The Chancellor, George Osborne, delivered his 2011 Budget Report on 23 March 2011. This update summarises the key announcements for finance lawyers.

For details of PLC's comprehensive coverage of the 2011 Budget, including tailored practice area updates, see PLC 2011 Budget.

References in this note to "Overview" are to the HM Revenue & Customs and HM Treasury Overview of Tax Legislation and Rates, published on 23 March 2011.

The government confirmed that the asset purchase facility will remain in place for the 2011-12 financial year. Pursuant to the asset purchase facility, a wholly owned subsidiary of the Bank of England has, since 2 February 2009, been authorised by the government to purchase from banks, other financial institutions and financial markets "high quality private sector assets", including corporate bonds, commercial paper, syndicated loans and certain asset-backed securities created in "viable securitisation structures".

For more information, see HM Treasury: 2011 Budget report, paragraph 1.29, page 35.

For more on the asset purchase facility, see Asset purchase facility: developments tracker.

The government has confirmed that the bank levy will be introduced in the Finance Bill 2011. For details of the bank levy including rates for 2011, see Practice note, Bank levy.

However, the government announced in the 2011 Budget that the rates of the bank levy from 1 January 2012 will be higher than previously announced; this is to offset the benefit to banks of the cut in corporation tax (see Corporation tax rates reduced). The bank levy rates from that date will be:

For more information, see Legal update, 2011 Budget: key business tax announcements: Bank levy rates increased.

For more on the bank levy in the context of tax indemnity and increased cost clauses in facility agreements, see Drafting note, Facility agreement: Bank levy and Increased costs: Part 2, Schedule 5.

For the 2011 Budget announcement, see HM Treasury: 2011 Budget report, paras 1.74, 1.90 and 2.87, pages 27, 30 and 58.

The main rate of corporation tax will be reduced by a further 1%, following the four annual reductions announced in the June Budget 2010 (see Legal update, June 2010 Budget: key business tax announcements: Corporation tax rates reduced from 2011-12). From April 2011, the rate will be reduced from 28% to 26% and, by 2014, it will reach 23%. The main rate applies to companies and groups whose annual profits exceed £1.5 million.

For more information, see Legal update, 2011 Budget: key business tax announcements: Corporation tax rates further reduced from 2011-12 and HM Treasury: 2011 Budget report, paragraph 1.74, page 27.

Entrepreneurs' relief is relevant to the tax treatment of loan notes where these are issued by a buyer to a seller (or sellers) as an alternative to cash in a share purchase transaction. The government announced that, effective from 6 April 2011, the lifetime limit on capital gains qualifying for entrepreneurs' relief (where eligible gains are taxed at a 10% rate of capital gains tax) will be doubled to £10 million.

For more information, see HM Treasury: 2011 Budget report, paragraph 1.85, pages 29 to 30.

For more on the tax treatment of loan notes issued as share consideration, see Drafting note, Loan note instrument (share consideration): Tax treatment of loan notes: individual sellers.

The government announced that it will set up an industry working group from April 2011 to look at any tax issues associated with new bank capital instruments developed in the light of the Basel III proposals and, if necessary, will legislate in the Finance Bill 2012.

For more information, see HM Treasury: 2011 Budget report, para 2.88, page 58.

For more information on Basel III, see Practice note, Basel III: an overview.

The government will make regulations introducing direct tax rules for Sharia-compliant variable loan arrangements and derivatives in 2011, following formal consultation with industry. For more information on Sharia-compliant financing and derivatives, and tax issues in relation to them, see:

No further details of this measure were provided as part of the 2011 Budget. However, this does signify that the government is continuing to seek to tax Sharia-compliant transactions in the same way as their "conventional" counterparts.

For more information, see Overview, para 3.33: Islamic Finance, page 25.

The government announced that the Finance Bill 2011 is to include legislation providing a further remedy for the potential adverse tax and regulatory consequences for some types of debt securities that resulted from amendments made to article 77 of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (SI 2001/544) by the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2010 (SI 2010/86).

For more information, see Legal update, 2011 Budget: key business tax announcements: Securitisation: further remedy for adverse effects of amended "specified investment" definition.

The government has announced further possible changes to the debt cap rules (that is, what finance expenses may be deducted by corporate taxpayers when calculating their tax liability).

In the 2011 Budget, the government stated that ongoing consultation on the rules had identified practical issues with their application that need to be addressed. The government is to hold a consultation in June 2011, followed by draft legislation in autumn 2011 with a view to including the legislation in the Finance Bill 2012. The stated aim of this exercise is to allow businesses to apply the debt cap more easily.

For more information, see Legal update, 2011 Budget: key business tax announcements: Debt cap: further amendments.

The rules on taxing loan relationships and derivatives in accordance with economic reality, rather than in accordance with their accounting treatment, are to be expanded.

Under the Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) Regulations 2004 (SI 2004/3256) (Disregard Regulations), in certain circumstances, companies may be taxed in relation to financial instruments hedging assets or liabilities in accordance with the economic reality rather than (as is usually the case) in accordance with the accounting treatment. This can be useful if, for example, a derivative is accounted for on a fair value basis (giving rise to credits and debits for foreign exchange movements) but the hedged item is not.

