3rd December 2014
Tina Riches, national tax partner at Smith & Williamson considers the business tax changes in the Autumn Statement.
The Government has announced that Entrepreneurs’ relief can be maintained on qualifying gains when those gains are re-invested in shares qualifying under the Enterprise Investment Scheme (EIS) or for Social investment tax relief (SITR), and deferral relief is claimed.
Entrepreneurs’ relief will be available on the revived gain when there is a chargeable event in relation to the EIS or SITR shares. This change will apply to qualifying gains deferred into EIS or SITR shares on or after 3 December 2014.This is a very welcome change. Previously, potential investors were discouraged from re-investing gains into unquoted trading companies because of the loss of Entrepreneurs’ relief on those gains, resulting in them being taxed at 28% rather than 10%.
Entrepreneurs’ Relief (ER) withdrawn on incorporation
The government has introduced rules, with immediate effect, to prevent individuals or members of partnerships from claiming ER on disposals of business goodwill when a business is transferred to a related close company. Gains on other business assets will not be affected. This reduces the tax incentives for traders to incorporate existing businesses.
Research & Development Relief
An increase in the rate of Research & Development (R&D) Relief for the small and medium enterprise (SME) scheme from 225% to 230% has been announced to apply from 1 April 2015. The rate of ‘above the line’ credit has also increased from 10% to 11%. However a restriction on qualifying expenditure will be simultaneously introduced to exclude the cost of materials incorporated in products that are sold. The relief rate increase is welcome and will help counter the effective reduced benefit from R&D tax relief due to lower corporation tax rates for large companies.
From 1 April 2015, there will be a restriction for banking companies on the use of losses incurred up to that date. The use of the losses will be restricted to 50% of the banking companies’ annual taxable profits arising after 1 April 2015. The unused losses can be carried forward to future periods, but this will result in a significant decrease in the rate at which corporation tax relief will be available to the banking companies, and will therefore affect cash flow. Losses incurred in the first 5 years of a bank’s authorisation will be exempt.
A new “Diverted Profits” tax will be introduced from 1 April 2015, which will apply to multinational companies using artificial arrangements to divert profits overseas in order to avoid UK tax. The Diverted Profits tax will be applied at a rate of 25%. Given that the rate will be 5% higher than the UK corporation tax rate of 20% that will apply to all companies from 1 April 2015, this appears to be an incentive to encourage companies to keep profits onshore, rather than diverting them to lower tax jurisdictions. Detailed rules on how the legislation will operate are not expected until 10 December 2014 and it is hoped that they will not inadvertently give rise to an increase in administrative burdens to those companies not exploiting the rules in this area.