Corporation tax to be reduced by 2% in April, and will continue to fall by 1% for the next three years
What Was Announced:
Corporation tax will be cut by 2% (not 1% as expected) from this April, followed by 1% for the next three years. Currently, corporation tax is at 28% but it will become the lowest in the G7 in three years' time.
Banks lose out on the benefit of the cut, with the Treasury increasing its bank levy for the second time in as many months in order to offset the gain.
Entrepreneur Country Analysis:
Cutting corporation tax by 2% this year (instead of the expected 1% that had been expected) will not directly effect many small businesses and entrepreneurs who pay small business tax at 20% rather than corporation tax.
The Chancellor had already announced in last June's Emergency Budget that he would cut the corporation tax rate to 24% over the next 4 years. Yesterday's announcement sets out the road map for doing so and for going further by an additional 1% to 23%.
A 23% rate of corporation tax will mean the UK has the lowest rates in the G7, 16% below the US, 11% lower than France and 7% lower than Germany.
This move makes Britain a more competitive place for businesses to be based and has already attracted welcome approval from the likes of WPP and UBM who have inferred that it makes their return to London more likely.
Reaction From Entrepreneurs and Business
"The cut in corporation tax is a very encouraging sign that this government recognises that the way to stimulate growth is through enterprise. This will hopefully encourage the great entrepreneurial spirit this country has." Adam King, Partner at King & Allen
"The chancellor has made clear the UK is open for business. The extra 1p cut in corporation tax will help firms increase investment. Meanwhile, significant changes to entrepreneurs' taxation will rightly focus much-needed support on businesses with growth potential." John Cridland, Director-General of the CBI
"Overall, the budget seems positive. It seems Osborne is signalling to the world that the UK is going to be a more competitive place to do business. The corporation tax cut is a good thing, as it encourages enterprise, and most importantly, profit." Nicko Williams, owner of Climatecars
"This was a disappointing budget for high-growth businesses. While the extra one per cent reduction in corporation tax is welcome, it will not have a large or immediate impact on SMEs. There was an absence of specific measures on encouraging investment in SMEs, on business funding, and on incentives for exporters. This was always going to be a budget where the Chancellor's hands were tied. Fast-growing businesses will be disappointed but not surprised." Paul Lindley, Founder of Ella's Kitchen
21 New Enterprise Zones
What Was Announced:
- He also announced an extension of plans to set up Enterprise Zones in some the most deprived areas of England - from 10 areas to 21.
- The areas will benefit from relaxed planning laws and discounted business rates to encourage job creation.
Entrepreneur Country Reaction:
Chancellor George Osborne's announcement that he will increase the number of funded enterprise zones across the UK from the previously confirmed 10 up to 21 enterprise zones is a significant boost to small businesses and innovation. across the UK. Within these enterprise zones, businesses will get up to 100% discounts on rates for up to 5 years, new superfast broadband and the potential to use enhanced capital allowances in zones where there is a strong focus on manufacturing.
The London site for the enterprise zone is said to be Newham. A further ten enterprise zones will be announced in the summer.
The first ten enterprise zones will be located in:
Birmingham and Solihull
Leeds
Liverpool
Greater Manchester
the Tees Valley
Tyneside
the Bristol area
the Black Country
Derbyshire and Nottinghamshire
Sheffield
London
Reaction From Entrepreneurs and Business:
"We welcome the raft of supply-side measures announced in the Budget. The combination of reduced corporation tax and planning liberalisation will help to lift business confidence at a difficult time. However, the scale of deregulation in areas that really matter to business in general, such as employment law, is still very limited. And while the 21 new enterprise zones have real potential, we question why the whole of the UK can't be an enterprise zone." Institute of Directors, Miles Templeman
Entrepreneurs Relief
What Was Announced:
The limits on ER have been increase from £5m to £10m from 6 April 2011.
Entrepreneur Country Reaction:
Entrepreneur's Relief (ER) was introduced following the abolition of taper relief in 2008. The limits have increased from £1m to £5m and from 6 April 2011 will be £10m. This makes the relief even more attractive.
There are a number of conditions which must be met to qualify for the relief and the most problematic is when gains arise on the sale of shares. The conditions can sometimes be met by using different classes of shares and it is pleasing to note HMRC have stated that no changes are proposed to these conditions.
ER reduces the rate of capital gains tax on the sale of company shares from 28% to 10% but only if the shares are held by a director or employee and they own at least 5% of the ordinary shares and voting rights, making it a "personal company". These conditions must also have applied for at least 12 months up to date of disposal.
The people who most often lose out from not meeting the conditions are:
Family shareholders who are not employees or officers of the company Employees holding less than 5% of the shares Employees with share options that are exercised less than 12 months before the company is sold.
