You and your Business

Business and capital gains tax

For disposals made on or after 6 April 2008 there is to be a new single rate of capital gains tax (CGT) of 18%. This reduces the CGT liability by up to 22% but for some taxpayers the linked change to taper relief will mean an increase of 8% in the tax payable on disposal of business assets - which almost doubles their tax liability.

This change will apply to all chargeable persons except limited companies.

However, the change and simplification of the CGT system also includes major changes to some of the existing reliefs and allowances.

Taper relief for business and non business assets will cease to exist. This will materially affect the tax on the disposal of business assets after 5 April 2008, leading to a potential 80% increase in tax payable. It is possible that this will prompt business owners to consider the possible disposal of their business prior to 5 April 2008 rather than wait until the higher tax regime commences. For those owning pure investment assets, this is mainly good news, as after 10 years ownership they would be facing a tax charge of between 12% and 24%, as opposed to the 18% which will apply in future.

Indexation allowance will be scrapped for non corporate bodies. Where assets were held at 31 March 1982 there will continue to be a need to value them at that date although there will be amendments to the legislation which will result in the original cost no longer be taken into account. In practice, this means that tax will be calculated on the rise in value between 1982 (or date of acquisition if later) and the date of disposal. Taxpayers will lose the benefit of indexation allowance between 1982 and 1998, which would otherwise produce an allowance of up to 105% of the 1982 value. Once again, disposals before 6 April 2008 would enable taxpayers to take advantage of the old rules.

Chargeable gains will be computed by deducting the annual exemption of £9,200 from the total gains (proceeds less costs or 31 March 1982 market value if the asset was acquired before that date) and then charged at the single rate of 18%. The current link between the rate of income tax and capital gains will therefore no longer apply.

This is a major change to the CGT legislation and there will undoubtedly be those who gain and those who lose. Careful consideration should be given to the timing of potential disposals prior to 6 April 2008 as there may be opportunity to make tax savings prior to the new legislation taking effect.

Capital allowances

The Chancellor announced that expenditure incurred after 1 April 2008 (6 April 2008 for a business paying Income Tax) on alterations to buildings in response to a fire authority notice would no longer qualify for capital allowances. This reflects the changes in fire safety legislation which now operates on a self-assessment basis and is intended to discourage businesses from waiting until they are compelled to make fire safety improvements.

Anti-avoidance measures

As in recent years the Chancellor has again used the Pre Budget Report as the stage for announcing a new raft of anti-avoidance measures. Tax saving schemes using sale and finance leaseback have been countered previously in 1997 and 2004 but businesses have still been able to exploit the existing rules which can give rise to tax-free disposals of plant and machinery. Also the existing rules for long-funded leases can create tax losses with no corresponding commercial loss. The Finance Bill 2008 will bring in measures to remove most of the previous legislation and sale and leaseback arrangements will be brought within the long funded lease rules.

Some employers have been making exceptionally large pension contributions in recent years to fund pension fund deficits. However there are spreading rules which prevent employers claiming the tax relief on exceptionally large payments all in one accounting year. In order to get round these spreading rules some employers have used a new company as the vehicle for making the payments. The Finance Bill 2008 will include clauses to prevent this happening.

HM Revenue & Customs has received notification of a scheme which attempts to get round the anti-avoidance legislation introduced in Finance Act (No 2) 2005 (known as the 'shares as debt' rules). The anti-avoidance countered the conversion or disguise of interest payments as dividends which when paid between UK companies are tax exempt. The notified scheme attempts to exploit other forms of distribution which would also be exempt from corporation tax. The Finance Bill 2008 will include clauses to block such schemes.

Some employers have been exploiting the holiday pay national insurance exemptions. These exemptions were introduced in the 1960s specifically to assist the construction industry which has a highly mobile workforce. However these exemptions were exploited by employers in other industries and so the Chancellor has announced that legislation is being tabled today to remove the exemption for other employers with effect from 30 October 2007 and for construction industry employers the exemption will be phased out over 5 years, with complete withdrawal by 30 October 2012.

Hedging foreign exchange risks

Companies which are exposed to foreign exchange risks because of investments in overseas businesses frequently hedge their exposure to the exchange risks by taking out foreign exchange borrowings or using some form of currency derivative. At present there are two sets of rules depending on whether the company is applying UK or international accounting standards. New short term rules will be introduced for accounting periods beginning on or after 1 January 2008 and longer term changes will be announced for accounting periods beginning on or after 1 January 2009. Following a consultation process companies will be able to elect to match their foreign holdings with the value of the net underlying currency assets rather than the book value. A further measure will remove the subjective test of 'the company's intentions' with regard to such matching and replace it with a more objective approach and also deal within anti-avoidance aspects.

Sale of lessors: Companies in partnership

The measure announced today has retrospective effect from 5 December 2005 when anti-avoidance legislation was introduced. The legislation ensured that there was symmetry in tax treatment of the corporate partners of a leasing business when there was a change in ownership of the business. It did not however deal with the situation where the entire business was sold to a single company and in such a case the acquirer would not receive the matching tax relief equivalent to the charge on the vendors. The Finance Bill 2008 will include the necessary clauses to bring this change into effect.

Landfill tax dredging waste

The exemption from landfill tax for dredging waste is being extended to cover additives necessarily added to comply with the new landfill regulations being phased in. The regulations prohibit dredging waste being used in landfill sites unless any free-draining liquids have been trapped or solidified: this is achieved by the use of additives which themselves would not normally qualify for exemption.

Stamp duty land tax - Changes to anti-avoidance affecting property investment partnerships

These measures affect property investment partnerships that acquire interests in UK property and are backdated to 19 July 2007 (the date the Finance Act 2007 received Royal Assent).

The change to be introduced will ensure that, where there is a transfer of an interest in a property within an investment partnership, there will be no charge to Stamp Duty Land Tax.

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