponding national insurance changes will be introduced outside the Finance Bill.

Back to top 

Tax-efficient investments 

Pensions tax relief
The annual allowance for pensions savings eligible for tax relief is to be reduced from £255,000 to £50,000 from 2011/12, and the lifetime allowance from £1.8 million to £1.5 million from 6 April 2012. Transitional rules on the annual allowance apply from 14 October 2010, when the changes were first announced. Above these figures a tax charge arises on the excess, and consultation is taking place as regards the possibility of individuals being able to meet those charges from their pension benefits rather than from other resources.

‘Pensions savings’ in the case of a defined contribution scheme are the total of contributions by both the employee and the employer, or (in the case of a personal pension scheme) the contributions paid plus the associated tax relief. In the case of a defined benefit scheme the figure is based on the difference between the notional capital value of the expected benefits at the beginning of the year and at the end of the year. The notional capital value is determined by multiplying the expected pension by a ‘valuation factor’, and the expected pension for this purpose is the pension that would be paid if the individual retired at the valuation date but was then at the normal pension age for the scheme (i.e. ignoring any adjustment for early payment).

Other changes to the annual allowance rules, also with effect from 2011/12, include:

• linking the charge for exceeding the limit (currently at the rate of 40%) to the individual’s own marginal tax rate; 
• allowing any unused annual allowance to be carried forward for three years;
• increasing the valuation factor used for defined benefit pension schemes from 10 to 16, and making the opening value of rights under such schemes subject to a revaluation rate;
• providing that the rules will normally apply in the year of taking benefits, but with exemptions in the year of death or where the individual retires because of severe ill health; and
• providing that inflation-linked increases in expected pensions for deferred members of schemes will not count towards the annual allowance charge.
  

Individuals who believe that the value of their pension ‘pot’ is already above £1.5 million, or that it will rise to above that figure through investment growth without any further contributions, will be able to apply for a higher lifetime allowance of £1.8 million provided they cease accruing benefits in all registered schemes, and make the necessary application, before 6 April 2012.

Individuals who believe that they are over or near the new limits will need to consider their position, particularly where they are members of a number of different schemes. There will be some new obligations on employers to provide information to pension schemes, but in general this is information that, in practice, employers provide already. There will also be some administrative costs for pension schemes in providing additional information to affected scheme members.

Pension annuitisation 

The current position
Members of a drawdown pension fund who are under the age of 75 may currently take an income from the fund, up to 120% of the ‘equivalent annuity’ (as determined using rates set by the Government Actuary’s Department). Once they reach 75 they must either use the fund to purchase an annuity or enter into a ‘drawdown’ arrangement called an ‘alternatively secured pension’ (ASP), which is subject to maximum and minimum limits. Transitional provisions in F(No 2)A 2010, introduced in anticipation of the present changes, enable members who reach the age of 75 on or after 22 June 2010 to withdraw income between nil and 120% of an equivalent annuity (subject to the scheme rules). This has effectively enabled such individuals to continue as before, pending the new rules that have now been announced.

Under the current rules lump sum death benefits for individuals who die before reaching the age of 75 and without taking a pension are tax-free; for those who die before the age of 75 but after taking a pension there is a tax charge at 35%; and no lump sums may be paid after the member has reached the age of 75. IHT applies to unused sums remaining on death because an annuity has not been purchased, where the scheme member has an ASP and is over the age of 77 as part of the transitional measures mentioned above, with effect from 22 June 2010)

The changes: pensions
From 6 April 2011 the rules requiring a member of a scheme to secure a pension income by the age of 75, either by means of an annuity or an ASP, are to be removed for both new and existing pensioners. The maximum income that may be drawn from most drawdown funds, irrespective of whether the member has reached the age of 75, will be 100% of the ‘equivalent annuity’, and there will be no minimum amount. Individuals who have a lifetime pension income from other sources (including the state pension) of at least £20,000 will not be subject to any limit, so they will be able to withdraw the whole amount if they wish (provided the pension scheme offers flexible drawdown arrangements) However, once a scheme has accepted an application from an individual to access the whole of his or her drawdown fund any further pension contributions he or she makes to any scheme will be liable to the tax charge that applies where the annual allowance is exceeded. This will prevent amounts being ‘recycled’ to obtain additional relief.

