Finance Bill Tracking Service 2007 | Budget 2007 | Budget Notes

BN02 Business tax reform package

Who is likely to be affected?

1   All businesses.

General description of the package

2   Budget 2007 announces significant reforms of the business tax system. The package has three main elements:

•   changes in the rate of onshore and small companies' corporation tax;

•   changes to the capital allowances regime governed by Parts 2, 3 and 4 of Capital Allowances Act 2001; and

•   increases in the levels of enhanced deductions available to companies in respect of their qualifying expenditure on research and development.

3   These reforms are designed to achieve three main objectives:

•   enhancing the international competitiveness of UK based business;

•   encouraging growth, through investment and innovation; and

•   ensuring fairness across the tax system.

Operative dates

4   The major elements of the package will apply from 2008-09. However, certain measures will take effect from 2007-08, and separate Budget Notes explain these measures in more detail.

Current law and proposed revisions

5   The major elements may be grouped under three main headings as follows:

Corporation tax rates

i) The rate of onshore corporation tax will decrease from 30% to 28% from 2008-09. (See BN03.)

ii) The small companies' rate of corporation tax will increase from 19% to 20% in 2007-08, 21% in 2008-09 and 22% in 2009-10. (See BN04.)

iii) North Sea oil and gas ring fence activities will retain a main corporation tax rate of 30% and small companies' rate of 19%.

Capital Allowances

i) The temporary 50% rate of first-year allowances for small enterprises will be extended for a further 12 months (see BN06).

ii) A new annual investment allowance for the first 50,000 of expenditure on plant and machinery in the general pool will be introduced from 2008-09. The detailed design and scope of this allowance will be the subject of consultation.

iii) From 2008-09 the rate of writing-down allowances for plant and machinery in the general pool will be reduced from 25% to 20%.

iv) From 2008-09 the rate of writing-down allowances on long-life asset expenditure will increase from 6% to 10%.

v) From 2008-09 writing-down allowances on industrial and agricultural buildings will be gradually phased out, with final withdrawal of both regimes by 2010-11. To prepare the way for final abolition, most balancing adjustments, and the recalculation of writing-down allowances on sale, will effectively be withdrawn from 21 March 2007. (For further details see BN07.)

vi) From 2008-09 the rate of writing-down allowances on certain fixtures integral to a building will be set at 10%. The detailed design and scope of the integral fixtures provisions will be the subject of consultation.

vii) From 2008-09 a payable tax credit for losses resulting from capital expenditure on certain designated "green technologies" will be introduced. The detailed design and scope of the tax credit will be the subject of consultation.

viii) North Sea oil and gas ring fence activities will retain their existing capital allowances treatment.

Research and Development tax credits

i) From 2008-09, and subject to state aid approval, the enhanced deduction available to SMEs in respect of qualifying research and development expenditure will increase from 150% to 175%. The value of the payable credit will remain broadly at its current level (24% of qualifying expenditure).

ii) From 2008-09 the enhanced deduction available to large companies in respect of qualifying research and development expenditure will increase from 125% to 130%.

6   The consultations will commence in the summer and further details will be made available at that time.

Further advice

7   If you have any questions about these changes, please contact

•   Alice Dowswell on 020 7147 2627 for information about Corporation Tax Rates

•   Bob Wightman on 020 7147 2581 for information about Capital Allowances

•   Lynn Carroll on 020 7147 2636 for information about Research and Development tax credits. Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk