Finance Bill 2012

Following on from the Chancellor’s Autumn Statement last week, the Treasury has released draft legislation that will constitute a substantial proportion of next year’s Finance Bill. The highlights of the draft legislation are summarised below.

Tax Rates

From 6 April 2012, the Personal allowance for those under 65 will increase to £8,105, with the basic rate band being reduced to £34,370. Taxpayers will therefore commence paying higher rate tax when their income exceeds £42,475.

The 10% starting rate for savings income will also be increased to £2,710.

The capital gains tax annual exempt amount for 2012/13 will remain at the 2011/12 level of £10,600. From 2013/14 the annual exempt amount will rise in line with the Consumer Prices Index (CPI) instead of the Retail Prices Index (RPI).

Seed Enterprise Incentive Scheme – SEIS

It is proposed that an incentive, by way of an income tax deduction of 50% of the amount invested, is to be given to individual investors who subscribe for shares in smaller, early stage UK companies. The companies must:

·         carry on, or be preparing to carry on, a new business in a qualifying trade;

·         have less than 25 employees; and

·         have gross assets of less than £200,000 at the time of the issue of qualifying shares. 

The scheme will initially apply for shares issued to investors from 6 April 2012 to 5 April 2017. Subscriptions will be limited to £100,000 per investor per annum and each investor must have a stake of less than 30% in each company. In addition, for the first year of the scheme (i.e. until 5 April 2013), capital gains, arising from disposals of other assets in the year, will be exempt from capital gains tax if they are invested through SEIS in that same year. Investors can also elect that shares issued in one year be deemed to have been issued in the previous year to accelerate available tax relief.

The basic draft legislation is accompanied by a swathe of detailed conditions to circumvent any attempt to hijack the core intent of stimulating investment in new smaller early stage UK trading companies.

Capital Allowances

The Government has designated 6 areas, including part of Sheffield, as ‘assisted areas’.  Companies that operate in these areas and invest in new plant and machinery will, from 1 April 2012, be eligible for 100% first year allowances.  To qualify for 100% relief, the assets must be acquired for the purpose of starting a new business or expanding or changing an existing one.

Expenditure on solar panels will be designated as special rate expenditure and enhanced capital allowances for energy saving equipment will be restricted where equipment is also eligible for Feed-in Tariffs or the Renewable Heat Incentive. 

The legislation proposes new criteria governing the entitlement to capital allowances in respect of fixtures for businesses buying property. In short, in most cases, the seller and the purchaser will need to jointly elect, within two years of the transfer, for an amount of the sale price which is to be attributed to fixtures.  

Finally the Business Premises Renovation Allowance scheme will be extended for a further five years.  As a result, the Assisted Areas Order which is due to expire in 2013 will need to be renegotiated with the Commission.

Enterprise Incentive Scheme

Changes have been announced which HMRC say will provide a better focus for the EIS and VCT schemes on higher risk activities.

Amendments will be made to introduce a new disqualifying purpose test and a change will also be made to the definition of a qualifying business activity so that the acquisition of existing shares in another company will be excluded. In addition receipts from Feed-In Tariffs or similar subsidies will not be a qualifying activity.

For the purposes of EIS, there will be a relaxation of the rules which define when a person is connected to a company and the definition of qualifying shares will be extended to allow shares to carry a preferential right to dividends in certain circumstances.

The £1m limit for investment by a VCT in a company will be removed but will remain for companies in a partnership.

The annual amount that an individual can invest under EIS will be increased to £1m (currently £500,000) for the tax year 2012/13.

The company size thresholds for EIS and VCT’s will also be increased.

The new rules will apply to shares issued on or after either the 1 or 6 April 2012, subject to state aid approval in some cases.

Research & Development (R&D) Tax Credits

As expected, the legislation in respect of R&D tax credits is to be amended as of 1 April 2012 for both the SME and large company schemes.

For the SME scheme only:

·         From 1 April 2012 the rate of additional deduction for SMEs will increase from 100% to 125%, giving relief of 225% in all

·         The payable tax credit will be reduced to 11%

·         The PAYE/NIC limit will be abolished

·         Companies in administration or liquidation will be excluded from relief.