An individual making a withdrawal from a flexible drawdown pension fund while resident outside the UK for a period of less than five full tax years will be liable to UK income tax on the withdrawal for the tax year in which he or she becomes UK resident again.

The changes: lump sums
Most of the rules preventing registered pension schemes from paying lump sum benefits after the member has reached the age of 75 are to be removed, and the tax charge for all lump sum benefits will be 55%, except in the case of benefits to those who die before the age of 75 without having taken a pension, which will remain tax free. It will be possible to donate to a charity any unused funds of a scheme member who dies with no living dependants.

From 6 April 2011 IHT will not normally apply to drawdown funds remaining under a registered pension scheme, whether the individual concerned dies before or after reaching the age of 75; and existing anti-avoidance IHT charges that may currently apply where an individual fails to buy an annuity or take other entitlements will be removed. IHT charges will remain in cases where pension trustees have no discretion as to the destination of lump sums so that such amounts form part of the member’s estate, and in the case of lump sums from schemes that are neither registered pension schemes nor qualifying non-UK pension schemes.

Taken together, the changes will allow considerably greater flexibility in managing their retirement funds to individuals whose pension schemes permit such arrangements.

Changes in consequence of the Pensions Act 2008
The National Employment Savings Trust (NEST) is being set up under the Pensions Act 2008 as a registered pension scheme. Under existing legislation borrowing by a registered scheme, above certain limits, gives rise to a tax charge. This is to be removed from 6 April 2011 in respect of borrowing linked to the cost of setting up, managing or administering schemes, such as NEST, set up under s67.

The Pensions Regulator may require employers to pay interest on pension contributions paid late. Under present legislation this could give rise to a tax charge on the employee, which will be removed with effect from Royal Assent to the 2011 Finance Bill.

The Treasury is given the power, from 6 April 2011, to make regulations to deal with any unintended tax consequences that may emerge as a result of the implementation of NEST or of the duties imposed on employers by the Pensions Act 2008.

The effect of all these changes is simply to prevent unintended tax distortions interfering with the objectives of the Pensions Act in extending the availability of pension provision.

Enterprise investment schemes/Venture capital trusts 
To encourage greater investment in smaller companies, the Government has announced a package of measures to make such investments more attractive. These include:

• increasing the rate of income tax relief under EIS from 20% to 30% from 6 April 2011;
• raising the annual amount that can be invested from £500,000 to £1 million for shares issued on or after 6 April 2012;
• increasing the size of company that qualifies under the EIS and VCT rules by raising the maximum employee limit from 50 to 250; increasing the company size threshold to £15m (gross assets) before investment and raising the annual maximum investment from £2m to £10m. These changes are intended to apply to shares issued on or after 6 April 2012.

Certain companies whose trade consists of the generation of solar or renewable energy cease to qualify under EIS from 6 April 2012.

These proposals are subject to State Aid approval but if enacted could result in a significant number of additional companies potentially being able to attract EIS or VCT investors.

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Employment taxes

NIC rates and thresholds 
As part of the Government’s strategy of introducing greater transparency and understanding of the tax system, the basis for increasing NIC rates, limits and thresholds will be linked to the CPI from 6 April 2012. This measure will affect the thresholds at which employees start to pay Class 1 NIC, the rate of Class 2 paid by the self-employed, and the rate of Class 3 paid by those people wishing to fill gaps in their contribution record.

Mileage allowance
From 6 April 2011, the approved mileage rate for cars and vans will increase from 40p per mile to 45p per mile for the first 10,000 miles. The rate beyond 10,000 miles will remain at 25p per mile. In addition, the allowance of 5p per mile for passengers who are employees will be extended to include volunteers.

Individuals who receive less than the approved mileage rate are able to claim tax relief on the difference between the amount paid and the approved mileage rate. Those who receive a higher rate are taxed on the excess. This increase will therefore enable employees to make greater claims for tax relief, and reduce the tax and national insurance liability of individuals receiving more than the approved mileage rate, welcome changes indeed given the rising cost of fuel.

Employer-supported childcare and the national minimum wage 
Employers may provide childcare for employees without giving rise to an income tax or national insurance charge on a benefit in kind, either by providing childcare vouchers or by contracting directly with an independent supplier. There are also separate rules dealing with on-site nurseries, which are not affected by the present changes. The tax and national insurance exemptions apply only if a number of conditions are met, one of which is that the benefit is available to all the employees of the employer concerned, or to all of them at a particular location.

