Business Tax and Investment Incentives

Corporation Tax

Corporation tax rates and bands are as follows:

The main rate of corporation tax will be reduced to 25% for the financial year commencing 1 April 2012 and to 24% for the financial year commencing 1 April 2013.

Associated companies

A new measure amends corporation tax small profits rate legislation. It will ensure that companies are not held to be associated through an attribution of rights (solely by virtue of relationships between individuals), but only where the level of commercial interdependence between the companies themselves makes it appropriate to do so.

The tax effect on companies which are held to be associated is to lower the profit threshold at which they fall within the main rate of corporation tax, in proportion to the number of associated companies.

Patents

A reduced 10% rate of corporation tax for profits arising from patents will come into effect from 1 April 2013.

Capital allowances

The rates of writing down allowances (WDAs) for new and unrelieved expenditure on plant and machinery will be reduced from 20% to 18% per annum for expenditure allocated to the main rate pool, and from 10% to 8% per annum for expenditure allocated to the special rate pool. This will have effect for chargeable periods ending on or after 1 April 2012 for businesses within the charge to corporation tax and on or after 6 April 2012 for businesses within the charge to income tax.

The Annual Investment Allowance (AIA) will be reduced from the current limit of £100,000 to a new limit of £25,000. This will have effect from April 2012.

The period over which expenditure can be given short life asset treatment will be increased from four years to eight years. This will have effect for expenditure incurred on or after 1 April 2011 for businesses within the charge to corporation tax and on or after 6 April 2011 for businesses within the charge to income tax.

Research and development (R&D)

The additional corporation tax deduction given to SMEs for qualifying R&D expenditure will increase from 75% to 100%, giving a total deduction of 200%. Subject to State aid approval, this will have effect for expenditure incurred on or after 1 April 2011. A further increase to 125% will have effect for expenditure incurred on or after 1 April 2012.

Controlled foreign companies (CFCs)

The following changes to the CFC rules will be introduced in Finance Bill 2011:

• an exemption for certain intra group trading transactions where there is little connection with the UK
• an exemption for CFCs with a main business of intellectual property (IP) exploitation where the IP and CFC have minimal connection with the UK
• a statutory exemption which runs for three years for foreign subsidiaries that, as a consequence of a reorganisation or change to UK ownership, come within the scope of the CFC regime
• an alternative to the current de minimis exemption, which will increase the limit to £200,000 profits per annum, and the replacement of the need to calculate chargeable profits with an accounts based measure
• extension of the transitional rules for superior and non-local holding companies until July 2012.

A full reform of the CFC rules will be introduced in 2012.

Foreign branches

Legislation will be introduced to allow a UK resident company to make an irrevocable election for all of its foreign branches, located anywhere in the world, to be exempt from UK corporation tax on their profits. If an election is made, no relief will be available for foreign branch losses. This will have effect for accounting periods commencing on or after Royal Assent.

Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs)

Subject to State aid approval, the rate of income tax relief given under EIS will increase to 30% for shares issued on or after 6 April 2011.

For EIS and VCTs, the following increases will, subject to State aid approval, be introduced for shares in investee companies that are issued on or after 6 April 2012:

• the employee limit to fewer than 250 employees
• the size threshold to gross assets of no more than £15 million before investment
• the maximum annual amount that can be invested in an individual company to £10 million
• the annual amount that an individual can invest under the EIS to £1 million.

Companies whose trade consists wholly or substantially in the receipt of Feed-In Tariffs (FITs) or similar subsidies will only be eligible for the two schemes where commercial electricity generation commences before 6 April 2012. Shares issued before 23 March 2011 will not be affected.

Business rates

The Government will offer up to 100% business rate discount for five years to businesses located in any of the 21 new Enterprise Zones.

The small business rate relief ‘holiday’ will be extended by one year from 1 October 2011.