Potential tax changes for businesses

In contrast to the wealth of information available before the election on this area, the Conservative-Liberal Democrat coalition document does not make any specific announcements about proposals for business taxation.

The Conservative manifesto promised a reduction in the small company rate of corporation tax to 20%, and a reduction in the full rate to 25%. These would be paid for, the manifesto promised, by the abolition of “complex reliefs”. It became clear that at least part of the cost would be met by the abolition of the Annual Investment Allowance, but that other changes to capital allowances were also contemplated. It is not now clear what will happen on these proposals.

Main rate of corporation tax

A reduction in the full rate of corporation tax is viewed as quite desirable to retain international competitiveness – it is not wise for our rate to drift too far out of line with our EU partners, as businesses attracted to the EU will clearly establish themselves where the local conditions are most favourable – and the rate of corporation tax on profits is a key element in this decision. Fr4eedom of movement within the EU also means that large groups may move their base of operations if they see UK taxes as uncompetitive, so a reduction in rate may be an economic necessity at some point – that point may not, however, be now.

Small company rate
A reduction in the small company rate has long been in the Conservative proposals – long before the general election and the launch of the manifesto. However, the Conservatives are treading on dangerous ground here. The cost of reducing the rate is modest, but as Gordon Brown found a few years ago, tinkering with this rate can produce unexpected effects, and any reduction is likely to see increased pressure from small businesses to incorporate to save tax. Advisers will have to wait until Budget Day to find out what the government has in store on this – but changing the rate mid year is entirely possible, as although convention says that rates only change from 1 April, corporation tax works to specific dates, so apportioning a chargeable period to alternative dates would not be complex to legislate for.

NIC rates and thresholds
As for the proposed rise in NIC rate – this is a difficult one to be certain about. The coalition agreement states that the parties agree to “stopping Labour’s proposed jobs tax.” It also indicates that the rise in the NIC threshold for employees will not happen, but that the threshold for employers will increase as planned – leading to a differential starting point for NIC for employees and employers. The reason for increasing the threshold for employers is to “stop Labour’s jobs tax”, so one must conclude from this that the rate for employers will rise as planned, offset by the increased threshold, minimising the impact on jobs for those with moderate earnings. There is no indication as to the intention on the increased rate for employees.

Green deal for energy efficient investment
The current Enhanced Capital Allowances (ECA) scheme provides 100% tax relief on energy efficient and environmentally beneficial plant and machinery, with a payable tax credit of 19% claimable by companies investing in approved technologies whose allowances mean that the company incurs a tax loss for the period. It is difficult to imagine how this successful scheme might be improved upon but this is a specific commitment, so it is likely to mean more allowances for environmentally beneficial investments.

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