The tax legislation is to be amended so that where the childcare is delivered by means of a salary sacrifice or flexible remuneration arrangement (which in practice covers the majority of cases) this ‘all employee’ condition need not be met as regards ‘relevant low-paid employees’. These are employees whose remuneration is at a level where, if they entered into such an arrangement, the requirements of the national minimum wage legislation would not be met, because those requirements do not take account of benefits in kind. The corresponding changes to the national insurance legislation will be made outside the Finance Bill.

Childcare costs
As announced by the previous Government in 2009, the Chancellor confirmed that employees paying the 40% higher rate of income tax who join employer-supported childcare schemes, such as child care vouchers, after 6 April 2011 will receive tax relief at the basic rate only. This will be achieved by introducing tax exempt limits of £28 per week for 40% taxpayers and £22 per week for employees paying tax at the highest rate of 50%.

Employees who are members of such schemes at 5 April 2011 will not be affected and will continue to receive tax relief at their marginal rate of income tax. Higher paid employees wishing to benefit from such arrangements therefore have a short window of opportunity to obtain the benefit of higher rate tax relief by signing up to their employer’s childcare scheme before 5 April 2011.

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Business tax 

Corporation tax 
In a surprise move, the Chancellor announced that the main rate of corporation tax will be reduced from 28% to 26% from 1 April 2011. A reduction to 27% had previously been announced, but in a clear signal that Britain should be seen as “open for business”, the additional 1% reduction represents a welcome measure for corporate taxpayers. Legislation introducing the change will be included in Finance Bill 2011, along with further 1% reduction to 25% from April 2012. This will be followed by further legislation to reduce the rate by 1% per annum until a standard rate of 23% is reached from 1 April 2014. This will give the UK the lowest corporation tax rate of the G7 nations.

The main rate for profits arising from oil extraction and oil rights in the UK and the UK Continental shelf (‘ring-fence profits’) is to remain at 30%.

The small profits rate (SPR), which applies to profits below £300,000, is to be reduced to from 21% to 20% from 1 April 2011. The SPR for ring-fence profits will remain at 19%.

Where commercially appropriate, companies should consider deferring profits to later accounting periods to gain the most benefit from the decreasing rate of corporation tax, although this must be balanced against other tax changes, such as the reduction in the rate of writing down allowances on plant and machinery, which may negate some or all of the corporation tax benefit.

The Chancellor announced further that discussions would be held regarding the possibility of introducing a special corporate tax rate for Northern Ireland. This is a direct response to the Republic of Ireland’s low tax regime, where the standard rate of corporation tax is 12.5%.

Associated companies for the purposes of the small profits rate 
Where there are associated companies (i.e. companies under common control) the limits for the application of the SPR and the related marginal relief are split between them. In establishing who controls a company the legislation attributes to an individual all the rights and powers held by his or her ‘associates’. An existing extra-statutory concession (ESC C9) limits the attribution of the rights and powers of relatives (except spouses and minor children) to cases where substantial commercial interdependence exists between the companies.

With effect for accounting periods ending on or after 1 April 2011 this practice will be put on a statutory footing, and will extend to all relatives (including spouses and minor children) and partners (i.e. business partners).

This will prevent the benefit of the small profits rate being denied in cases where there is no question of activities having been fragmented in order to gain an advantage, and where the connection between the shareholders is simply an accident of circumstances.

Capital allowances: Short-life assets 
In another measure aimed at supporting long term economic growth, legislation will be introduced in Finance Bill 2011 to increase the period over which expenditure on plant or machinery can be given “short-life asset” treatment. This effectively accelerates the period over which capital allowances are obtained on expenditure on qualifying short life assets.

From 1 April 2011 (6 April 2011 for individuals) businesses investing in plant or machinery which they expect to scrap or sell within eight years will benefit from relief for the actual cost of the asset over the period of ownership. The extension from four years to eight years will benefit those businesses investing in plant or machinery in excess of the Annual Investment Allowance.

Consideration should be given to electing for short-life assets treatment in respect of assets which have previously been excluded due to their expected useful life.