For both the SME and large company schemes:

•      The £10,000 minimum expenditure requirement will be removed for accounting periods ending on or after 1 April 2012.

A new “above the line” credit for R&D will become effective from April 2013. As part of the 2012 Budget a consultation will be launched on the design of this credit.

ESC C16 – “simple winding up of companies”

As was stated as a possibility in our previous articles, HMRC announced yesterday that ESC C16 (the concession that allowed us to informally wind up companies and obtain capital gains tax treatment on the final distribution) will be enacted as of 1 March 2012 with severe restrictions. From that date, capital gains tax treatment will only be available on final distributions up to a maximum of £25,000. For companies with assets in excess of this amount, a formal liquidation procedure will be required. Shareholders in companies that are to be wound up should give serious consideration to doing so before 1 March 2012.

Secondly, the Treasury Solicitor has now confirmed that he will not attempt to recover any distributions made prior to dissolution. This is a welcome clarification, and is more generous than the Concession was, which allowed only £4,000 to be distributed in this way. This is only of benefit up to the 1 March 2012 deadline, unless the amount to be distributed is no more than £25,000.

Patent Box

As expected, legislation will be introduced in Finance Bill 2012 to introduce the Patent Box. The Patent Box will allow companies to elect to apply a 10% rate of corporation tax from 1 April 2013 to all profits attributable to qualifying Intellectual Property.

The legislation outlines a complex calculation setting out how to arrive at the qualifying profits from the qualifying Intellectual Property.

For companies selling patented products or licensing their patents, the calculation starts from the total profits arising from the sale of products incorporating the patented invention or the profit from licensing the invention. The full rate of corporation tax will still be charged on a 10% routine return on certain costs and on any part of those profits which is attributable to marketing intangibles. All remaining profit will be eligible for the Patent Box rate.

Companies making smaller claims can choose a simpler calculation, avoiding the need to value their brand.

Overseas aspects of the taxation of individuals

The increase in the amount charged to non-UK domiciled individuals who wish to continue to use the remittance basis for UK tax has been confirmed. Currently, a charge of £30,000 applies where the individual has been resident in the UK for at least seven out of the last nine tax years. This will now increase to £50,000 for individuals who have been resident in the UK for at least twelve of the last fourteen tax years. Click here

Remittances to the UK by non-UK domiciled individuals will no longer be charged to UK tax if the amount remitted is used to make a commercial business investment in an unlisted company carrying on a trade or development/letting of commercial property.

The charge which can arise when an overseas asset of a non-domiciled individual is brought to the UK to be sold is to be removed, provided the funds realised are sent offshore.

Following responses to the consultation on a statutory residence test, the legislation on this issue is to be deferred from 2012 to 2013, to allow more time for the detailed rules to be finalised.

Taxation of Foreign Profits

As planned, Finance Bill 2012 is to include a full reform of the Controlled Foreign Companies (CFC) legislation. This legislation is aimed at modernising the CFC regime and exempting profits that arise from genuine economic activities, or where there is no artificial diversion of profits from the UK.

Overseas companies will be outside of the new rules unless they meet certain conditions set out in what is called the “gateway” which will define what is treated as an artificial diversion of profits. The rules are not intended to catch profits arising from general commercial business or incidental finance income. There will also be an excluded territory exemption and low profits exemption, in addition to the current low level tax test which will remain.

The effective date of the new rules is yet to be announced.

VAT

The VAT Cost Sharing Exemption

The VAT Cost Sharing Exemption will be introduced with effect from Royal Assent of the Finance Bill 2012. The exemption aims to reduce the potential VAT barrier that can arise when organisations with VAT exempt or non–business activities join together in groups to share costs. The draft legislation issued today is couched in broad and general terms and HMRC has promised that more detailed guidance will be published at a later date.

Overseas issues

From 1 December 2012 the VAT registration threshold will be reduced to zero for businesses with no place of establishment in the UK that make taxable supplies in the UK.

Taxation of gaming machines

The taxation of gaming machines will be reformed by the introduction of a new Duty; Machine Games Duty (MGD) which will apply to games played on machines where customers hope to win a cash prize worth more than they stake.  Where MGD is payable it will replace the existing Amusement Machine Licence Duty and will exempt machine takings from VAT. 

MGD will take effect from 1 February 2013.