On 22 June 2010, the UK Government delivered a special Budget. Draft legislation is expected shortly.

Corporation tax rate

The current rate of corporation tax is 28%, with a lower rate of 21% for small companies.

From April 2011 the rates will be 27% and 20%, and the main rate will reduce by a further 1% each year until it reaches 24% in April 2014.

However, while the rate of tax is reduced, the rate of capital allowances will also be reduced, so that tax relief for depreciation accrues at a slower rate. From April 2012, the rate for plant and machinery will be 18% (down from 20%), and for long life assets 8% (down from 10%).

Capital gains tax

The rate of capital gains tax (CGT) for individuals has risen with immediate effect from 18% to 28% for higher rate tax payers (i.e. those whose total taxable income and gains exceeds £37,400). For those with income/gains below that level, the rate remains at 18%. The annual exemption from CGT (currently set at £10,100 and which is available for all taxpayers) remains unchanged.

The existing CGT relief for “entrepreneurs” has been extended - up to £5m of lifetime gains can benefit from a 10% tax rate, subject to various qualifying conditions.

Income tax

The personal allowance for individuals will be increased to £7,475 from April 2011, thereby allowing them to earn an extra £1,000 before being subject to income tax. For non-residents able to claim the allowance, this will enable more UK income to be received tax-free.

VAT rate

VAT will rise to 20% on 4 January 2011. Insurance premium tax will also rise to 20%.

New bank levy

A new bank levy was announced, with effect from 1 January 2011 and which is expected to raise about £2bn each year.

In a joint statement with the UK, the French and German governments announced that they would be introducing similar levies in due course.

The UK levy is a tax based on certain balance sheet items of UK banks (or overseas banks active in the UK) that have relevant liabilities of at least £20bn. Tier 1 capital and ordinary retail deposits will not be included in the tax base. The initial rate of tax is to be 0.04%, but will rise to 0.07%.

The levy will not be deductible for corporation tax purposes.

International issues generally

There were no new measures announced in relation to non-UK domiciled individuals (broadly, those who have their permanent home outside the UK), nor was the issue of UK tax residence dealt with (where a statutory definition has long been discussed), but these are under review.

International groups will need to consider complex changes (first announced in November 2009) to the interest deduction rules, known as the “world wide debt cap”. These rules limit the availability of interest deductions in the UK by reference to the external borrowing of international groups.

For further information on this tax analysis and thought, please contact:

Mark Nichols
Partner – CMS Cameron McKenna
E mark.nichols@cms-cmck.com

Tair Hussain
Associate – CMS Cameron McKenna
E tair.hussain@cms-cmck.com

Gregory Price
Associate – CMS Cameron McKenna
E gregory.price@cms-cmck.com