Plant and machinery writing-down allowances 
The rate of writing down allowance for the main pool of plant and machinery expenditure is to be reduced from 20% to 18% from 1 April 2012 (for companies) or 6 April 2012 (for businesses liable to income tax). The rate for the special pool (which applies to long-life assets, thermal insulation, integral features in buildings and certain high-emission cars) will be reduced from 10% to 8% from the same date. For periods straddling the commencement date a hybrid rate will apply, varying according to the respective lengths of the periods before and after that date.

Oil and gas ‘ring fence’ activities have their own capital allowances rules for plant and machinery, which continue unchanged.

In some cases businesses may wish to consider bringing forward expenditure in order to benefit from the higher rates.

Annual investment allowance 
The annual investment allowance enables business to claim full tax relief on most types of plant and machinery expenditure in the year in which it is incurred, up to a limit, rather than having to claim writing-down allowances on the reducing balance in a pool. From 1 April 2012 (for corporation tax) or 6 April 2012 (for income tax) the limit will be reduced from £100,000 to £25,000 per year.

Where the chargeable period of a business straddles the commencement date the applicable limit will be determined by aggregating a proportion of the £100,000 limit and a proportion of the £25,000 limit, calculated by reference to the proportions of the period that fall, respectively, before and after that date. However, expenditure after the commencement date will only qualify for relief up to the amount of the appropriate proportion of £25,000.

Again, businesses may wish to consider bringing forward expenditure in order to benefit from the higher limit.

R&D tax credits for SMEs
The Chancellor has taken note of the recommendations made in the Dyson review of innovation and recent consultation on the targeting of research and development reliefs, and announced a number of changes to R&D tax reliefs for small and medium-sized business.

Firstly, the rate of additional deduction for qualifying R&D expenditure is to increase from 75% to 100% (giving a total deduction of 200%) from 1 April 2011.

Further measures that will have effect from 1 April 2012 include:

• the increase of the additional deduction by a further 25% (to 225%); and
  the abolition of the rule limiting the R&D tax credit payable to an SME to the amount of PAYE and NIC paid.
• In addition, the £10,000 minimum expenditure condition will be abolished for all companies and changes will be made to the rules under the ‘large’ company scheme for work undertaken by subcontractors.

These changes, which are subject to EU approval, will be funded by an initial reduction (to 20%) and subsequent abolition of the Vaccine Research Relief, which can be claimed by SMEs.

Enterprise Zones 
The Chancellor announced the creation of 21 new Enterprise Zones. The Government will offer a business rate discount of up to 100% for five years to businesses located in Enterprise Zones and will consider, in a limited number of cases, the scope for introducing enhanced capital allowances where there is a strong focus on high value manufacturing.

Taxation of foreign branches
As previously announced, legislation will be introduced in the 2011 Finance Bill to exempt from corporation tax profits arising in foreign branches of UK resident companies. Companies that operate in this way, rather than setting up subsidiaries overseas, tend to be large companies involved in oil and gas exploration, insurance or banking, although many smaller companies may initially set up overseas as a branch operation to obtain tax relief for losses.

For accounting periods commencing on or after Royal Assent to the 2011 Finance Bill a UK company will be able to make an irrevocable election for all its foreign branches, wherever located, to be exempt from corporation tax. For a branch located in a country where the double tax treaty with the UK includes a non-discrimination article, the exempt income will be the UK measure of the profits of the branch that are taxable by the other state in accordance with the treaty, including capital gains. In other cases the exempt amount will be based on the OECD Model Tax Convention. No relief will be available for losses.

There will be provisions to prevent abuse by diverting profits from the UK to a branch, and also to ensure that any relief for losses in the last six years (or longer in the case of very large losses) is recaptured by the Exchequer.

The exemption will not extend to profits from international air transport and shipping, to the extent that the relevant treaty prevents them being taxed in the overseas country. It will extend to some, but not all, life insurance business.

The significance of the exemption is not necessarily as great as might be thought. In many cases, under current rules, branch profits are taxed in the overseas country and the UK gives a double tax credit for the foreign tax against the corporation tax liability, so that what the UK is giving up now is only the residual tax.

The changes reflect the Government’s move towards a more territorial tax system (see CFCs below) and bring the tax treatment of branches more into line with that of overseas subsidiaries.

