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BN 01: Corporation Tax Rates

Who is likely to be affected?

1. Most companies with profits chargeable to corporation tax of less than £50,000.

General description of the measure

2. The reduction of the starting rate of corporation tax to 0% in April 2002 has resulted in a significant number of small businesses incorporating solely or mainly for tax and NIC reasons rather than as a step to growth.

3. This measure will simplify the corporation tax position for small companies with a single CT rate replacing the starting and non-corporate distribution rates.

4. There will be no changes to the current small companies and main rates, nor to the profit limits and fraction used in smoothing the differences between these rates (marginal small companies’ relief).

Operative date

5. The new rates will apply from1 April 2006.

Current law and proposed revisions

6. The various corporation tax rates are to be found in the Income and Corporation Taxes Act 1988. The provisions in respect of the starting rate are at Section 13AA and those for the non-corporate distribution rate at Section 13AB and Schedule A2.

7. The rate at which corporation tax is payable depends on the amount of a company’s profits for the financial year in question. Corporation tax is charged at the starting rate (currently 0%) where profits are £10,000 or less, the small companies’ rate (currently 19%) where profits are between
£50,001 - £300,000, and the main rate (currently 30%) where profits exceed £1,500,000. Marginal relief is given to smooth the transition from one rate to another.

8. In addition, where a company makes a distribution on or after 1 April 2004 to a non-corporate person (a recipient who is not a company) a minimum rate of 19% is applied to the profits distributed.

9. This measure will remove the starting and non-corporate distribution rates from 1 April 2006. This will result in a much simpler regime with profits charged at either the small companies’ rate or the main rate, with marginal relief for companies with profits between the limits.

Further advice

10. If you have any questions about this change, please contact your local HMRC office. Information about Budget measures and on how to contact local offices is now available.