Business Tax and Investment Incentives

Corporation Tax

The rate of corporation tax will decrease from 30% to 28% from 2008/09. The small companies' rate of corporation tax will increase from 20% to 21% in 2008/09 and to 22% in 2009/10.

Capital allowances

The 50% rate of first-year allowances for capital expenditure by small businesses on plant and machinery will be extended for a further 12 months from 1 April 2007 for companies and from 6 April 2007 for businesses subject to income tax.

The following changes to the capital allowances regime are to be introduced from 2008/09:

• An annual investment allowance for the first £50,000 of expenditure on plant and machinery in the general pool will be introduced. The detailed design and scope of this allowance will be the subject of consultation.

• The rate of writing-down allowances (WDAs) for plant and machinery in the general pool will be reduced from 25% to 20%.

• The rate of WDAs on long-life asset expenditure will increase from 6% to 10%.

• WDAs on industrial and agricultural buildings will be gradually phased out, with final withdrawal of both regimes by 2010/11. To prepare the way for final abolition, most balancing adjustments, and the recalculation of WDAs on sale, will effectively be withdrawn from 21 March 2007.

• The rate of WDAs on certain fixtures integral to a building will be set at 10%. The detailed design and scope of the integral fixtures provisions will be the subject of consultation.

• A payable tax credit for losses resulting from capital expenditure on certain designated ‘green technologies’ will be introduced. The detailed design and scope of the tax credit will be the subject of consultation.

For qualifying expenditure incurred on and after 11 April 2007, Business Premises Renovation Allowance (BPRA) will provide 100% initial allowance for capital expenditure on the renovation or conversion of certain business properties that have been vacant for a year or longer in designated disadvantaged areas of the UK.

The new Construction Industry Scheme

After a delay of a year, the new Construction Industry Scheme (CIS) will be introduced on 6 April 2007. All the old cards and vouchers disappear, but monthly returns will be required and there will be considerably stricter compliance rules. The new scheme will have a standard deduction rate of 20%; however unregistered sub-contractors will be subject to the higher deduction rate of 30%.

Research and development (R&D) tax credits

From 2008/09, and subject to state aid approval, the enhanced deduction available to small and medium enterprises (SMEs) in respect of qualifying R&D expenditure will increase from 150% to 175%. The value of the payable credit will remain broadly at its current level (24% of qualifying expenditure). The enhanced deduction available to large companies will increase from 125% to 130%.

The SME R&D relief scheme will be extended in the Finance Bill to companies with fewer than 500 employees which have an annual turnover not exceeding 100 million euros and/or which have an annual balance sheet total not exceeding 86 million euros. This is subject to EC state aid approval.

Managed service companies (MSCs)

Legislation will be introduced which will deem income received by individuals providing their services through MSCs, not already treated as employment income, to be employment income. The consequence of this is that on all payments received by individuals in respect of services provided through such companies the MSCs will have to operate PAYE (where such payments are received on or after 6 April 2007) and Class 1 NICs (from a date to be specified shortly after Royal Assent).

Film tax relief

Companies incurring expenditure on the production of films other than for the cinema will be allowed to opt out of the film tax relief rules and into general tax treatment. A company will be able to make an election that it is not a film production company in respect of any future films and of all films that started principal photography in the previous two years. An election can be made on or after the date of Royal Assent.

Venture capital schemes

The qualifying company rules for Enterprise Investment Scheme (EIS), Corporate Venturing Scheme (CVS) and the Venture Capital Trust (VCT) scheme will be amended so that a company (or group of companies) must have fewer than 50 full time employees at the date the relevant shares or securities are issued and must have raised no more than £2 million under any or all of the schemes in the 12 months ending on the date of the relevant investment. These changes will not apply in relation to investments made out of funds raised by VCTs before 6 April 2007, nor to EIS or CVS shares issued before the date of Royal Assent. A change will also be made to extend the meaning of a ‘qualifying 90% subsidiary’ and this will be effective from 6 April 2007.

Anti-avoidance

A number of measures will be introduced to tackle anti-avoidance. These will affect:

• The buying of corporate capital losses and gains.

• The buying of trading losses from Lloyd's corporate members who are leaving the market.

• The sale of lessor companies.

• Life insurance companies.

• Sale and repurchase agreements.

• Partnerships and sideways loss relief.

• Employee benefit trusts.

• The salary costs of an employee seconded to a charity or educational institution.