Controlled foreign companies 
As previously announced, the Government intends to introduce a full reform of the CFC rules in 2012, with interim improvements in this year’s Finance Bill. This is part of a move towards a more territorial corporate tax system that imposes a charge only on income arising in the UK.

For accounting periods beginning on or after 1 January 2011 there will be:

• an exemption for certain intra-group trading transactions where there is little connection with the UK, so it is unlikely that UK profits have been artificially diverted;
• an exemption for CFCs with a main business of intellectual property (IP) exploitation, where both the IP and the CFC have minimal connection with the UK;
• a three-year exemption for foreign subsidiaries that come within the scope of the CFC regime as a result of a reorganisation or a change to UK ownership. This will include companies that have been CFCs at some time in the past, and have then ceased to be so, with the result that the new exemption will be available to previously UK-headed groups returning to the UK;
• an alternative to the current de minimis exemption for CFCs with profits below £50,000 per annum, increasing the limit to £200,000 and basing the test on accounts profits rather than profits calculated according to UK tax rules.
  

In addition, the current transitional rules that exempt ‘superior holding companies’ and ‘non-local holding companies’ until July 2011 will be extended indefinitely, pending the full reform.

Simplification of chargeable gains value shifting rules
Current legislation on value shifting by companies:

• increases the disposal consideration taken into the calculation of a chargeable gain or loss where, broadly, the value of an asset has been artificially reduced under arrangements where additional value is received in a tax-free form. The rules also apply to transactions within a group of companies;
• includes rules that reduce or eliminate a loss (but do not create a gain) where shares in a company are disposed of after the value of the company has been reduced by a transaction conferring a benefit on another group company.

From the date of Royal Assent to the 2011 Finance Bill, the former provisions will be repealed, and replaced with a much shorter purpose-based rule that targets arrangements which have tax avoidance as their main purpose, or one of their main purposes. Arrangements that consist solely of the making of a tax-exempt distribution will be specifically excluded from the scope of the charge. As a result, companies (and HMRC) will no longer have to investigate the effects of wholly commercial transactions that have taken place before a disposal of shares.

From the same date, the provisions reducing or eliminating a loss following a reduction in a company’s value will only apply where the depreciatory transaction took place within the six years preceding the disposal of the shares, with the effect that it will not be necessary for companies to maintain records beyond that period.

Bank levy
In a further measure to raise revenue from the much maligned banking sector, the rate of the Bank Levy, intended ‘to ensure that the banking sector makes a fair contribution’, will increase from 1 January 2012 to 0.078% for short-term chargeable liabilities and 0.039% for long-term chargeable equity and liabilities.

The levy came into effect on 1 January 2011, notwithstanding that legislation to introduce it will be included in Finance Bill 2011. There has already been one increase in the rate of the levy, effective from 1 March, meaning that there will be three different sets of rates in the 2011 calendar year, although the effective rates for the year will be 0.075% and 0.0375%.

The increase in the bank levy will be used to fund the reduction in the main rate of corporation tax.

Oil and gas exploration companies
Legislation is to be included in the 2011 Finance Bill, to take effect from Budget day, to make it clear that no corporation tax deduction is available under the rules for intangible fixed assets for any goodwill or other intangible asset which relates to, derives from or is connected with an oil licence or an interest in an oil licence.

The 20% ‘supplementary charge’ that is currently payable, in addition to corporation tax, on ‘ring fence’ profits from oil and gas extraction and exploitation in the UK and UK continental shelf is to be increased to 32% from 24 March 2011.

As part of the ‘fair fuel stabiliser’, if the price of oil falls below a set trigger price on a sustained basis, the Government intends to reduce the supplementary charge back towards 20% ‘on a staged and affordable basis’ while prices remain low. The trigger price will be set after consultation, somewhere around the level of 75 US dollars.

The 2012 Finance Bill will contain provisions to restrict relief for decommissioning expenses to the 20% rate of supplementary charge, from Budget day 2012. The Government has undertaken that there will be no restriction on decommissioning relief beyond this level for the lifetime of the present Parliament, and it will work with the industry with the aim of announcing further, long-term certainty on decommissioning in the 2012 Budget.

