1. This clause introduces a new starting rate of corporation tax for the financial year beginning 1 April 2000. The new rate will apply to companies with taxable profits of up to £10,000.

2 Companies with taxable profits between £10,000 and £50,000 will receive marginal relief to ease the transition from the starting rate to the small companies’ rate of corporation tax (20 per cent from 1 April 1999).

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3. Clause 25, subsection (1) inserts a new section 13AA in the Income & Corporation Taxes Act 1988 (ICTA).

4. Subsection (1) provides that qualifying companies with taxable profits in an accounting period of up to £10,000 (the first relevant amount) may claim that the corporation tax to be charged on those profits shall be at the starting rate.

5. Subsection (2) provides that qualifying companies with profits between £10,000 and £50,000 (the second relevant amount) may claim be taxed at the small companies’ rate of corporation tax with marginal relief.

6. Subsection (3) prescribes the formula for calculating marginal relief.

7. Subsection (4) sets the first and second relevant amounts at £10,000 and £50,000 respectively and provides that where a company is associated with other companies, the relevant amounts are to be reduced by dividing them by one plus the number of associated companies.

8. Subsection (5) provides for section 13 (4) and (5) ICTA to apply to

define "associated company";

exclude from the calculation in subsection (4) any company which has not carried on a trade or business at any time in the accounting period in question ; and

ensure that all companies which at any time within an accounting period were associated are counted when determining how many associated companies a claimant company has in that period

so that the same rules apply for both the small companies’ rate marginal relief and the starting rate marginal relief.

9. Subsection (6) proportionately reduces the relevant amounts for an accounting period of less than twelve months.

10. Subsection (7) applies the definitions of "profits" and "basic profits" in section 13 (7) and (8) ICTA for the purposes of section 13AA, so that the same definitions are used for both the small companies’ rate marginal relief and the starting rate marginal relief.

11. Subsection (8) defines the meaning of the term "qualifying company", so that only a company which is resident in the UK, and is not

a close investment holding company; or

a housing investment trust

may make a claim under section 13AA.

12. Clause 25, subsection (2) makes a consequential amendment to section 13A ICTA (which defines a close investment holding company) so that it applies for the purposes of the new section 13AA..

13. Subsection (3) makes it clear that authorised unit trusts which are charged to corporation tax under section 468 ICTA at a rate equal to the lower rate of income tax cannot claim to be taxed at the new starting rate or the small companies’ rate of corporation tax.

14. Subsection (4) extends paragraph 1 (a) of Schedule 12 to Finance Act 1989 (provision of information concerning close companies) to the new section 13AA. so that information can be obtained in connection with the new starting rate.

15. Subsection (5) inserts a reference to starting rate marginal relief claims under section 13AA (2) in paragraph 8 (1) of Schedule 18 to Finance Act 1998, which sets out how the amount of tax payable is calculated under corporation tax self-assessment.

16. Subsection (6) provides that the starting rate of corporation tax shall apply to the financial year 2000 and subsequent financial years.

17. Subsection (7) introduces an apportionment provision to enable a company which has an accounting period that straddles 1 April 2000 to apportion profits between the financial years 1999 and 2000, treating the two parts of the accounting period as separate accounting periods. This will allow a qualifying company to make a claim to the small companies’ rate under section 13 ICTA for the period up to 31 March 2000 and to the starting rate under section 13AA for the period from 1 April 2000.

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18 Companies with taxable profits of up to £300,000 pay corporation tax at the small companies’ rate (20 per cent from 1 April 1999). Around 85 per cent of companies which pay corporation tax do so at this rate. Companies with profits between £300,000 and £1,500,000 receive marginal relief to ease the transition to the main rate. Companies with profits of more than £1,500,000 pay corporation at the main rate (30 per cent from 1 April 1999).

19. Where companies are associated with one another the £300,000 and £1,500,000 profit limits are reduced by dividing them by one plus the number of associated companies.

For the financial 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 (set at 10 per cent by clause 26] This will enable small and growing companies to retain more of their profits for investment.

21. Companies with profits between £10,000 and £50,000 will receive marginal relief to ease the transition from the starting rate to the small companies’ rate. (Companies with profits between £50,000 and £300,000 will continue to pay tax at the small companies’ rate.)

22. The following example illustrates the effect of starting rate marginal relief for a company with taxable profits of £20,000, assuming a small companies’ rate of 20 per cent for the financial year 2000. The company’s liability will be: