CLAUSE 55: CORPORATION TAX – SMALL COMPANIES’ RATE AND FRACTION FOR FINANCIAL YEAR 2001

SUMMARY

This clause provides for the small companies’ rate of corporation tax for the financial year beginning 1 April 2001 to be 20 per cent, and for the fraction used in calculating marginal relief above the small companies’ rate to be one fortieth (the same as for the previous year).

BACKGROUND NOTE

1. Companies with 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 of £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. Where two or more companies are associated together, the profits limits for the small companies’ rate are divided by the number of associated companies.

5. Around 150,000 companies pay corporation tax at the small companies’ rate, with about a further 20,000 benefiting from marginal relief.