More help for businesses
We were expecting the main rate of corporation tax to be reduced from 28% to 27% for the financial year commencing on 1 April 2011, but the reduction has been doubled, to 2%, so the rate will be 26% from 1 April 2011, with a further 1% reduction to follow in each of the subsequent three financial years.
As already announced, the small profits rate of corporation tax will be reduced from 21% to 20% from 1 April 2011. In another helpful move, companies will not be treated as associated solely by virtue of (sometimes quite distant and difficult to monitor) relationships between shareholders and relatives. A level of commercial inter-dependence between the companies themselves will also be required to justify associated treatment. HMRC has issued draft guidelines on how commercial inter-dependence will be interpreted.
These changes are clearly designed to encourage domestic growth and investment, and to increase the competitiveness of the UK tax system and reverse the trend of companies leaving the UK.
The immediate reduction of 1p per litre in the rate of fuel duty, and the deferral of further increases will provide some welcome relief to many businesses, particularly those in the transport and haulage industry.
A further piece of good news is that the vehicle excise duty for heavy goods vehicles is to be frozen for 2011/12.
There are 21 new enterprise zones going to be created. The first 10 will be in Birmingham and Solihull, Leeds, Liverpool, Greater Manchester, The Tees Valley, Tyneside, the Bristol area, the Black Country, Derbyshire and Nottinghamshire, and Sheffield.
There will also be a zone in East London, and 10 further zones will be announced in the summer.
Full details are yet to be announced, but businesses situated in these zones will be entitled to enhanced capital allowances and other benefits, including discounted business rates and superfast broadband. This should encourage regional investment, as proved to be the case with previous enterprise zones.
There will also be significant improvements to R & D tax credits for small and medium-sized enterprises, subject to EU state aid approval being obtained:
From 1 April 2011 the additional deduction for qualifying expenditure will be increased from 75% to 100% (giving a total deduction of 200%). From 1 April 2012 the additional deduction for qualifying expenditure will be further increased to 125% (giving a total deduction of 225%).
Subject to further consultation, the Treasury also propose to introduce the following measures to simplify the R&D legislation from 1 April 2012:
A company's entitlement to claim an R&D tax credit from HMRC will no longer be capped at the amount of PAYE and national insurance contributions it has paid. The £10,000 minimum expenditure requirement will be abolished.
The rules governing relief for work carried out by subcontractors under the large company scheme will be changed.
These measures should encourage SMEs to carry out R&D activities and to increase the level of innovation in the UK. For SMEs that have not previously considered whether they could qualify for R&D relief, these enhancements provide an additional reason to undertake a review.
More help for entrepreneurs
In a surprise move, the Chancellor doubled the entrepreneurs' relief (ER) lifetime allowance, under which qualifying disposals of businesses or business assets are subject to capital gains tax at only 10%, from £5 million to £10 million. The new limit will apply to qualifying disposals from 6 April 2011.
This further increase means that the lifetime allowance has been raised from £1 million to £10 million in only a year, providing a significant encouragement to entrepreneurs - including a maximum CGT saving for a married couple of £3.6 million.
More help for business investors
In a further measure to encourage business investment, the tax reliefs for investing in Enterprise Investment Scheme (EIS) companies and Venture Capital Trusts (VCTs) are to be improved, subject to state aid approval being obtained.
The rate at which investors obtain income tax relief will be increased from 20% to 30%, for shares issued from 6 April 2011. The maximum annual qualifying investment for an individual will be increased from £500,000 to £1 million from 6 April 2012.
EIS and VCTs - the limits on the size of qualifying companies and the amounts they can raise will be increased from 6 April 2012:
The gross assets limit from EIS and VCT companies will be increased from £7 million to £15 million.
The maximum number of employees an EIS or VCT company can have will be increased from 50 to 250.
The maximum amount a company can raise under the EIS or VCT schemes in a 12 month period will be increased from £2 million to £10 million.
These changes mean that many more companies will be able to raise money through EIS and VCT investment, but it is disappointing that companies will have to wait a year for most of the changes to come into effect.
Other positive measures
Personal allowances continue to be increased, in the move towards a goal of a £10,000 allowance. This year, they are increased by £1,000, and next year's increase will be £630.
The government has recognised the rising cost of fuel for employees by increasing the maximum tax-free mileage allowance payable to employees who use their own cars or vans for business from 40p per mile to 45p per mile.
Individuals will be encouraged to make donations to charities in their wills by a 10% reduction in the rate of inheritance tax on death if they donate at least 10% of their net estate to charity.
In the longer term, the government is to look into merging income tax and national insurance. This would simplify matters for employers, but a great deal of thought will be needed to deal with the effect of such a change on pensioners and the effect on investment income.
The not-so-good news
Despite the positive and helpful nature of much of the Chancellor's announcements, no Budget would be complete without some bad news, and this year's is no exception.
Some of the proposed measures which will mean higher costs for both individuals and businesses include:
The pre-announced national insurance increases will take effect on 6 April 2011, adding an extra 1% for both employers and employees in most cases.
The new pensions tax relief restrictions, with an annual limit of £50,000, also come into effect on 6 April 2011.
Non-domiciled individuals who have been in the UK for more than 12 years face a remittance basis charge of £50,000 instead of the current £30,000, from April 2012.
The 'disguised remuneration' proposals will prevent bonuses and other amounts being paid to employees via third parties such as Employee Benefit Trusts from 6 April 2011. However, the initial draft legislation was too widely drafter, and will have to be amended and clarified to ensure that 'innocent' employee remuneration arrangements are not also caught.
Many small business owners will be disappointed that the IR35 rules regarding payment of workers via intermediaries are not going to be abolished, but these would become redundant if income tax and national insurance are merged.
Capital allowances rates are being reduced, notably the Annual Investment Allowance will drop from £100,000 to only £25,000 from April 2012.
Overall, this Budget is positive for entrepreneurs and most businesses, and it is to be hoped that the measures will have the desired stimulus.
Jeff Webber is a Tax Director with BDO LL