The Chancellor of the Exchequer presented the 2013 Budget to Parliament on 20 March, 2013. The draft Finance Bill is to be published on 28 March.

As previously announced, the main rate of corporation tax will be reduced from 23% in April 2013 to 21% in April 2014. However this will now be reduced further to 20% from April 2015.

From April 2013 large companies are eligible for tax credits amounting to 10% of research and development expenditure. This means that large companies will be able to benefit from R&D tax relief even if they are not making taxable profits. The current system of enhanced tax deductions for R&D expenditure will continue to be available until April 2016 and companies have the chance to elect to use the new system at any time before that date. Companies may treat the credit as a government grant and show it above the line in their financial statements. It should be noted that the rate of after-tax relief under the new scheme is slightly higher than that given by the old scheme. The R&D tax credit may however be subject to a cap, calculated in relation to the amount of PAYE and national insurance contributions made by the company. Further details of this cap will be published in due course.

As previously announced, the UK is introducing a Patent Box regime from 1 April 2013. Companies may elect into this tax regime that will apply a 10% rate of corporation tax to profits arising from patented inventions or some other innovations such as medicinal or botanic innovation rights. There are various conditions, for example the company must own or exclusively license-in the inventions and must have undertaken qualifying development on them. The full benefit of the patent box regime is being phased in between 1 April 2013 and 1 April 2017, For 2013/14 the 10% tax rate applies to 60% of the relevant profits, rising to 100% of the relevant profits from 1 April 2017.

An Employment Allowance, giving GBP 2,000 relief from employer’s national insurance contributions is to be available to all UK companies from 1 April 2014. This is intended to be an incentive for companies to take on further employees. There are likely to be safeguards in the legislation to prevent exploitation of the relief by certain personal service companies or by companies restructuring their business to enable multiple claims to be made.

The UK government has announced its intention to modernize the legislation relating to loan relationships and derivative contracts. A consultation is to be held on a package of proposals to strengthen the current tax regime and bring some of the rules up to date. This consultation would lead to legislation in 2014 and 2015.

The government has also announced a consultation on countering the use of partnerships in artificial schemes to reduce tax liabilities. There is concern that the Treasury is losing revenue from national insurance contributions because individuals are granted the status of a partner in a limited liability partnership (LLP) instead of having employment status.  There is also concern about the use of corporate partners to take advantage of the difference between the income and corporate tax rates. The government also wants to combat the use of partnerships to allow certain individual investors to artificially benefit from certain tax incentives available to businesses.

The Chancellor has confirmed his support for the work conducted by the Organization for Economic Development and Cooperation (OECD) in respect of base erosion and profit shifting. A recent report by the OECD identified key areas of international taxation including hybrid instruments and entities; transfer pricing issues relating to risks and intangibles; the tax treatment of intra-group financing; and harmful low-tax regimes. Working groups have been set up to consider specific issues and it should be noted that the UK is chairing the working group looking at transfer pricing issues.

Individual income tax

From 6 April 2014 the personal allowance for those who born after 5 April 1948 will be raised to GBP 10,000, and the basic rate limit will be decreased to GBP 31,865. As set out in 2011 Budget, once the personal allowance has reached GBP 10,000, it will then increase by CPI (Consumer Prices Index) in future years which starting from 2015 or 16.

The capital gains reinvestment relief for investments under the Seed Enterprise Investment Scheme (Seed EIS) has been extended for one further year. For 2013/14, 50% of the amount invested in seed enterprises under the scheme may be used to offset capital gains. The Seed EIS was introduced in 2012 and gives 50% income tax relief for investments of seed capital in qualifying companies. The definition of an eligible company to receive investment under the scheme has been extended to cover a company that was initially established and controlled by another company, provided that during that period the company had only issued subscriber shares and had not yet begun its preparations for doing business.

The limit up to which a company may make a loan to its employee without a taxable benefit arising to that employee has been increased from GBP 5,000 to GBP 10,000. This will be of help to employees who need to travel long distances to their place of work and may require a loan to buy an annual ticket for their travel. Above the GBP 10,000 limit a taxable benefit arises on the deemed interest on the loan.

Anti-avoidance

The general Anti-Avoidance rule (GAAR) will apply to income tax, corporation tax (including amounts treated the same as corporation tax), National Insurance contributions (NICs), inheritance tax, capital gains tax, stamp duty land tax and petroleum revenue tax. It will also apply to the annual tax on enveloped dwellings owing to be enacted with effective from 1 April 2013.

The general Anti-Avoidance rule will provide an additional means for HMRC (HM Revenue & Customs) to tackle abusive tax avoidance schemes. Except to the extent needed to fit with the new legislation, no changes are proposed to present tax rules. All forms of tax avoidance (with both abusive tax avoidance to which the general Anti-Avoidance rule may apply and tax avoidance that doesn’t fall within the meaning of abusive tax avoidance which is the target of the general Anti-Avoidance rule) will continue to be challenged and counteracted using existing means.

The Government will discuss on new proposals to aim at the promoters regarding tax avoidance schemes, intending to tackle both the supply & demand of these schemes. HMRC (HM Revenue & Customs) will consult on new ‘naming and shaming’ proposals along with a range of targeted disclosure requirements and related penalties.