Investment trust companies
Under current legislation investment trust companies (ITCs) that meet stipulated criteria and apply to HMRC for approval annually are exempt from corporation tax on chargeable gains, to reflect the fact that investors will be chargeable to CGT or corporation tax on the disposal of their holdings.

The main requirements are that an ITC must not be a close company and:

• must derive at least 70% of its income from shares and securities (the income test);
• and must not at any time in its accounting period have a holding in another company that represents more than 15% of the value of its total investments (the investment test).

The 2011 Finance Bill will introduce a new definition of an ITC, and will contain provisions enabling HMRC to introduce regulations prescribing conditions and rules relating to a new ‘once-only’ advance approval process. The regulations will contain provisions to prevent an ITC losing its approved status as a result of minor inadvertent breaches of the rules provided they are rectified without unreasonable delay and do not occur regularly.

The measures will take effect from a date to be appointed by Treasury Order. Changes will also be made to modernise company law rules on ITCs in a way that is consistent with the tax changes.

The objective of the changes is to make the UK a more competitive location for ITCs and facilitate a wider range of investment strategies while not allowing tax factors to distort investment decisions. Their effect is to reduce administrative costs rather than to make any changes to the determination of tax liability.

Carry-forward of capital losses after a change in ownership
Current rules restrict the use of capital losses where a company’s ownership changes as a result of a takeover or merger. A capital loss that a company realised before it was taken over, or a loss arising subsequently on an asset that the company held before the change of ownership, cannot be set off indiscriminately against gains arising in the new group; they can only be set against gains on:

• other assets that were owned prior to the takeover, either by the company concerned or by other members of the group of which it then formed part; or
• assets acquired by the company after the takeover that are used in a continuing trade of that company.

From the date of Royal Assent to the 2011 Finance Bill these rules will no longer apply to losses realised after a change of ownership. There are, however, already specific rules (which remain in place) to counter loss-buying schemes with a tax avoidance motive.

As regards losses realised before the change in ownership, there are more limited relaxations. The requirement that the gain against which the loss is set must arise on an asset used in a continuing trade of the company is modified so that it applies to a continuing business, not necessarily a trade. In addition, it will no longer be necessary that the same company should carry on the business after the change of ownership; it is sufficient that it is carried on somewhere in the group.

The changes will make it easier for a group to integrate an acquired business into its existing operations without losing relief for capital losses incurred by that business.

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Charities and charitable giving 

Donor Benefits 
At present the maximum benefit an individual or company can receive is £500 for a donation of more than £10,000 under the Gift Aid scheme.  Legislation will be introduced to increase the maximum value of the benefit from £500 to £2,500.  The new limit will be subject to the rule that the benefit must not exceed 5% of the gift.  This is designed to encourage people to give more to charity.  This will effect donations made on or after 6 April 2011 by individuals and in accounting periods ending on or after 1 April 2011 by corporate donors.

Inheritance tax
A new inheritance tax relief will apply where death occurs on or after 6 April 2012 and 10% or more of the deceased’s estate (after all applicable exemptions, reliefs and the nil rate band) is left to charity. The relief will reduce the tax rate on the estate from 40% to 36%.

This will not increase the value of the net estate available to distribute to beneficiaries, so it is unlikely to change taxpayer behaviour, but is a welcome benefit to anyone who was already thinking of making a gift of that amount in any event.

Gift aid administration
The Government intends to relax record-keeping requirements for small donations of £10 or less so that gift aid declarations will no longer be required where a charity has been operating gift aid for three years and has a good tax compliance record. The Government also intends to introduce online filing to allow charities to make their gift aid claims.

Gift aid – In-year claims
The current extra-statutory concession that allows in-year repayments of income tax to charities will be given legislative effect.

SA Donate
This scheme, which allowed repayments of tax to be directed to charity, will be withdrawn for repayments due on tax returns for 2011/12 onwards as it is used very rarely.

Gifts of art
The Government will consult on the introduction of a scheme to allow tax relief where an individual makes a gift of a work of art or object of national importance. Details are unclear, but this is presumably something in addition to heritage property relief for inheritance tax.

Tainted donations to charities
Existing rules apply to substantial donors to charities; i.e. those who have made donations of at least £25,000 in a period of 12 months, or at least £150,000 over a six-year period.

