By John Bird, Christie Buck, Tom Downing, Derek Henderson, Phil Richards, Andrew Wilde, Richard Williams and James Wright

As in recent years, the U.K. 2008 Budget again heralds no major surprises for large U.K. companies and groups investing into the U.K. As announced in the 2007 Budget, the key change is that the U.K. corporation tax rate will be reduced from 30% to 28% from April 2008.

International Matters

The Budget included no further announcements on international tax matters following the consultation in summer 2007 on the taxation of foreign profits, which proposed a European-style participation exemption for dividends and a passive income Controlled Companies regime. A further consultation document is, however, promised before summer 2008. Therefore, in the context of foreign profits reform, there has been no further statement on the potential restriction of interest deductibility. In the meantime, limited changes to tighten up the existing controlled foreign companies (CFC) rules have been announced, targeting, among others, some “decontrol” structures used to shelter overseas income from U.K. tax.

Change in Corporation Tax Rate – Deferred Tax Implications

The fall in the main corporation tax rate from 30% to 28% was enacted in Finance Act 2007. Under U.K. GAAP and International Accounting Standards, deferred tax provisions should be calculated by applying the lower rate for periods ending after 26 June 2007. Under U.S. GAAP, the new rate will apply for deferred tax purposes for periods ending after 19 July 2007. A blended rate should be applied to timing differences expected to reverse in accounting periods straddling 1 April 2008.

Targeted Changes to Financing Arrangements

Targeted changes in respect of certain financing arrangements, including disguised interest, were announced in advance of a new “principles based” approach to financial products planning arrangements, which will now be the subject of further consultation and is expected to be introduced in 2009.

Tax Depreciation

The Budget confirmed the reform of the tax depreciation system from 1 April 2008, including:

Companies will need to consider the impact of these changes on their deferred tax balances.

In addition to the above previously announced changes, the Budget announced that loss-making companies will be able to claim a cash payment in respect of allowances on designated energy-saving or environmentally beneficial plant and machinery from 1 April 2008.

Research and Development Tax Credits

The Budget also confirmed the increase in the rate of the R&D tax credit from 125% to 130% for large companies and from 150% to 175% for small and medium-sized enterprises.

Review of Links with Large Business

A further document on the review of links between HM Revenue & Customs (HMRC) and large business has been published. This document:

Reform of Capital Gains Tax

The government confirmed the replacement of the existing capital gains tax regime, which taxes individuals on gains on the disposal of business assets at an effective rate of as little as 10%, with a new regime incorporating a flat rate of 18%. These changes only apply to individuals and companies will not be affected by this reform. In particular, the substantial shareholdings exemption, which exempts companies from gains on sales of most shareholdings in trading companies, will still apply.

Taxation of Non-U.K. Individuals

The government also confirmed that the proposed reform of the U.K.’s residence and domicile rules will go ahead but they appear to have listened to representations made and have introduced some sensible relaxations. The existing rules tax overseas nationals living in the U.K. on their foreign income and gains only if they are remitted to the U.K.

A GBP 30,000 annual charge will be introduced from 6 April 2008 for overseas nationals who have been living in the U.K. for more than seven of the past 10 years and who wish to retain the remittance basis. This is designed to allow overseas nationals to come on secondment to the U.K. without being affected by the charge. The U.K. government’s view is that this charge will be treated as income or capital gains tax for the purpose of double tax treaties.

Transitional Period for VAT Claims

Recent case law overturned the three-year time limit for VAT claims, allowing claims relating to periods from 1973 to 1997. The government announced that this will only apply for a transitional period up until 31 March 2009, after which the three-year time limit will apply to all periods.

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