UK: Budget 2007

The standard rate of corporation tax is to be reduced from 30% to 28% from April 2008. This is in response to industry lobbying for a reduction to make the UK more competitive internationally. However, the benefit will be offset by the reduction in capital allowances. Conversely the small companies rate is to rise from 19% to 20% next year and 22% from the following year.

Industrial Buildings Allowances are to be phased out over four years. As a start, with immediate effect, balancing adjustments are withdrawn as is the re-calculation of writing down allowances when a purchaser acquires an industrial building. The purchaser will get the same writing down allowances as would have been due to the original owner.

The standard writing down allowance for plant and machinery is reduced from 25% to 20% from 2008, but for plant integral to buildings will be reduced to 10%. The definition of what is integral to buildings is awaited. Presumably lifts, air conditioning and heating will be caught but it is not clear where the boundary will be drawn. The rate for long life assets increases from 6% to 10%. The temporary 50% rate of first year allowances for small businesses is extended for a further year.

A new annual investment allowance for the first £50,000 of expenditure on plant and machinery will be introduced next year.

A new 100% allowance for expenditure on renovating vacant business properties in designated disadvantaged areas comes into force on 11 April. Certain industries are excluded.

The anti-avoidance provisions introduced in the pre-budget report are to be replaced by new provisions which will take effect from the date of Royal Assent. The new provisions have yet to be published. The original provisions have been widely criticised as being poorly drafted. We can expect something better focussed but the days of packaged schemes seem to be gone.

The linking of property exchanges between connected persons, which could lead to higher rates of SDLT will be abolished from the date of Royal Assent.

A working party is considering the removal of the current tax disadvantages for onshore authorised funds (unit trusts and OEICs) investing in property. The conditions are likely to follow those of REITs so the new vehicle is unlikely to offer an alternative for smaller, closely held funds. A technical paper is to be published in the summer.

A number of changes will take effect from 6 April:

• There is to be a new limit of 50 employees for qualifying companies.
• A company may raise no more than £2 million in aggregate under any of the schemes in any twelve-month period.
• Changes to the definition of "qualifying subsidiary" will allow more flexibility in group structures.
• There is an easing of the "70% test" for VCTs to give them time to reinvest the proceeds from disposal of an investment.

Research & Development tax credits are increased to 130% for large companies and 175% for SMEs. The number of employees a company may have to qualify as an SME is increased from 250 to 500.

There is a further tightening of the anti-avoidance rules on buying and selling corporate capital losses and gains.

Anti-avoidance provisions in relation to employee benefit trusts are introduced with immediate effect to prevent employers side-stepping the "nine-month rule" to obtain an early tax deduction for contributions.

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