It was heralded as the Budget of the 3 ‘R’s – Rescue, Reform and Recovery. With many of the tax measures already widely trailed as part of the Government's new approach to tax policy making, last month's Budget nevertheless contained several surprise tax measures aimed at making the UK a more competitive place to do business.

The Chancellor announced new enhancements to current reliefs designed to boost investment and innovation, an additional cut in the main rate of corporation tax and the introduction of some ‘new for old’ measures including the reintroduction of enterprise zones. These are all aimed at boosting support for new and growing businesses.

There were also a number of unexpected moves in areas such as inheritance tax, REITs and investment allowances. And, although it had already been reported by the Office of Tax Simplification, the decision to consult on merging the income tax and national insurance systems will be welcomed, though this is likely to be some distance in the future.

In the area of ‘Dishonest tax agents’, it was announced that further consultation and draft legislation will be published in July 2011 on HMRC's approach in this area with a view to introducing legislation in Finance Bill 2012. Together with our fellow professional bodies, Chartered Accountants Ireland was a strong voice against the original draft legislation published in February 2010. It appears Government have listened to our concerns and are keen to get this legislation right from the outset, though there still remains a question to be answered if this legislation is needed at all.

And, following on from the ongoing focus on avoidance by the Government, there were a number of not unexpected detailed measures in this area.

To access HM Treasury's extensive suite of Budget 2011 documents visit http://www.hm-treasury.gov.uk/2011budget.htm.

Competitiveness Measures

Under the banner of creating the most competitive tax system in the G20 the Government announced that it will:

• Reduce the main rate of corporation tax by a further 1 per cent;

From April 2011, the rate will be reduced to 26% (and not 27% as announced last June) finally settling to 23% by 2014. But not all industries will benefit. As a result of this additional 1% decrease, the rate of the Bank Levy will increase to 0.078 per cent from 1 January 2012. And, having cut fuel duty on Budget day, the fuel duty escalator is being replaced with a fair fuel stabiliser that increases tax on North Sea oil production when oil prices are high. The Government also announced an increase to the Supplementary Charge on oil and gas production to 32 per cent from 24 March 2011.

• Implement the Corporate Tax Road Map announced last November;

This will include introducing new Controlled Foreign Company (CFC) rules in Finance Bill 2012 with the aim of allowing groups based in the UK to compete more effectively with those based overseas whilst protecting against the artificial diversion of UK profits.

A further consultation document will be published in May 2011, followed by draft legislation in autumn 2011. The new rules will include a finance company partial exemption that, in broad terms, results in an effective UK tax rate of one quarter of the main rate on profits derived from overseas group financing arrangements (equivalent to 5.75 per cent by 2014). This will be preceded by interim changes to the current CFC rules in Finance Bill 2011 for accounting periods beginning on or after 1 January 2011 to make the rules easier to operate ahead of full reform next year.

An opt-in exemption from corporation tax on the profits of foreign branches of UK companies will be introduced in Finance Bill 2011. This is aimed at contributing to the Government's strategy of a more territorial corporate tax system to help make the UK a more competitive location for international businesses.

• Continue consultation on taxation measures surrounding the proposed “Patent Box” with a further consultation on the introduction of a patent box in May 2011 setting out details on how the regime will operate, followed by draft legislation in autumn;

The Patent Box will provide a reduced 10% corporate tax rate for profits from patents, which it is hoped will encourage UK businesses to retain high-value jobs associated with commercialisation of patents and to invest further in innovation.

• Continue and respond to the work of the Office of Tax Simplification (OTS);

This will include abolishing 43 tax reliefs deemed no longer valid (a list of the reliefs to be abolished, some of which will disappear from 1 April 2011, can be found on pages 66 to 68 of HM Treasury's Budget 2011 document).

And, as proposed by the OTS, the Government intends to consult this year on options for integrating the operation of income tax and National Insurance Contributions (NICs).

However, it recognises that any change will be complex and involve a wide range of policy and implementation issues. The Government will consult this year on the options, stages and timing of reform. It intends to maintain the contributory principle and will reflect this in any changes it brings forward. In addition, the Government will not extend NICs to individuals above State Pension Age or to other forms of income such as pensions, savings and dividends.

Whilst the OTS originally put forward three separate options to achieve this, the Government has now decided to retain IR35 on the basis that it's abolition would put substantial revenue at risk.

Following publication of the OTS interim review of small business tax, the Government has, however, committed to making clear improvements in the way IR35 is administered.

The intended improvements will include setting up a dedicated helpline staffed by specialists, publishing guidance on those types of cases HMRC view as outside the scope of IR35, targeting compliance activity by restricting reviews to high risk cases and setting up an IR35 Forum which will monitor HMRC's new approach.

