Corporation Tax

The U-turn on the 0% corporation tax rate on profits of less than £10,000 announced in the pre-budget report in December 2005 was confirmed.

For small companies with taxable profits of less than £300,000 the rate of tax will be 19%. For companies with profits above £1.5m the full rate of 30% will be payable.

Marginal relief is given to smooth the transition from one rate to another. These limits are reduced to take into account associated companies.

Prior to April 1, 2006, where a company makes a distribution to a non-corporate, ie, an individual, and corporation tax had not been paid at a minimum rate of 19%, the company will pay 19% corporation tax on the profits distributed.

With the abolition of the zerorate tax this non-corporate distribution rate will be abolished and so all companies with profits below £300,000 will now pay tax at 19%.

First year allowances

The rate of first year allowances for expenditure by small businesses on qualifying plant and machinery will be increased to 50% for new expenditure incurred between April 6, 2006 and April 5, 2007.

A small business is one which satisfies two of the following conditions: not more than £5.6m in turnover; not more than £2.8m in assets; not more than 50 employees. This increase is to compensate those businesses affected by the abolition of the zero rate.

Self-assessment filing date change

Measures were announced to move the following deadline for income tax self-assessment returns to September 30 where returns are on paper, or November 30 where the returns are filed online. Currently selfassessment tax returns must be filed by January 31 following the tax year.

It is intended that these changes will be effective from 2008 and will be introduced on a phased basis. By 2012 it is expected that all income tax self-assessment returns will be filed by these dates.

In addition to this, computer generated paper substitute returns currently used by accountants will no longer be accepted. For many businesses the change in these filing deadlines will increase pressures to prepare the necessary information in time. This is particularly true for sole traders and partners who have to prepare accounts.

Venture capital schemes

Some changes to Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EIS) were announced in the budget.

The chancellor announced that a new income tax relief for investors in Venture Capital Trusts (VCTs) would be "increased" to 30%. Considering that the rate had previously been 40% this feels more like a reduction!

In addition the minimum period for which investors must hold their shares will increase from three years to five years.

Bigger changes were announced for EIS investments which provide a valuable source of capital to start up and growing businesses.

The doubling of the income tax relief for the annual investment limit to £400,000 is a welcome increase. However the change in the gross assets test will mean that fewer companies will be eligible for EIS relief.

Under the current rules the gross asset of the company (or a group of companies) raising money under EIS must not exceed £15m immediately before the investment and £16m immediate after. These limits will be reduced to £7m and £8m from April 6, 2006.

The press releases did not make it clear whether this gross asset test is also reduced for EIS deferral relief. It is likely, however, that this will be the case. This means that the scope for reinvestment into EIS companies will be limited.

Technology Announcements in connection with the current exemptions for computers and mobile phones came as a big surprise.

The exemptions for computers have been around since 1999 and the government has actively encouraged Home Computer Initiative (HCI) schemes which rely on this exemption.

Under current rules, no taxable charge arises where an employee is provided with computer equipment with a value of up to £2,500. This is on the basis that there is no transfer of ownership in the property and the scheme is available to all employees.

Without the exemption the employee would be subject to a benefit in kind on 20% of the value of the assets, ie £500.

The removal of the exemption will affect a number of businesses who were considering the introduction of these schemes for their employees.

HMRC has confirmed that where existing schemes are in place a benefit in kind charge will not arise.

Mobile phones were also under attack and limits placed on the exemption. Under current legislation employers can provide mobile phones with unlimited private use to their employees and members of their household. Members of the household include spouse, children, nannies, etc.

This means that an employee can have multiple phones. The new measures which will be introduced from April 6, 2006 will mean that only one tax-free mobile phone is available per employee.

Changes to trusts

The inheritance tax (IHT) system for trusts is the subject of a major overhaul with some very unexpected changes.

Currently transfers of assets into accumulation and maintenance trusts (typically trusts where assets are used for the benefit of children/ grandchildren) and interest in possession trusts (trusts where beneficiaries have a present right to the present enjoyment of trust assets) have been exempt from IHT unless the donor dies within seven years of the gift.

This potentially exempt transfer exemption has been withdrawn with immediate effect and lifetime gifts into trusts will now attract inheritance tax at a rate of 20%.

This will affect many business owners who currently use trusts as a method of providing for their families.

Thresholds and rates

The VAT registration threshold has been increased to £61,000 from April 1, 2006 and the deregistration threshold up to £59,000.

The turnover limit for using the annual accounting scheme has been increased to £1,350,000 per annum with effect from April 1, 2006.

The scale charges that tax fuel that is supplied for private use have been increased to take account of the rise in the price of fuel.

It would seem that HMRC is making a conscious effort to improve the administrative side of tax for small businesses, however the actual incentives and tax breaks available to these businesses are reduced.

It leaves one wondering if a streamlined tax system is being created which will take away many of the tax breaks available to owner managed businesses.

Paula Tallon is director and head of Direct Tax at Chiltern plc.