Budget 2011

The Chancellor of the Exchequer, George Osborne, delivered his Budget on 23 March 2011, in which various tax amendments were announced. In his Budget speech, the Chancellor announced that two of the government’s ambitions for the British economy were to create the most competitive tax system in the G20 and to make the UK the best place in Europe to start, finance and grow a business. Consequently, many of the Budget announcements are viewed as being favourable to business. The most significant changes in relation to business and potential investors are summarised in this article.



On 1 April 2011 the main rate of corporation tax was reduced by a further 1% in addition to the reductions announced in the June 2010 Budget. Consequently, the main rate of corporation tax will be 26% and will ultimately fall to 23% by April 2014.

Capital allowances

Legislation will be introduced to increase the period over which expenditure on plant and machinery can be given short-life asset treatment from four years to eight years, from the end of the period in which the expenditure is incurred. Short-life asset treatment enables expenditure on qualifying assets to be allocated to a short-life asset pool. This measure came into force on 1 April 2011.

Controlled foreign companies (CFC) reform

Full reform of the CFC regime is planned for 2012. The government has announced that the new regime will introduce a mainly entity-based system that will be targeted to ensure that only profits of CFCs that have been artificially diverted from the UK are subject to a CFC charge. The new rules will include a partial exemption for finance companies, resulting broadly in an effective UK tax charge of one-quarter of the full rate of UK corporation tax. By 2014 this will equate to an effective rate of 5.75% (the main rate of corporation tax having been reduced to 23%). A consultation document is expected to be published later this month, with draft legislation in autumn 2011.


The government intends to clarify certain aspects of the rules on the taxation of distributions. The Finance (No 3) Act 2010 (the 2010 Act) introduced rules relating to the tax treatment of distributions of a capital nature. The government announced that during consultation on the 2010 Act provisions, certain areas of uncertainty had been identified in other parts of the distributions legislation. Consequently, a working group will be established to identify and resolve areas of uncertainty. Comprehensive guidance or legislation will be enacted in 2012.

Debt cap

Further changes to the debt cap rules were announced to enable companies to apply the rules more easily. Broadly, the debt cap rules restrict the deduction of financing costs for large corporate groups, for tax purposes only. The ongoing consultation on the rules has identified practical issues with their application that need to be addressed. Informal consultation will be held in June 2011, followed by draft legislation in autumn 2011.

Loan relationships and derivative contract disregard regulations

The disregard regulations allow companies to defer exchange gains and losses on loan relationships and derivative contracts for tax purposes in certain circumstances, and, therefore, be taxed in accordance with economic reality, rather than in accordance with their accounting treatment. The government will consult on amendments to expand the regulations to cover foreign exchange gains and losses of companies in a further three specific circumstances, where companies:

  1. issue foreign currency preference share capital to raise foreign currency finance;
  2. invest directly in foreign currency partnerships or in foreign currency assets through a partnership; or
  3. agree to sell foreign currency shares and receive the proceeds at some future date. Draft regulations are set to be published for consultation in the next few weeks.
Leasing: anti-avoidance

On 23 March 2011 legislation was introduced to prevent the abuse of the sale of lessor company legislation. The sale of lessor company legislation seeks to impose a charge, at the time of sale, on profits of a lessor company that have been earned, but not recognised for tax purposes, before it changes ownership. The government intends that the new legislation will ensure that all plant and machinery leasing is accounted for when determining whether a company comes within the scope of the rules and that the charge fully reflects any deferred taxable profits. The option to elect out of the charge when a lessor company is sold will also be withdrawn. Additionally, a company that has previously elected out of the charge will bring into account, for tax purposes, the full value to the company of any asset later sold.

Corporate gains: degrouping charges

On 23 March 2011 legislation was introduced to prevent groups of companies avoiding corporation tax on chargeable gains by using arrangements that seek to exploit the ‘associated companies exception’ to a degrouping charge. The degrouping charge rules in s179 of the Taxation of Chargeable Gains Act 1992, ensure that if a company leaves a group holding an asset acquired from a fellow group member within the previous six years, any gain or loss that had been deferred (by the asset being transferred on a no gain/no loss basis between companies in the same group) is duly paid.


Capital gains tax: entrepreneurs’ relief

On 6 April 2011 the lifetime limit for qualifying gains was increased from £5m to £10m.

Income tax and national insurance contributions (NICs) reform

The government intends to consult on a proposed merger of the income tax and NICs systems. A consultation document will be published later this year, outlining the differences in the current systems and options for reform.


From April 2012 the government proposes to increase the annual remittance charge from £30,000 to £50,000 for non-domiciles who have been UK resident for 12 years or more, and who wish to remit foreign income or capital gains to the UK. The £30,000 charge will remain for those who have been resident for at least seven of the past nine years and fewer than 12 years.

From April 2012 the remittance charge will be removed where non-domiciles remit foreign income or capital gain into the UK for the purpose of commercial investment in UK businesses.


The government intends to consult on introducing a statutory definition of residence. A consultation document will be published in June 2011, with implementation planned for April 2012.

Venture capital schemes

April 2011: subject to state aid approval, with effect from 6 April, the rate of income tax relief given under the EIS regime was increased from 20% to 30%.

April 2012: subject to state aid approval, the following changes will be made to the enterprise investment scheme (EIS) and venture capital trust (VCT) regimes:

  • the EIS annual investment limit will be increased from £500,000 to £1m; and
  • several changes will be made to the qualifying conditions relating to becoming EIS or VCT investee companies, including raising the employee limit from 50 to 250 employees, increasing the annual amount that can be invested in an individual company from £2m to £10m, and increasing the gross assets test from £7m immediately before and £8m immediately after the share issue, to £15m before investment.