Corporate Capital Loss and Gain Buying

For the third year running changes have been made to legislation (these with effect from Budget day) to prevent groups of companies buying and selling companies in order to gain access to their capital losses and gains.

Anti-avoidance rules were introduced in 2005 aimed to prevent this and an exception was introduced in the 2006 Finance Act dealing with the deemed disposals that arise on de-grouping. These allowed the use of losses by any other company that was in the same group as the company with the losses prior to the de-grouping.

Schemes have arisen to purchase companies together with their subsidiary companies in order to gain access to these losses and this will be stopped.

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Sale of Lessor Companies

Anti-avoidance measures were introduced in last year's Finance Act to counteract the tax-motivated sale of companies carrying on trades of leasing plant and machinery.

Since then, arrangements have been disclosed to HMRC that exploit a mis-match in the concept of control in that legislation and that used in a provision allowing companies to transfer businesses between themselves in a tax-neutral way. Arrangements have also come to light under which the accounting value of the assets has been manipulated to produce greater tax benefits. More recently, HMRC have become aware of other structures for the transfer of leasing businesses between consortia and partnerships.

New rules will be introduced to block these arrangements, in the case of the first two mentioned above from 22 November last year, and in the case of the consortia and partnership rules from Budget day.

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Securitisation companies

Current rules allow securitisation companies to be taxed on the basis of accounting standards that were in force before the introduction of International Accounting Standards. These rules were due to end for any periods of account ending after 31 December 2007. A measure has been introduced allowing this deadline to be extended.

The power to make specific tax rules for securitisation companies in the future has also been extended to cover a wider range of securitisations.

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Corporation Tax Rates

From 1 April 2008 the headline rate of corporation tax will be reduced from 30% to 28% for companies making annual profits in excess of £1,500,000.

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From 1 April 2007 the small companies’ rate of corporation tax (payable by companies making annual profits not exceeding £1,500,000) will increase from 19% to 20% with a marginal relief fraction (the fraction used to soothe the differences between the small companies and full rate) of 1/40.

The rate will further increase to 21% on 1 April 2008 and 22% on 1 April 2009.

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Extending Research & Development Tax Credits 

In 2008 the rate of corporation tax relief for large companies on qualifying R&D expenditure will increase from 125% to 130%. Subject to State Aid approval, the rate of relief for Small and Medium-sized Enterprises (SMEs) will increase from 150% to 175%.

The value of the alternative payable credit will remain broadly as it is now (24%).

The relevant legislation will be introduced in the Finance Bill 2008.

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Capital Allowances

The 50% rate of first-year capital allowances for expenditure by small businesses on plant and machinery will be extended for a further year. The extension will apply to spending incurred on or after 1 April 2007 for businesses paying corporation tax and on or after 6 April 2007 for businesses within the charge to income tax. The rate of first year allowances for medium-sized companies remains at 40%.

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Further, from 2008-09:

  • there will be a new annual investment allowance for the first £50,000 of expenditure on plant and machinery in the general pool. This will apply to small and medium-sized businesses only and will replace first year allowances;
  • the rate of writing-down allowances on long-life assets will increase from 6% to 10%;
  • the rate of writing-down allowances for fixtures will be set at 10%;
  • the rate of writing-down allowances for plant and machinery in the general pool will reduce from 25% to 20%; and
  • a new payable tax credit will be introduced for losses arising from capital expenditure on designated “green technologies”.

See also our note on the phasing out of industrial and agricultural buildings allowances in the section on Property and Stamp Duty Land Tax.

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Sale and Repurchase Agreements (“Repos”)

New rules will apply to “Repos”. These are financing mechanism used by large companies – essentially secured loan transactions. The current tax treatment is intended to reflect the economic and accounting substance of the transaction. However, HMRC have seen such arrangements used in a number of tax avoidance arrangements and the new rules will tax profits and losses on the arrangements in accordance with accounting entries prepared under generally accepted accounting principles.

The changes will be implemented in Finance Bill 2007, and consultation in this area is currently underway.

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Stamp Taxes Reconstruction Reliefs

A company buying and holding its own shares as part of a reorganisation will no longer need to cancel them or accept shares in the acquiring company to qualify for relief from stamp duty or stamp duty land tax under sections 75 to 77 Finance Act (FA) 1986 and schedule 7 Finance Act 2003. Such shares will be ignored in establishing whether the shareholdings before and after the reorganisation meet the required criteria.

This change will take effect from the day after the date of Royal Assent to the Finance Act 2007.

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Recognised stock exchanges and the definition of “listed” for tax purposes

From the date of royal assent of the Finance Bill 2007, HMRC will be able to designate as a recognised stock exchange for tax purposes any investment exchange designated as a recognised investment exchange (RIE) by the FSA.

A definition of “listed” will be introduced to reflect regulatory and market changes as there is currently no explicit statutory definition of the terms “listing” and “listed”.

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Penalties for incorrect returns - a new single regime

Legislation will be introduced to introduce a new single penalty regime for incorrect returns for income tax, PAYE, corporation tax, NIC and VAT.

The new penalty system is expected to apply for return periods commencing after 31 March 2008 and where the return is filed after 31 March 2009.

There will be at least 20 months between Royal Assent of Finance Bill 2007 and the implementation of the changes, during which HMRC will continue to consult on the guidance relating to the changes.

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