For donations made on or after 1 April 2011, these provisions are to be replaced by rules that apply only to ‘tainted donations’; i.e. cases where the donor is party to arrangements which have as their main purpose, or one of their main purposes, the obtaining from the charity of an advantage for the donor or a connected person. In such cases relief will be denied, and the donor will normally be liable for any tax relief that is to be recovered, rather than the charity as under the current rules. The focus of the revised rules will be on financial advantages, and will include a carve out for certain housing providers and charitable payments made to a charity for onward transmission to a non-charitable body. The transitional period before the existing rules are withdrawn is to be reduced from five years to two.

The changes are likely to reduce administrative costs of charities, because they will not be required to track donations from particular individuals as closely as at present.
 

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VAT and indirect taxes 

VAT registration
The VAT registration threshold will increase from £70,000 to £73,000 from 1 April 2011. Businesses making UK taxable supplies of goods and/or services in excess of the threshold must register for VAT, if not already registered. The VAT deregistration threshold increases from £68,000 to £71,000 on the same date.

The VAT registration threshold for businesses not established in the UK will be removed. Further details are awaited. However, this announcement suggests that non-UK established businesses supplying goods or services in the UK will have to register for UK VAT, regardless of the value of those supplies.

Online filing
Applications for VAT registration/deregistration and the notification of changes to HMRC must be submitted online from 1 August 2012.

Businesses that are not already required to file VAT returns online will have to do so for VAT periods beginning on or after 1 April 2012. A consultation paper will be issued in June 2011.

VAT fuel scale charges 
The VAT fuel scale charge affects all VAT registered businesses that recover input tax on fuel used for private motoring. Changes will be made to the scale charge to reflect the changes in fuel prices. There will also be amendments to the table of CO2 bands to maintain alignment with those used for direct tax purposes.

Businesses must use the VAT fuel scale charges in the table below from the start of their next prescribed accounting period on or after 1st May 2011. 

CO2 band	VAT on 3 month charge (Box 1)	Net value of 3 month charge (Box 6)
120 or less	26.17	130.83
125	39.33	196.67
130	42.00	210.00
135	44.67	223.33
140	47.17	235.83
145	49.83	249.17
150	52.50	262.50
155	55.17	275.83
160	57.67	288.33
165	60.33	301.67
170	63.00	315.00
175	65.67	328.33
180	68.17	340.83
185	70.83	354.17
190	73.50	367.50
195	76.17	380.83
200	78.67	393.33
205	81.33	406.67
210	84.00	420.00
215	86.67	433.33
220	89.33	446.67
225 or more	91.83	459.17

Import VAT
Low Value Consignment Relief allows goods with a value of less than £18 to be imported into the UK free of import VAT. The threshold will be reduced from £18 to £15 from 1 November 2011. The Government will also consult with the European Commission on further changes to the relief.

Academy schools
Special arrangements are to be introduced for ‘academy schools’; i.e. those that have entered into relevant arrangements with the Secretary of State for Education under the Education Act 1996 or the Academies Act 2010. The new rules will enable academies to recover VAT incurred on purchases made on or after 1 April 2011 to support their non-business activities, which would have been recoverable by the local authority had the schools remained (or come) under the control of that body.

Splitting of services involving printed matter
Provisions to address the avoidance of VAT by artificially splitting supplies that include printed matter will have effect from the date that the 2011 Finance Bill receives Royal Assent. See Moore Stephens’ December 2010 Update, Government announces new tax avoidance measures, available at http://www.moorestephens.co.uk/taxavoidance.aspx.

Stamp duty land tax
Purchasers of multiple residential properties in linked transactions will pay SDLT on the average consideration for each property from the date of Royal Assent to the Finance Bill 2011. Prior to that date SDLT is levied on aggregate consideration paid.

Anti-avoidance rules will apply from 24 March 2011 to alternative finance arrangements so that sub-sale relief cannot be used to completely avoid a charge. The definition of a financial institution will also be tightened.

The notional consideration on an exchange of land will be deemed to be market value.

Various redundant reliefs and exemptions are also to be abolished.

Fuel duty
The rates for unleaded petrol, diesel, biodiesel and bioethanol will be reduced by 1p per litre from 6.00 p.m. on 23 March 2011. Duty rates will increase by 3.02p per litre on 1 January 2012. The 2012/2013 fuel duty increase will take effect on 1 August 2012.