As part of the second stage of the OTS review of small business tax, the OTS will look at improving tax administration for small business, with recommendations to the Government for Budget 2012. Further detail on this work, the Government's response to OTS reviews, and future work of the OTS will be announced before summer 2011.

Start, Grow, Finance, Innovate Measures

The Government's announcements in these areas were as follows:–

• Reform is to be undertaken of the Enterprise Investment Scheme and Venture Capital Trusts;

The rate of EIS income tax relief will go to 30% from April 2011. From April 2012 the Government will increase the annual EIS investment limit for individuals to £1 million, increase the qualifying company limits to 250 employees and gross assets of £15 million (EIS and VCT), and increase the annual investment limit for qualifying companies to £10 million (EIS and VCT).

The Government will also consult on options to provide further support for seed investment, simplification of the EIS rules by removing some restrictions on qualifying shares and types of investor and refocusing both EIS and VCTs to ensure they are targeted at genuine risk capital investments. All changes are subject to EU State aid clearance (Finance Bill 2011 for rate increase in 2011, Finance Bill 2012 for other changes).

• Subject to EU approval, the SME rate of R&D tax credit will increase to 200% from April 2011 and 225% from April 2012.

Having considered in more detail the recommendations of Sir James Dyson in his March 2010 report in this area, the Government has reaffirmed its commitment to research and development (R&D) tax credits. Following consultation, the Government announced an intention to also simplify the R&D tax credit schemes.

This will include removing the Pay As You Earn/NICs cap on the amount of payable credit that can be claimed, removing the minimum expenditure rules and allowing relief through the large company scheme for subcontracted activity which forms part of a wider R&D project.

The Government will publish a response to the consultation in May 2011, which will include a consultation on the detail of proposed changes. Note however that Vaccines Research Relief will be reduced to 20% for SMEs from April 2011 and not available to SMEs from April 2012 (Finance Bill 2011 for April 2011 increase to the SME scheme rate of relief and April 2011 decrease to Vaccines Research Relief, Finance Bill 2012 for other changes).

• A doubling of the lifetime limit for Entrepreneurs Relief to £10 million;

Effective from 6 April 2011, the lifetime limit on capital gains qualifying for Entrepreneurs’ Relief (where eligible gains are taxed at a 10 per cent rate of Capital Gains Gains Tax) will increase from £5 to £10 million.

Once implemented, the lifetime limit of £2 million as at 6 April 2010 will have increased fivefold in the space of just over nine months.

Encouraging Investment and Exports

This included a range of measures of as follows:-

• The limit for capital allowances short life assets election will be extended from four to eight years from April 2011.
• From 2012 the Business Premises Renovation Allowance scheme will be extended for a further five years (readers should be aware that the entire Northern Ireland region currently counts as an assisted area for the purposes of this relief).
• 21 new Enterprise Zones will be set-up.

As part of the Enterprise Zones initiative, the Government will consider, in a limited number of cases, the scope for introducing enhanced capital allowances to support Enterprise Zones in assisted areas, where there is a strong focus on high value manufacturing.

The Government has also confirmed that it will work with the various devolved administrations to explore opportunities for employing the new Enterprise Zone model, which will initially be limited to 11 named areas, followed by a further 10 later this year, across the UK.

Non-doms and Tax Residence

Turning to the area of non-doms and residence, reform was announced to these taxation rules. The Government will consult on the detail in June ahead of legislating in Finance Bill 2012.

• The existing £30,000 annual charge will be increased to £50,000 for non-domiciled individuals who have been UK resident for twelve or more years and who wish to retain access to the remittance basis of taxation. The £30,000 charge will be retained for those who have been resident for at least seven years but less than twelve years;
• The tax charge will be removed when non-domiciled individuals remit foreign income or capital gains to the UK for the purpose of commercial investment in UK businesses;
• Technical simplifications are planned to some aspects of the current rules to remove what is classed by Government as “undue administrative burdens” for non-domiciled individuals;
• The current rules that determine tax residence for individuals are deemed as being unclear and complex. The Government will consult in June on the introduction of a statutory definition of residence to provide greater certainty for taxpayers.

Anti-avoidance Measures

In its ongoing crack down on avoidance, detailed measures and policies in this area were announced last Wednesday targeted at raising around £4 billion over the current Parliament. These measures are intended to balance long-term improvements to the anti-avoidance framework with targeted measures to prevent particular schemes spreading.

