Business taxes

Small company dividends and loans

Companies or groups with annual profits below £300,000 will have to pay at least 19% corporation tax on dividends that are paid to shareholders who are individuals or trusts. The minimum rate will apply to distributions made after 31 March 2004. The 0% starting rate will only apply to profits that are retained or distributed to other companies. The measure, which aims to reduce the advantage of incorporating a business, falls short of the imposition of national insurance on dividends that many people expected. The government is also considering measures to strengthen anti-avoidance legislation on loans made to shareholder directors of close companies.

Notification of trading

Companies will have to notify the Inland Revenue within three months of commencing trading. Currently they only have to notify chargeability to corporation tax. The change takes effect from the date of Royal Assent and will be enforced by penalties.

Capital allowances

First year allowances on plant and machinery for small businesses will rise from 40% to 50% for one year. The new rate will apply to expenditure from 1 April 2004 for corporation tax and
6 April 2004 for income tax. The increase does not apply to medium-sized enterprises.
The Chancellor did not extend the 100% allowance for computer equipment for small businesses, which therefore ends on 31 March 2004.

Research and development (R&D) tax credits

A wider range of research and development costs will qualify for R&D tax credits. Qualifying expenditure will now include costs of software, power, fuel, water and consumable or transformable materials. The change will take effect from 1 April 2004 for large companies and as soon as the government receives EU state aid approval for small and medium-sized companies.

SME thresholds

The thresholds for small and medium-sized enterprises were increased with effect from accounting periods ending after 29 January 2004. This was announced in the Pre-Budget Report in December 2003.

Investment companies

Tax relief for the costs of managing investments will be available to companies with investment business whether or not they qualify as investment companies. The requirement that such companies be UK resident will also be removed, which will extend relief to UK permanent establishments of non-resident companies. The rules will specifically disallow the deduction of capital expenditure and take effect from 1 April 2004.

Tax and accounting

New rules will ensure broadly equivalent tax treatment between companies that choose to adopt International Accounting Standards (IAS) and those that continue to use UK Generally Accepted Accounting Practice (UK GAAP). The measure will also make changes to the legislation on loan relationships, derivative contracts, intangibles and R&D to accommodate accounting changes both under IAS and UK GAAP. This takes effect for periods of account beginning after 31 December 2004.

Transfer pricing

Small and medium-sized enterprises will be exempt from the transfer pricing and thin capitalisation rules in most circumstances from 1 April 2004. For other companies, the transfer pricing rules will be extended to transactions within the UK. Where a company is taxed under the transfer pricing rules, the connected company will be able to make a corresponding adjustment in calculating its own taxable income.

Property derivatives and Property Investment Funds

A new tax regime will broadly extend the 2002 derivative contracts legislation to property derivatives. The rules will be introduced by regulations that will be made after Royal Assent. The government is consulting on the most appropriate structure for a new Property Investment Fund.

Construction industry

A revised Construction Industry Scheme from April 2006 will replace the present CIS cards, certificates and vouchers with an Inland Revenue verification service and monthly returns. It will also aim to ensure construction industry workers are correctly classified as employed or self-employed.

Renovation allowance

A business premises renovation allowance scheme will provide 100% capital allowances for the costs of renovating business properties in Enterprise Areas that have been vacant for at least a year. The scheme will start in 2005, subject to the government obtaining EU state aid approval.

Interest and royalties

The UK is implementing the EU Interest and Royalties Directive with effect from 1 January 2004. This largely eliminates taxation in the source state of interest and royalty payments between associated companies in different EU member states.

Enterprise capital funds

To improve access to finance for small and medium-sized firms, the government will introduce enterprise capital funds from a date to be announced. They will be commercial funds investing a combination of private and public monies in small high-growth businesses.