Summer Budget brings three business tax changes

In our second Budget 2015 Tax Update, we focus on the introduction of three new tax regulations which impact business owners. Some of the business tax changes will be welcomed, for instance the permanently increased annual investment allowance and the reduction in corporation tax, whereas the restriction of corporation tax relief on the acquisition of goodwill will bring higher costs.

What Budget tax changes should business owners be aware of?

1. Further reduction in corporation tax rates

UK corporation tax rates have been reduced in recent years and are set to drop further from the current rate of 20%. Following the Budget, the new corporation tax rates for all companies will be:

• 19% with effect from 1 April 2017; and
• 18% with effect from 1 April 2020.

2. Some tax payment instalments to be brought forward

For the majority of smaller SME companies, corporation tax is generally payable in full 9 months after the company’s accounting year-end. Currently companies (or groups) with annual taxable profits exceeding £1.5m must pay their corporation tax in quarterly instalments commencing in the sixth month of their accounting period. These requirements will continue.

However, if companies (or groups) have annual taxable profits of £20m or more, they will now need to pay their corporation tax in quarterly instalments in the third, sixth, ninth and twelfth months of their accounting period.

3. Restriction to business goodwill amortisation

In the past, companies purchasing business goodwill have been able to claim corporation tax relief on the cost of this purchased goodwill, spread over its useful life. This relief will be restricted for acquisitions on or after 8 July 2015 and legislation governing this change will be enacted in the Summer Finance Bill 2015. It is a further tightening of the rules surrounding the ability for a company to obtain tax relief using the value of goodwill within a business, which we have blogged about in the past.

This latest change has tax planning implications as the removal of corporation tax relief on the purchase of goodwill will mean that the real cost of an acquisition of a business will increase. To date, it has been a quite clear cut exercise to establish that a purchasing company would rather purchase assets than shares, whilst a vendor would rather sell shares than assets. This change may go some way to bringing the two factions closer together.

4. Increased annual investment allowance

The current annual investment allowance of £500,000 is temporary and was due to revert to a permanent rate of £25,000 on 1 January 2016. The permanent level is now to be set much higher, at £200,000 from 1 January 2016.

For tax planning purposes, although the new annual investment allowance is a generous £200,000, if your company is due to spend more than this on plant and machinery, it will be worthwhile ensuring the purchase can benefit from the temporarily increased allowance, as this will only be available for the remainder of this year. Thereafter additional plant and machinery purchases can utilise the new £200,000 annual investment allowance. The calculation of the relief due for periods straddling the change is complex and advice should be taken if you are in this position.

If you own a business and wish to discuss any aspect of taxation or tax planning please contact Lesley Stalker by emailing las@rjp.co.uk.