Reaction From Entrepreneurs and Business:
"ER is now worth a possible £1.8m in tax savings and its eligibility should be considered at least 12 months before any sale. It may be possible to take additional steps to ensure that the conditions for the relief are met and specialist advice should be taken. Possible solutions include: A restructure of shareholdings, using shares with limited rights Making family members employees with limited responsibilities Exercise share options or give employees shares in another qualifying company set up for the purpose." Declan Cunningham, Cameron Cunningham LLP
“I approve of the extension of the small business rate relief; there is a strong case for prioritising the provision of stimuli that will boost British SME’s. It’s our smaller but more innovative, faster moving enterprises that can react quickest and drive the recovery.” Adam King of King & Allen
“Entrepreneurs Relief increase – fine for business owners who hold at least 5% of the business, but what about all the other staff who are instrumental in growing a company who might be small/minority shareholders who would be excluded from this benefit – why is there a minimum threshold to this relief?” Tim Walker, Director Iconnyx
"Changing the rules to expand the range of companies that VCTs can invest in is a welcome boost to the sector and businesses desperately seeking finance." Ian Sayers, Association of Investment Companies Director General
Research & Development Tax Credits
What Was Announced:
An increase in tax relief for R&D work carried out by SMEs to 200 per cent in 2011 and 225 per cent in 2012
Entrepreneur Country Reaction:
HMRC have noted that only 6,500 companies are claiming R&D Tax Credits for Small or Medium Enterprises, SMEs. Many companies are still ignoring the real benefits of claiming for the additional tax relief on R&D and the changes just announced will allow more companies to claim, and as the relief is improved considerably, attract more companies to investigate whether they qualify.
The current relief allows an SME to claim 175% of qualifying costs as a tax deduction. Qualifying costs include the employment costs of those working on R&D, even if the rights to the product belong to another company.
If the SME is making losses, it can convert the qualifying loss into a PAYE refund equal to 14% of the R&D relief (assuming it has paid sufficient PAYE). Thus it is possible to claim a refund of PAYE up to a maximum of £24.50 for every £100 spent (175 x 14%).
From 1 April 2011 the uplift on qualifying costs increases to 100% so a tax deduction of £200 is available for every £100 spent. Assuming it is still possible to recover PAYE at a rate of 14% (no announcement has been made), the effective recovery is £28 for every £100 spent. (200 x 14%).
The relief will become even more attractive from 1 April 2012. It is proposed from that date that:
The uplift will increase to 125%, The £10,000 minimum qualifying expenditure will be abolished The repayable amount will no longer be capped by the PAYE paid.
All these changes are subject to State Aid regulations and so approval from the EU is necessary.
Reaction From Entrepreneurs and Business:
"The relief has always been attractive and it is concerning that companies which qualify are not taking advantage of it. The changes will make the relief even more attractive and companies should take specialist advice to determine whether they qualify and then to quantify the benefits. The relief will particularly benefit companies making losses as it may allow them to reclaim all their PAYE paid, if they have sufficient qualifying losses. Also from 1 April 2012, the reclaim could exceed the PAYE paid. The improved relief from 1 April 2011 and the further improvements from 1 April 2012 should increase the number of companies claiming the relief as it is now even more important that claims be considered." Declan Cunningham, Cameron Cunnigham LLP
"Increasing the rate of R&D tax relief to 200 per cent in 2011 will be good for some SMEs, but the process to gain access to this is long, complicated and not well-publicised – and will not encourage the growth of many SMEs." Bobby Lane, Partner at Shelley Stock Hutter
"Raising the rate of the SME credit was essential to maintain the effectiveness of the UK R&D tax credit regime. The uplift will provide a much needed cash flow boost to innovative manufacturers."Lee Hopley, EEF Chief Economist
"We welcome today's simplification and expansion of the R&D tax credit. This is something called for in our work with Sir James Dyson and is of huge importance for industries such as the UK's video games sector. This will support and encourage our most innovative firms to make longer-term investments and take the sorts of risks which have the potential to grow their business in a sustainable way for the benefit of the UK economy." Stian Westlake, executive director of policy and research at NESTA
Enterprise Incentive Scheme Relief
What Was Announced:
EIS tax relief has been raised from 20% to 30% and will enjoy more lax investment rules.
Entrepreneur Country Reaction:
EIS has been an essential tool for companies seeking investment from Business Angels. The relief is increasing on 6 April 2011 so that the credit increases from 20% to 30%. This should incentivise investors and perhaps allow them take greater risks as they have an increased tax subsidy.
The current limit of EIS relief for an individual is £500,000 per annum. It is proposed that this increase from 6 April 2012 to £1m. Additionally, it is proposed that the limits for the company seeking EIS qualifying funds increase as follows:
The amount raised each year will increase from £2m to £10m. The limit on employees will increase from 50 to 250 The gross assets test will increase from £7m to £15m.
All these changes are subject to State Aid regulations and so approval from the EU is necessary.
A change previously announced taking effect on 1 April 2011 will allow foreign companies trading from a permanent establishment in the UK to be eligible for EIS and VCT investments, giving tax relief on the investment for their shareholders, assuming all other conditions are met. Previously the funds invested had to be used by a company trading wholly or substantially in the UK. This change also applies to Enterprise Management Incentive share options.
A further change from 1 April 2011 will deny relief to companies who are "failing". Thus it is important to confirm the company is a going concern to get the relief in future.
Reaction From Entrepreneurs and Business:
"A number of companies who have been unable to seek EIS qualifying funds will be able to do so from 6 April 2012. This, together with the increased limits per individual of £1m should create a more investment into privately owned and AIM quoted trading companies. The increase in the tax credit rate to 30% from 6 April 2011 is also a welcome boost to companies seeking funds. Foreign companies with operations in the UK which are looking for new investment or for ways of incentivising and retaining key employees should take advice on the effect of these changes." Declan Cunningham, Cameron Cunningham LLP