Building on the commitments made last year, the Government also published Tackling Tax Avoidance, which:

• Initiates reviews of legislation which have been subject to repeated attempts at tax avoidance;

To be known as a Programme of reviews of high risk areas, the Government also set out work to improve areas of legislation that it considers have been subject to repeated attempts at tax avoidance. The first areas for review will be income tax losses and Unauthorised Unit Trusts.

• Outlines proposals to counter the continued use and marketing of highly aggressive and artificial tax avoidance schemes; and
• Sets the criteria for deciding whether to announce a change to tax law that has immediate effect including publishing a Protocol on the circumstances in which it will be prepared to announce a change to tax law that has immediate effect, other than at the Budget time;

The Budget also included measures which target specific avoidance schemes. This includes new measures to address the abuse of stamp duty land tax rules (effective from 24 March 2011); to amend the sale of lessors anti-avoidance legislation (effective from 23 March); and to clarify the degrouping charge rules affecting corporate gains (also effective from 23 March).

Specific avoidance areas targeted are as follows:

Listed tax avoidance schemes – the Government will consult in May 2011 on proposals to counter the continued marketing and use of highly aggressive and artificial tax avoidance schemes. Subject to consultation, the Disclosure of Tax Avoidance Schemes (DOTAS) regime will be extended to enable the listing of specific tax avoidance schemes for direct taxes so that the subsequent use of such schemes will carry consequences for the user. Options under consideration include a surcharge for late payment of the tax (Finance Bill 2012).

DOTAS: improvements – A group of measures improving the DOTAS regime took effect on 1 January 2011 following consultation. The measures included some refinements to the hallmarks (the descriptions of schemes to be disclosed). The Government will hold further informal consultations over the summer on the remaining changes to the hallmarks. Subject to consultation changes will be implemented in 2011–12.

DOTAS: inheritance tax – Regulations have now been laid to bring inheritance tax, as it applies to transfers of property into trust, within DOTAS. These come into effect on 6 April 2011 and will require disclosure of new and innovative IHT avoidance schemes involving transfers into trust.

Tax treaties – The Government will introduce legislation that will ensure that relief from tax is not given where a claim is made under UK double taxation treaties and where tax avoidance arrangements have been made in relation to the claim (Finance Bill 2012).

Employer asset-backed pension contributions – The Government will consult on changing tax rules to limit the amount of tax relief available to employers when they make asset-backed contributions to their defined benefit pension schemes so that the tax relief accurately reflects the increase in fair value of pension plan assets, while maintaining flexibility for employers and schemes (Finance Bill 2012).

Changes to capital allowances anti-avoidance legislation – The Government will consult in May 2011 on replacing the existing test for the application of the capital allowances anti-avoidance rules with a new test to bring it in line with other anti-avoidance rules and on amendments to make the rules more effective (Finance Bill 2012).

Capital allowances: fixtures mandatory pooling – The Government will consult in May 2011 on introducing a requirement that businesses pool their expenditure on fixtures within a short period after acquisition in order to qualify for capital allowances (Finance Bill 2012).

Air Passenger Duty

In the June Budget 2010, the Government undertook to explore changes to the aviation tax system, including switching from a per-passenger to a per-plane duty. It was announced last month that the Government will not introduce a per-plane duty at the present time, given concerns over the legality and feasibility of this approach.

However, it is intended that the Government will start a programme of intensive work with its international partners to build consensus for a per plane duty in the future.

Consultation was also launched on reform of Air Passenger Duty with the aim of a simple tax system for air transport services which does not hamper growth, ensures a fair contribution toward the public finances and which will also support the reduction of global emissions.

The consultation includes plans to extend the tax system to flights taken aboard business jets for the first time. The Government will also freeze Air Passenger Duty rates for 2011–12, with the RPI increase assumed in the forecast deferred to April 2012.

Tax Measures Affecting Charities

There were various measures in this area:-

Gift Aid benefit limits – The Gift Aid benefit limit will be increased from £500 to £2,500, subject to the existing 5%, from April 2011. New guidance will be published to help clarify what constitutes a benefit (Finance Bill 2011).

Gift Aid small donations scheme – From April 2013, the Government will introduce a new scheme to allow charities to claim Gift Aid on up to £5,000 of small donations without the need for Gift Aid declarations.

Gift Aid online filing – The Government confirms that it will introduce an online system for charities to claim Gift Aid and as a first step will shortly be publishing ‘intelligent’ forms (which contain automatic checks) for charities to use to apply for and claim tax reliefs.

In-year repayments on tax to charities – The Government will legislate an extra statutory concession under which HMRC makes repayments of tax to certain charities without requiring a tax return to be completed (Finance Bill 2012).

