From 1 April 2011 the small company rate of corporation tax is to be cut from 21% to 20%. Larger companies are being treated more generously, with the current 28% rate to be reduced to 24% over the next four years starting from the financial year beginning 1 April 2011.
Whilst many will initially see this as a green light for business we recommend the measure should be regarded with caution and viewed in the overall context of the reduced rates of capital allowances (referred to below) which could counterbalance the rate reduction for many companies.
Capital allowances trimmed back: The rate at which tax relief is given for capital spending will be reduced from 20 to 18 per cent, meaning that businesses will still receive full tax relief, but over a longer time frame. The annual investment allowance will be reduced to £25,000. However the Government states that 'over 95 per cent' of businesses will still be fully covered for their capital investments.
This measure is effective for corporation tax accounting periods ending after 1 April 2012 and on or after 6 April 2012 for those within the charge to income tax.
It’s disappointing to note that businesses who enjoyed up to £100,000 of immediate relief for capital spend saving tax at a maximum of £28,000 will now need to reconsider their future capex plans at a time when cash flows are so stretched and the need for investment in business is so crucial.
In the first year of implementation the reduced Annual Investment Allowance will be worth a maximum tax saving of £6,500 for those paying 26% corporation tax.
The auditors amongst us will no doubt be considering the accounting adjustments that may be necessitated by the potential for ‘big swings’ in deferred tax as a result of both the rate changes for corporation tax and the rate reductions for capital allowances.
Many will have not so fond memories of the post balance sheet events notes and calculations necessitated by the last big changes to the Capital Allowances regime introduced by Finance Act 2007!
Capital gains tax (CGT) increased: Those who pay income tax at the basic rate will continue to pay CGT at 18 per cent. However, higher-rate taxpayers will pay CGT at 28 per cent on all transactions from midnight on 22 June.
Undoubtedly there are many who would categorise this in the “red” zone however given that the Coalition Programme for Government mooted an increase in CGT to a rate ‘close to that applied to income’, the highest rate being 50% - this was one of the big surprises on Tuesday.
After taking advice from Treasury on what would happen if the CGT rate were increased to much further beyond 28 per cent, the rate was fixed at 28% as that ‘dynamic’ analysis from Treasury showed the Chancellor that, as many analysts including ourselves were advocating, the much mooted rates of 40/50% would have resulted in smaller total tax revenues.
The Chancellor also considered in great detail the options presented for introducing tapers or indexation allowances, and concluded that the complexity and administration involved would have been self-defeating. There was also no change to the annual exempt amount of £10,100.
This tempered approach and the significant increase in entrepreneur’s relief caused us to move this from red to amber.
However it was tempting to move this measure back to red – when this proposal is looked at more closely it’s obvious that many will still fall into the 28% band as the definition of higher rate taxpayer is judged by reference to income including any gains post 22 June!