FINANCE BILL 2002: EXPLANATORY NOTE
CLAUSE 32: CORPORATION TAX - STARTING RATE AND FRACTION FOR FINANCIAL YEAR 2002
SUMMARY
This clause provides for the starting rate of corporation tax for the financial year beginning 1 April 2002 to be 0 per cent, and for the fraction used in calculating marginal relief from the small companies? rate to be nineteen four-hundredths.
BACKGROUND NOTE
1. The starting rate is being reduced from 10 per cent to zero. Companies with profits of up to £10,000 are subject to this rate.
2. Companies with profits between £10,000 and £50,000 (the lower and upper profits limits) benefit from marginal relief, which eases the transition to the small companies? rate (now 19 per cent). These companies are charged at an average rate lower than the small companies? rate. This is achieved by applying the small companies? rate to the full taxable profits, then reducing the resulting tax charge by a given fraction of the amount by which the upper limit exceeds those profits.
3. The fraction is being changed from one fortieth to nineteen four-hundredths to preserve a gradual rate of transition to the small companies? rate.
4. The example below illustrates the effect of marginal relief for a company with taxable profits of £20,000. Its tax liability is calculated as follows:
| £20,000 @ 19% | £3,800 |
| less nineteen four-hundredths of £30,000 (upper limit of £50,000 less the profits of £20,000) |
1, 425 |
| Tax payable: | £2,375. |
5. The same result is achieved by the following calculation:
| £10,000 (profits up to lower limit) at 0% (the starting rate) |
£0 |
| plus £10,000 (balance of profits) at 23.75% (the ?marginal rate?) |
2, 375 |
| Tax payable: | 2, 375. |
6. The reduction of the small companies? rate to 19 per cent and the starting rate to zero saves the company in this example £875 on its annual corporation tax bill.
7. As with the other rates, where two or more companies are associated with each other, the profits limits for the starting rate are divided by the number of associated companies.
8. Around 150,000 companies and unincorporated associations are subject to the starting rate, and so will have no corporation tax to pay for 2002-03. A further 160,000 companies benefit from marginal relief from the small companies? rate.