Miscellaneous Measures of Interest

Other measures of interest are listed as follows:-

• Reform of the stamp duty land tax rules applied to bulk purchases for residential properties will be undertaken (Finance Bill 2011);
• Measures to make Real Estate Investment Trusts easier to set up and more accessible to investors will be introduced (Finance Bill 2012);
• A reduced rate of inheritance tax to 36 per cent from April 2012 for estates leaving 10 per cent or more to charity;
• The annual exempt amount for capital gains tax will increase to £10,600, with effect from 6 April 2011;
• Single payment scheme and capital gains tax roll-over relief – following changes to the underlying EU legislation, the Government will restore entitlements under the EU Single Payment Scheme to the list of assets that qualify for capital gains tax roll-over relief (Finance Bill 2012);
• The inheritance tax nil rate band is frozen until April 2015;
• The list of designated energy saving technologies qualifying for enhanced capital allowances will be updated during summer 2011, subject to agreement with the European Commission;
• From 1 April 2011 the associated company rules will be simplified to ensure that companies can only be associated, through an attribution of rights between connected individuals, when substantial commercial interdependence exists between the companies concerned (Finance Bill 2011);
• Company Car Tax for cars emitting less than 95g/km will be frozen from April 2013. The Government will increase Company Car Tax for all vehicles with carbon dioxide emissions between 95g/km and 219g/km by 1 percentage point from the same date;
• From 1 April 2011, the VAT registration threshold will be increased from £70,000 to £73,000 and the deregistration threshold from £68,000 to £71,000;
• The Government will mandate online VAT registration, de-registration and variations, and make other changes, including removal of the UK VAT registration threshold for non-established businesses, with effect from 1 August 2012;
• The Government will also put forward regulations which, subject to consultation, will require all remaining VAT customers to file their VAT returns online and pay electronically from 1 April 2012 (Finance Bill 2012);
• Digital by Default consultation – The Government will consult in the summer on the implementation of mandatory online registration for the main business taxes by 2012–13;
• The Government will consult in 2011 on modernising the administration of the personal tax system to make it more transparent and accessible to individual taxpayers;
• For motorists who are required to use their own vehicle for work, the Approved Mileage Allowance Payments (AMAPs) rate will rise to 45p per mile for Budget 2011 and 25p per mile thereafter. In addition to claiming AMAPs rates, an allowance for passenger payments currently in place for business employees, at 5p per passenger per mile, will be extended to volunteers;
• From 6 April 2011, the fuel benefit charge multiplier used to calculate the tax payable on free fuel for company cars will increase by indexation only from £18,000 to £18,800;
• The Government announced a freeze in the level of van fuel benefit charge at £550 for 2011–12. The van benefit charge will also be frozen at £3,000 in 2011–12;
• The Government will legislate to transpose the EU Mutual Assistance Recovery Directive into UK law, providing for mutual assistance between Member States in the recovery of tax debts and related measures (Finance Bill 2011);
• Formal consultation will be published in June?2011 on options to simplify regulatory penalties;
• Following consultation, from 1 April 2012 HMRC data-gathering powers will be updated so that they can more effectively target non-compliant taxpayers (Finance Bill 2011);
• Following consultation earlier in 2011, the Government will publish a finalised tax consultation framework shortly;
• HMRC will expand the existing administrative burden reduction target to include wider taxpayer compliance costs. Over the Spending Review period any increase in administrative burdens must be met by equal reductions in other areas of the tax system;
• HMRC will be able from April 2012 to require a security from employers where there is a serious risk that tax due under PAYE or Class 1 NICs will go unpaid (Finance Bill 2011).

Commenting on the Code of Practice on Taxation for Banks which was introduced to ensure that banks follow the spirit as well as the letter of the law, the Government also confirmed that two hundred banks have now adopted the Code, including the top 15 banks operating in the UK.

Distributions working party – Legislation was introduced in Finance (No.3) Act 2010 covering the tax treatment of company distributions received in a narrow set of circumstances.

An industry working group will assist HMRC in identifying and resolving the areas of difficulty. Issues will be addressed by publishing comprehensive guidance or enacting legislation. If legislation is required, the Government will consult on draft clauses in the autumn (Finance Bill 2012).

Amendments to the tax treatment of financing costs and income – The Government recognises that consultation on the debt cap has identified practical issues with the application of the rules, such as the de minimis amount, that need to be addressed. Following further consultation in June 2011, the Government will introduce legislation to allow businesses to more easily apply the debt cap rules (Finance Bill 2012).

Amendments to the loan relationship and derivative contract disregard regulations – The Government will introduce secondary legislation in 2011 to implement changes to the Disregard Regulations. These changes will align tax treatment with the economic position for companies which use loan relationships and derivative contracts to reduce their exposure to foreign exchange fluctuations in certain circumstances.