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Corporation Tax

Corporation Tax Rates

As already announced the full rate of corporation tax will reduce from 30% to 28% from 1 April 2008, although even HMRC is getting mixed up with its future announcements and immediate changes, as one press release had this change occurring next April! This rate applies where taxable profits exceed £1,500,000 (assuming no associated companies).

The small companies’ rate will increase from 20% to 21% from 1 April 2008. This applies to profits below £300,000 (assuming no associated companies).

Taxable profits between these two bands will be subjected to 28% less marginal relief. This results in an effective rate of 29.75%.

Income Shifting rules delayed

After losing the Arctic Systems case, HMRC promised to introduce rules to prevent what they see as avoidance of income tax by many family businesses.

Draft rules were subsequently published in December and were met with many negative comments from industry, business bodies, tax advisers and the press. The rules, expected to be introduced from 6 April 2008, are to be subject to further consultation with the aim of introducing them in the 2009 Finance Bill.

The rules are intended to cover in the main family businesses where one spouse is the fee or income earner and the other spouse is either a partner or a company director and shareholder. The non-fee earning spouse would typically receive a share of profits or dividend that HMRC would view as an unfair share and as such this income should be taxed on the “working” spouse.

The rules proposed in the draft legislation went far beyond the typical scenario and they attracted much criticism.

Research & Development tax relief

The additional tax relief for qualifying revenue R&D expenditure is to increase from 50% to 75% for claims under the SME scheme. Likewise, the additional relief available under the large scheme is to increase from 25% to 30%. These changes will take place at a date to be announced.

This relief is now extremely generous and all companies should consider their activities to see if any R&D is undertaken. Quite often the development side of R&D is overlooked. Armstrong Watson has had successful claims for clients in sectors such as engineering, manufacturing, pharmaceuticals and IT.

Unfortunately, the relief is still only available to companies and the £10,000 minimum spend continues to apply.

SMEs who carry out work that is not R&D to them as an entity, but forms part of an R&D project subcontracted to it by a large company, may be able to claim under the large scheme.

Good news for members of film partnerships

From 1 April 2008 the rules for the definition of "associated company" in respect of small companies rate of corporation tax are to be amended by relaxing the definition of "control", where companies' controlling shareholders are members of business partnerships. 

Companies whose controlling shareholders are partners in any partnership will only be deemed associated with companies controlled by other partners of the same partnership ‘if relevant tax planning arrangements have been implemented’. Relevant tax planning arrangements will be defined as arrangements which involve the shareholder or Director and the partner and secure a tax advantage by trying to avoid the associated company rules. 

This will ensure that companies controlled by partners of a film partnership or similar arrangement will not be deemed associated with each other.