Business and corporate

Corporation tax small companies’ rate

The proposed increase in the small companies’ rate of corporation tax from 21 per cent to 22 per cent from 1 April 2009 has been deferred until 1 April 2010.

The marginal rate, which smoothes the difference between the main rate of corporation tax and the small companies rate, will also remain unchanged until 1 April 2010.

The main rate of corporation tax remains unchanged at 28 per cent.

The small companies rate applies to certain companies with profits chargeable to corporation tax of up to £300,000 per annum (adjusted for groups and associated companies).

How this affects you

This change means that companies with profits chargeable to corporation tax of up to £300,000 per annum will benefit from an additional year of corporation tax at a rate of 21 per cent.  The increase to 22 per cent will not come into effect until 1 April 2010.

Carry back of trading losses

For accounting periods ending in the period 24 November 2008 to 23 November 2009, companies and unincorporated businesses will be able to carry back trading losses, up to a maximum of £50,000, for up to three years.

Under current rules, there are a number of mechanisms for the set-off of losses, including

• unincorporated businesses and companies can offset trading losses against profits in the preceding year
• in the early years of operation start-up unincorporated businesses can carry trading losses back for three years
• unincorporated businesses and companies ceasing to trade can carry back losses for three years
• unrelieved trading losses can be offset against future profits of the same trade.

How this affects you

A company may make a loss relief claim under the new rules when filing its tax return for an accounting period which ends in the period 24 November 2008 to 23 November 2009.

The new rules extend the period that trading losses can be carried back against profits of prior periods from one year to three years.

Companies may still carry back unlimited losses to the immediately preceding year. After carry back to the immediately preceding year, a maximum of £50,000 is available to carry back to the earlier two years.

Loan relationships and connected parties

The release of connected party trade debt will not be taxable on release to the debtor company for accounting periods beginning on or after 1 April 2009.

Further consideration is being given to changing the rule that defers a corporation tax deduction for a debtor company for certain interest payable to a connected party that is outside the loan relationship rules (eg an individual or an overseas company).

The release of connected party trade debt is currently not tax deductible in the hands of the creditor company. However, such a release may give rise to taxable income for the debtor company.

Under the loan relationship rules, interest payable to a connected party is currently deductible on a paid basis (as opposed to an accruals basis) where it is not paid within 12 months of the year end. There is an exception where the recipient company is also within the charge to corporation tax. HMRC have acknowledged that these rules may contravene EC Treaty freedoms. HMRC will not apply the paid basis whilst considering how to change the law to be consistent with EU principles.  Therefore, a UK corporation tax deduction may currently be taken for interest payable to connected parties on an accruals basis.

How this affects you

The tax treatment of the creditor and debtor company will be symmetrical where connected party trade debts are released.

Further announcements are awaited from HMRC in respect of the late paid interest rules.

Change of accounting practice – foreign exchange

Double taxation (or relief) arising on the reversal of certain foreign exchange differences, following a change in accounting practice, will cease from 1 January 2009.  The change corrects an anomaly in the existing legislation.  

Foreign exchange differences can arise on debt instruments treated as hedging a company’s economic risk from holding certain overseas investments.  Such foreign exchange differences are frequently not taxable/deductible as a result of the tax matching provisions. 

As an unintended consequence of regulations introduced to deal with changes to International Accounting Standards (and their UK equivalents), the reversal of foreign exchange differences could have become taxable/deductible, even where such amounts were not previously taxed or relieved due to the tax matching regulations.

How this affects you

This change will prevent double taxation or double relief arising upon the reversal of foreign exchange movements as a result of a change in accounting practice and will have effect from 1 January 2009.

Business expenditure on cars

The rules which restrict capital allowances for cars costing in excess of £12,000 will be abolished and replaced by new rules.

Under the new rules, expenditure on cars will be allocated to one of the two main general plant and machinery pools.  Expenditure on cars with CO₂ emissions over 160g/km will attract writing down allowances at a rate of 10 per cent.  Cars with CO₂ emissions below 160g/km will attract writing down allowances at a rate of 20 per cent. 

The restriction on lease rental payments will be changed to a flat rate disallowance of 15 per cent of relevant payments and will only apply in respect of cars with CO₂ emissions above 160g/km.

Under the existing legislation the maximum writing down allowance that could be claimed in respect of cars with a cost in excess of £12,000 was £3,000 per annum. 

The tax deduction for lease payments for cars with a retail price in excess of £12,000 was restricted on all cars.

How this affects you

Additional capital allowances and tax deductions for leased cars may be available for cars with lower CO₂ emissions. 

Expenditure incurred on leased cars before 1 April 2009 will be subject to the old rules. There will be for a transitional period of approximately five years in respect of writing down allowances for expensive cars.

The rules will generally apply from 1 April 2009.

Taxation of foreign profits

Draft legislation will be published in December 2008 overhauling the taxation of foreign profits for large and medium sized businesses. The new rules will be introduced in the 2009 Finance Act.

The changes are in line with expectations. In the future dividends received from overseas shareholdings will be exempt from UK tax. 

How this affects you

The extension of the regime to ALL shareholdings in foreign companies will be welcomed by international businesses encouraging them to remain in the UK by putting the UK on an equal footing with other European countries.

The revamped foreign dividend regime is to be accompanied by an overhaul of the interest deductibility rules for international groups. The amount of tax relief on interest costs for International businesses will, in the future, be subject to a cap. The mechanics of the interest cap are as yet unknown.

Alongside these expected but radical changes are two further proposals. The first is an extended consultation of the CFC regime which is likely to continue until at least 2010. The second is a proposal to abolish the Treasury Consent procedure to be replaced by a new reporting regime for so called high risk transactions.

Stock lending arrangements - additional reliefs

New legislation will take effect on 24 November 2008 - subject to a possible election for it to apply from 1 September 2008 -  to provide relief to entities which enter into stock lending arrangements with financial institutions which subsequently become insolvent and are unable to return the borrowed securities.

The existing rule is that the non-return of borrowed securities is treated as a capital gains disposal by the lender. However, provided the lender uses the insolvent borrower's collateral to purchase replacement securities, the rule will be disapplied where the non-return is due to the insolvency of the borrower.

The purchase of the replacement securities will be relieved from Stamp Duty or SDRT. Additionally, there will be relief from the Stamp Duty or SDRT - originally deferred at the time of lending - which would otherwise have crystallised on the default. 

Temporary financial difficulty

A new HMRC Business Payment Support Service will allow businesses in temporary financial difficulty to pay their tax bills on a timetable they can afford.  This will cover all taxes.

How this affects you

This will help businesses manage their cash flow in difficult economic conditions.