FINANCE BILL 2000
CLAUSE 36: CORPORATION TAX CHARGE AND RATES SMALL COMPANIES? RATE FOR FINANCIAL YEAR 2000
SUMMARY
This clause provides for the small companies? rate of corporation tax for the financial year beginning 1 April 2000 to be 20 per cent, and for the fraction used in calculating marginal relief for small companies to be one fortieth (the same as for the previous year).
BACKGROUND
1. Companies with taxable profits between £50,000 and £300,000 pay corporation tax at the small companies? rate.
2. Companies with profits between £300,000 and £1,500,000 (the lower and upper profits limits) benefit from marginal relief. They are charged at an average rate lower than the main (30 per cent) rate, but greater than the small companies? rate. This is achieved by applying the main rate and then reducing the tax charged by a given fraction of the amount by which £1,500,000 exceeds the profits. This marginal relief has the effect of easing the transition from the small companies? rate to the main rate.
3. The example below illustrates the effect of marginal relief for a company with taxable profits for £500,000. Its tax liability is calculated as follows:
- £500,000 at 30% £150,000 less one fortieth of £1,000,000 (upper profits limit of £1,500,000 less the profits of £500,000) £25,000 Tax payable £125,000.
The same result is achieved by the following calculation:
- £300,000 at 20% (the small companies? rate) £60,000 plus £200,000 at 32.5% £65,000 Tax payable £125,000.
4. With effect from 1 April 2000, companies with profits of up to £10,000 pay corporation tax at the starting rate of 10 per cent (introduced in the Finance Act 1999). Marginal relief is given to companies with profits between £10,000 and £50,000, to ease the transition between the starting rate and the small companies? rate.
5. Where two or more companies are associated together, the profits limits for both the small companies? rate and the starting rate are divided by the number of associated companies.
6. About 270,000 companies (over 60 per cent of all taxpaying companies) will benefit from the starting rate. In addition, over 100,000 companies will benefit from the small companies? rate.