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August - 5 - 2011


Budget 2011 – Main announcements

 This page summarises the key, new announcements made by the Chancellor in Budget 2011 on tax, duties and national Insurance contributions that we think will be of interest to businesses.

 Business Taxes

Corporation Tax Main Rate

The Government is reducing:

• the main rate of corporation tax to 26 per cent for the Financial Year commencing 1 April 2011;

• the main rate of corporation tax to 25 per cent for the Financial Year commencing 1 April 2012; and

• the small profits rate of corporation tax to 20 per cent from the Financial Year commencing 1 April 2011.

VAT: revalorisation of registration and deregistration thresholds

The following changes will be made to the VAT registration and deregistration thresholds:

• the taxable turnover threshold, which determines whether a person must be registered for VAT, will be increased from £70,000 to £73,000;

• the taxable turnover threshold which determines whether a person may apply for deregistration will be increased from £68,000 to £71,000; and

• the registration and deregistration threshold for relevant acquisitions from other EU Member States will also be increased from £70,000 to £73,000.

The revalorised thresholds have effect on or after 1 April 2011. The simplified reporting requirement (three line accounts) for the income tax Self Assessment return will continue to be aligned with the VAT registration threshold.

Oil: Supplementary Charge and Decommissioning Relief

The rate of the supplementary charge levied on profits from UK oil and gas production will increase from 20 per cent to 32 per cent from 24 March 2011. As part of the fair fuel stabiliser, if in future years the oil price falls below a set trigger price on a sustained basis, the Government will reduce the supplementary charge back towards 20 per cent on a staged and affordable basis while prices remain low. The Government believes that a trigger price of US $75 per barrel would be appropriate, and will set a final level and mechanism after seeking the views of oil and gas companies and motoring groups.

With effect from Budget 2012, tax relief for decommissioning expenditure will be restricted to the 20 per cent rate of supplementary charge. There will be no restrictions to decommissioning relief beyond this level for the lifetime of this Parliament. The Government will work with the industry with the aim of announcing further, longer term, certainty on decommissioning at Budget 2012. Recognising the importance of continuing investment in the North Sea including in marginal gas fields, the Government will also consider with the industry the case for introducing a new category of field that would qualify for field allowance.

 Controlled Foreign Companies

Legislation will be introduced in Finance Bill 2011 to deliver a package of interim improvements to the controlled foreign companies (CFCs) rules as a first step to make the rules easier to operate ahead of full reform in 2012. The interim changes will have effect for accounting periods beginning on or after 1 January 2011 other than the extension to the transitional rules for the holding company exemptions which is deemed always to have had effect. Following consultation, a number of changes were made to ensure that the improvements delivered the desired outcome. This includes amending the three year temporary exemption to include overseas subsidiaries that are not currently CFCs but that have been in the past.

The full reform will introduce a mainly entity based system that will operate in a targeted and more territorial way by bringing within a CFC charge only the proportion of overseas profits that have been artificially diverted from the UK. The new rules will include a finance company partial exemption that, in broad terms, results in an effective UK tax rate of one-quarter of the main rate on profits derived from overseas group financing arrangements. This will result in a rate of 5.75 per cent by 2014. The Government will be consulting on this measure. A consultation document describing the new regime will be published in May 2011 with draft legislation in the autumn of 2011, for inclusion in Finance Bill 2012.

 Research and Development

Subject to State aid approval the rate of the additional deduction for expenditure on research and development (R&D) for companies that are small or medium sized enterprises (SMEs) will be increased from 75 per cent to 100 per cent from 1 April 2011, giving a total deduction of 200 per cent. The rate of vaccine research relief for SMEs will be reduced to 20 per cent from the same date.

Following consultation on the support that the R&D tax reliefs provide to innovation and on the recommendations of the Dyson review, the Government will publish a response in May which will include further consultation on the detail of proposed changes. Subject to State aid approval and to this consultation the rules will be simplified including:

• the rule limiting a company’s payable R&D tax credit to the amount of PAYE and national insurance contributions (NICs) it pays will abolished.

• the £10,000 minimum expenditure condition will be abolished for all companies.

• changes will also be made to the rules governing the provision of relief for work done by subcontractors under the large company scheme.

Bank Levy

In the June 2010 Budget the Government announced that it intended to introduce a bank levy (the Levy), effective from 1 January 2011, in respect of certain equity and liabilities on banks’ balance sheets. Following consultation on a number of operational issues around design and implementation, including possible and proposed approaches to defining taxable entities and the tax base, the Government

published a response document on 21 October 2010 along with an HMRC Technical Note setting out the Government’s proposals for the design of the Levy including changes made as a result of the consultation.

The Government announced on 8 February 2011 an increase in the effective rate of the Levy for the year 2011. The rates were increased so that the Levy will raise the target yield of £2.5 billion for the first year. Therefore, the rates for the calendar year 2011 will be:

• 1 January 2011 – 28 February 2011 0.05 per cent for short-term chargeable liabilities and 0.025 per cent for long-term chargeable equity and liabilities;

• 1 March 2011 – 30 April 2011 0.1 per cent for short-term chargeable liabilities and 0.05 per cent for long-term chargeable equity and liabilities; and

• 1 May 2011 – 31 December 2011 0.075 per cent for short-term chargeable liabilities and 0.0375 per cent for long-term chargeable equity and liabilities.

The Bank Levy rates will be increased from 1 January 2012 onwards from those announced on 9 December 2010 to offset the benefit of the further decrease in corporation tax. The rates for 2012 onwards will now be 0.078 per cent for short-term chargeable liabilities and 0.039 per cent for long-term chargeable equity and liabilities.

Revenue Protection

 All measures are detailed in Overview of Tax legislation and Rates. A small number of measures come into effect on 23 or 24 March 2011. These are in respect of:

• Corporation tax anti-avoidance derecognition

• Sale of lessor companies

• Stamp Duty Land Tax

• Corporate gains degrouping charges

• Oil and gas: intangible fixed assets

Tax Administration

Office of Tax Simplification – Review of Reliefs

The Office of Tax Simplification (OTS) was commissioned by the Chancellor to undertake a review of the reliefs and allowances available in the tax system. The OTS published their final report on 3 March 2011 (available on the HM Treasury website) in which they recommended abolishing a number of reliefs. Some of these reliefs have no further use, some are poorly targeted and several have an administrative burden that outweighs their benefit. The Government welcomes the recommendations and, based on the findings of the OTS and ongoing work by HMRC, intends to abolish a number of reliefs.

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