The Government will abolish the ‘fuel duty escalator’, which will be replaced by a ‘fair fuel stabiliser’ mechanism. The fuel duty escalator will be reintroduced in the event that the price of oil per barrel falls below a certain threshold, estimated to be around US$75.

Air passenger duty
The planned increase of air passenger duty rates in April 2011 will be deferred until April 2012.

The Government has announced its intention to tax business jets. A consultation exercise is to take place.

Alcohol and tobacco
Alcohol duty rates will increase by 2 percentage points above inflation on 28 March 2011. There will also be additional duty on high-strength beers and a reduced rate of duty on lower-strength beers.

Tobacco duty rates will increase by 2 percentage points above inflation from 6.00 p.m. on 23 March 2011. The duty on hand-rolling tobacco will increase by an additional 10%.

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Powers and administration 

Tackling tax avoidance
The Government has published a document ‘Tackling tax avoidance’. This reiterates the approach set out in its June 2010 document ‘Tax policy making – a new approach’ which involved:

making the tax system more watertight against avoidance, for example as part of wider policy reform;
reviewing areas that have been under repeated attack;
creating new generic defences against avoidance, as distinct from closing identified loopholes. This includes considering the case for a General Anti-Avoidance Rule (GAAR).
The first chapter of the new document sets out HMRC’s anti-avoidance strategy, which involves preventing avoidance at the outset where possible, detecting it early where it persists, and countering it by effective challenge. The second chapter describes action to strengthen defences in legislation, as follows:

reviews of two high risk areas, income tax losses and unauthorised unit trusts. Later Budgets will announce further areas for review as part of a rolling programme;
a consultation in May 2011 to remove the cash flow advantage that tax avoiders can sometimes obtain by retaining tax during a dispute over liability;
consideration of a GAAR, which is now under way, by a study group led by Graham Aaronson QC;
specific anti-avoidance legislation to deal with particular issues.
The third chapter deals with HMRC’s operational activities in dealing with avoidance, and the fourth chapter sets out a set of criteria that Ministers will observe when deciding whether to announce a change to tax law, outside the normal Budget and Finance Bill process, to have immediate effect. This reflects the results of consultation on the draft protocol published in December.

HMRC data gathering power
Legislation will be included in the 2011 Finance Bill to update the legislation governing: bulk information powers under which HMRC gather specific pieces of information about a group of taxpayers for use in risk analysis; and specialist ‘unnamed taxpayer’ powers that may be used during a compliance check where it is not clear who the taxpayer is.

The new legislation will repeal 25 existing powers and introduce a single set of general rules covering the form of the notice to be given by HMRC, how it may be complied with, and penalties for failure, with an option for HMRC to apply to the tribunal for increased penalties where the failure continues. There will be a new right of appeal against a notice, but this will not be available if a tribunal has approved the notice in advance.

The legislation identifies categories of data holders affected in respect of different types of income, and regulations will set out the data that may be required from each group. The provisions also now extend to data about foreign taxes that HMRC needs in order to meet its international obligations to exchange information.

Parallel changes as regards applications for increased penalties and the extension to data on foreign taxes are made to the existing general information and inspection powers in Sch 36 FA 2008, which are also amended to provide for a penalty if a person is aware of an inaccuracy when providing information or documents.

The intention is that the revised powers will be fully available to HMRC from 1 April 2012 onwards.

Security for PAYE
Legislation will be introduced to enable HMRC to make regulations under which they may require security from employers for PAYE that is seriously at risk. A criminal offence of non-payment of such security will also be introduced.

The existing link between PAYE regulations and national insurance regulations means that once the PAYE provisions are in place HMRC will be able to make corresponding provisions for national insurance purposes.

The enabling legislation will come into force on the date of Royal Assent to the Finance Bill. The draft legislation published in December 2010 is to be amended to ensure that time to pay arrangements are considered before a security is enforced. The intention is that the regulations should come into effect from 6 April 2012.

Office of Tax Simplification
The Office of Tax Simplification (OTS) published the final report of its review of tax reliefs on 3 March. This recommended the repeal of a number of reliefs, and the Government announced in the Budget that it would repeal a number of these in the 2011 Finance Bill (many, in any case, time expired). A furt