In the 2011 Budget, it was proposed that the Disregard Regulations be expanded to cover foreign exchange gains and losses of companies. For detailed information on these proposals, see Legal update, 2011 Budget: key business tax announcements: Reducing exposure to foreign exchange movements.

The government is to hold an informal consultation on its proposals in May 2011 before producing the enacting secondary legislation for comment "in the first half of 2011".

The government has confirmed certain measures it is going to take in relation to capital allowances, which were announced in the June 2010 Budget (see Legal update, June 2010 Budget: issues for finance lawyers: Capital allowances: writing down allowances and annual investment allowance reduced). As previously announced, the government will, from April 2012:

The legislation for these measures will be included in the Finance Bill 2011.

These changes may be of interest to finance lawyers involved in leasing transactions, as the nature and extent of capital allowances available to a lessor (against the acquisition cost of an asset) may be a factor in determining whether that lessor enters into a finance lease.

For more information, see HM Treasury: 2011 Budget report, paras 1.95 and 2.72 to 2.73, pages 31 and 56.

For information on capital allowances in connection with finance leases, see Practice note, Equipment leasing: tax: Capital allowances.

In the 2011 Budget, the government confirmed its previous announcement, made on 9 December 2010, that it will introduce legislation to ensure that the tax treatment of leases is not affected by future changes to lease accounting standards.

New accounting standards are expected to be introduced from 2011, broadly removing the accounting distinction between operating and finance leases (by bringing operating leases onto the balance sheet). For more information on the proposed changes to accounting standards and their impact, see Legal update, IASB and US FASB proposals on lease accounting.

For more information, see HM Treasury: 2011 Budget report, para 2.110, page 60.

For background information on the previous announcement, see Legal update, Taxation of leases: draft Finance Bill 2011 clauses.

The government has announced or confirmed the introduction of anti-avoidance legislation and announced a number of consultation proposals. These include:

The Code of Practice on Taxation for Banks (Code) was introduced in December 2009. It aims to counter tax avoidance and is voluntary. The government announced that 200 banks have adopted the Code.

For more information, see HM Treasury: 2011 Budget report, paragraph 1.91, page 30.

For background on the Code, see Legal update, March 2010 Budget: key business tax announcements: Code of Practice on Taxation for Banks.

The government announced £200 million of new funding for rail projects, as part of wider investment of over £30 billion in transport projects over the next four years. For further details, see PLC Construction, Legal update, 2011 Budget: construction industry implications: Infrastructure projects and transport and HM Treasury: 2011 Budget report, paragraph 1.96, page 31.

The government previously announced that it would be setting up a green investment bank to help the UK move to a low-carbon economy, a development of potential interest for project finance lawyers (for background, see Legal update, June 2010 Budget: issues for finance lawyers: New green investment bank proposed and PLC Environment, Legal update, Green Investment Bank: further details emerge).

In the 2011 Budget, the government announced that the initial capitalisation of the green investment bank will be £3 billion and that it will begin operation in 2012-13, a year earlier than previously anticipated.

For more information, see HM Treasury: 2011 Budget report, paras 1.112 and 2.22, pages 33 and 51 and PLC Environment, Legal update, 2011 Budget: environmental announcements: Green Investment Bank.

After the financial crisis, one of the measures introduced by the government for homeowners in financial difficulty was the Support for Mortgage Interest (SMI) scheme. For more information on this scheme, see Practice note, Help for residential borrowers struggling with mortgage repayments: Where can the borrower get financial help?.

In the 2011 Budget, the government announced that the waiting period for new working-age SMI claimants will remain at 13 weeks and the limit on eligible mortgage capital will remain at £200,000 for one year from January 2012.

For more information, see HM Treasury: 2011 Budget report, paragraphs 1.121 and 2.60, pages 34 and 55.

HM Treasury's Plan for Growth, published alongside the 2011 Budget Report, outlines a number of government initiatives to stimulate growth, particularly in the context of supporting UK exporters and encouraging trade and inward investment. Some of the initiatives are new, although many have been announced before the 2011 Budget. They include:

For more on the letter of credit guarantee scheme, see Practice note, Letters of credit: overview: ECGD support for UK banks confirming letters of credit.

For more information, see HM Treasury: 2011 Budget report, paragraph 1.100, page 31 and HM Treasury: The Plan for Growth, paras 2.62 to 2.87, pages 57 to 61.

The Plan for Growth also sets out the government's measures to enable SMEs to access finance and other forms of credit support. As with other 2011 Budget announcements, some of the measures are new, although others have previously been announced (see, Legal updates, Finance for business: government response and Banks to increase lending to businesses under Project Merlin). They include:

For more information, see HM Treasury: The Plan for Growth, paras 2.88 to 2.114, pages 63 to 67.

As part of its initiatives to reduce costs to businesses, the government is to call on the Office of Fair Trading to investigate claims that lending agreements frequently contain clauses that unfairly restrict competition in the audit market. In July 2010, the Organisation for Economic Co-operation and Development suggested that some banks will only lend to customers if they agree to have their audits undertaken by the top-tier firms.

For more information, see PLC Competition, Legal update, Government's Plan for Growth - competition issues and HM Treasury: The Plan for Growth, paragraph 2.146, page 78.