BN04 Corporation Tax Small Companies’ Rates

Who is likely to be affected?

  1. Companies with profits chargeable to corporation tax (CT) lower than the lower relevant maximum amount (LRMA) (currently £300,000), companies with CT profits between LRMA and the upper relevant maximum amount (URMA) (currently £1,500,000), and companies with profits from oil extraction and oil rights in the UK and the UK Continental Shelf (‘ring fence profits’).

General description of the measure

  1. The small companies’ rate, for all profits apart from ring fence profits, will become 20% from 1 April 2007 and the fraction used in smoothing the differences between the main rate of corporation tax and the small companies’ rate (marginal small companies’ relief) will be 1/40. Profit limits will remain the same.
  2. The small companies’ rate for ring fence profits will remain at 19% from 1 April 2007 and the marginal small companies’ relief fraction will be 11/400.

Operative date

  1. The legislation will set the small companies’ rate of corporation tax from the 1 April 2007.

Current law and proposed revisions

  1. The various corporation tax rates are to be found in the Income and Corporation Taxes Act 1988 (ICTA) and are maintained yearly through the Finance Act. The current provisions for the charge of corporation tax (CT) can be found at sections 24 and 25 of the Finance Act 2006.
  2. The current rules at section 13 of ICTA 1988 provide that, where a company is not a close investment-holding company and its CT profits are lower than an amount termed the lower relevant maximum amount (LRMA) (currently £300,000), those profits are taxed at the lower rate of CT, known as the ‘small companies’ rate’ (currently 19%).
  3. This legislation will amend the small companies’ rate to 20% for non-ring fence profits and 19% for ring fence profits from the financial year 2007-08.
  4. Section 13(2) of ICTA entitles companies with a profit of between £300,000 and £1.5m to marginal relief (‘marginal small companies’ relief’) from tax computed at the main rate. The fraction used in calculating this relief is currently 11/400.
  5. The changes to the small companies’ rate mean that this fraction will be adjusted to 1/40 for non-ring fence profits and remain at 11/400 for ring fence profits.
  6. The upper and lower limits for small companies’ rate are set at section 13(3) of ICTA. These will remain unchanged.

Further advice

  1. If you have any questions about this measure, please contact your local HMRC office.