IR19

9 March 1999

HELP FOR SMALL COMPANIES

NEW 10 PER CENT STARTING RATE OF CORPORATION TAX

Around 270,000 small and growing companies will benefit from the
Chancellor's proposal to introduce a new 10 per cent rate of
corporation tax from 1 April 2000. This change enhances the UK's
corporation tax regime, already one of the most competitive among
major industrialised countries.

Cuts of 1 per cent in the small companies' rate and the main rate of
corporation tax, announced last year, come into effect from 1 April
1999. This brings the total cuts in these rates to 3 per cent over
the life of this Parliament, reducing them to 20 per cent and 30 per
cent respectively.

The main rate of corporation tax is also being set at 30 per cent for
the year from 1 April 2000.

DETAILS

1. For the financial year 2000 (the year beginning 1 April 2000), a
company with taxable profits of up to #10,000 will be liable to
corporation tax at the new starting rate of 10 per cent. Companies
with taxable profits between #10,000 and #50,000 will also benefit,
through a lower average rate.

2. Marginal relief will ease the transition from the starting rate to
the small companies' rate. The fraction for calculating this marginal
relief will be one fortieth, (subject to any change in the small
companies' rate when it is set for the year from 1 April 2000).
Companies with taxable profits between #50,000 and #300,000 will
continue to pay corporation tax at the small companies' rate.

3. The new starting rate of 10 per cent will be the lowest rate of
corporation tax for small companies among major industrialised
countries. Within the European Union, the United Kingdom already has
the most generous combination of a low rate and a high profits limit
for small companies.

4. Like the small companies' rate, the new 10 per cent rate will not
apply to close investment holding companies.

5. The main rate of corporation tax, payable by companies with
taxable profits of #1,500,000 or more, will be 30 per cent for the
year from 1 April 2000, unchanged from 1999. The lower and upper
profits limits, which establish whether a company is eligible for the
small companies' rate or small companies' marginal relief, will also
remain unchanged at #300,000 and #1,500,000.

NOTES FOR EDITORS

1. In the July 1997 Budget the main rate of corporation tax was
reduced from 33 to 31 per cent and the small companies' rate from 23
to 21 per cent, both with effect from 1 April 1997. In last year's
Budget the rates were cut again to 30 per cent and 20 per cent
respectively with effect from 1 April 1999.

2. The main rate of corporation tax is paid by companies with taxable
profits of #1,500,000 or more. Approximately 10 per cent of companies
which pay corporation tax do so at the main rate, contributing around
85 per cent of the total yield.

3. Currently, companies with taxable profits of up to #300,000 pay
corporation tax at the small companies' rate. Around 85 per cent of
taxpaying companies are charged at this rate.

4. For companies with profits in the band between #300,000 and
#1,500,000, the benefit of the small companies' rate is progressively
withdrawn by increasing the average rate of tax gradually from the
small companies' rate to the main rate as profits increase. A
statutory formula reduces the tax charged at the main rate by a
fraction of the amount by which #1,500,000 exceeds the profits. The
fraction for the financial year 1999 was set by the Finance Act 1998
at one fortieth.

5. The new starting rate of corporation tax will apply to companies
with taxable profits of up to #10,000 and the benefit will be
gradually withdrawn from companies with profits between #10,000 and
#50,000. This starting rate marginal relief will work in the same way
as the existing marginal relief for small companies and the same
fraction will apply.

6. The cost of introducing the new starting rate of corporation tax
is estimated to be nil in 2000-01, #100 million in 2001-02 and #140
million in 2002-03, taking account of likely behavioural effects.

7. Now that companies pay corporation tax at the main rate in
quarterly instalments, the rate is being set a year in advance. This
does not apply to the small companies' rate as small and medium sized
companies are not required to pay corporation tax by instalments.

8. Changes to the taxation of service companies (see Inland Revenue
Budget press release on countering avoidance in the provision of
personal services) mean that the new starting rate of corporation tax
will be targeted at genuine entrepreneurial activity.

INLAND REVENUE PRESS OFFICE 
Media enquiries to:           0171 438 6692/6706/7327 
(Out of hours:0860 359544)

Non-media enquiries to:       0171 438 6420/6425 (Office hours only)

Inland Revenue information is on the Internet:
www.inlandrevenue.gov.uk

# = pounds sterling