Corporation Tax - a curate's egg

Summer Budget announces unexpected reductions in corporation tax rates, bringing the rate down to 18 per cent by 2020. Some good news and some less good news was announced in the Budget today together with the usual raft of anti-avoidance measures.

Reducing the corporation tax rate

A corporation tax rate of 20 per cent across the board applying from 1 April 2015 was thought to be as low it was necessary to go to create the right environment to attract investment into the UK. However the rather rushed introduction of the new diverted profits tax (DPT) to tax UK sourced profits which escape the charge to UK corporation tax in multinational groups has brought at least a temporary halt to inward investment due to the uncertainties DPT has created may have forced the Chancellor to act further on the headline corporation tax rates. These are to reduce to 19 per cent from 2017 and to 18 per cent from 2020. This is positive news, it will be interesting to see if this has any impact on inward investment from multi-nationals.

For banks a new 8 per cent corporation tax surcharge over the usual corporation tax rates will be applied to profits from 1 January 2016 although this will go hand in hand with reductions in the Bank Levy commencing from the same date.

Annual investment allowance (AIA) reduction

The AIA which provides 100 per cent tax relief on qualifying expenditure on plant and machinery was due to reduce from £500,000 to £25,000 from 1 January 2016. This will now only reduce to £200,000, which although a big reduction, is not as bad as it could have been. The transitional rules are complex and businesses should ensure they are fully aware what this will mean in practice if they have accounting periods which straddle the change date to avoid an unpleasant surprise.

Shock announcement for intangibles

Quite unexpectedly the Chancellor has announced the ending of tax reliefs for companies on expenditure on goodwill and other customer related intangibles purchased from Budget day in a business acquisition. Also the rules on the transfer to related persons of stock outside a transfer of trade and intangibles are to be clarified to ensure that the disposal takes place for tax purposes at market value.

Other changes

Other changes also announced today affecting the corporation tax regime will perhaps be limited in their effect. These include anti avoidance measures being introduced to restrict the offset of UK expenditure against taxable profits of a Controlled Foreign Companies, amendments to the loan relationship rules largely to recognise the recent changes to UK GAAP and some minor changes to the consortium relief rules where there is a 'link' company which is outside the UK.

Please contact Jim Meakin if you want to discuss how this might impact you.