CTM03651 - Corporation Tax: small companies: example 1

This example involves CT starting rate relief withdrawn for the financial year 2006 (i.e. the year beginning 1 April 2006) onwards.

A company provides the following information concerning its accounting period for the year ended 30 September 2006.

The ICTA88/S13AA profits are chargeable profits (£40,000) + non-group franked investment income received (£0) = £40,000.

The accounting period straddles 1 April 2006, when the starting rate lower and upper limits were withdrawn, and so the chargeable profits will need to be apportioned up to and from this date and the two parts treated as separate accounting periods. ICTA88/S13AA refers to the lower starting rate limit as the first relevant amount and the upper starting rate limit as the second relevant amount. FA06/S26 (10) gives authority for treating the two parts as separate accounting periods for the purposes of ICTA88/S13 as well if starting rate relief or marginal starting rate relief is due for the part of the period ending on the 31 March 2006.

For the period ended 31 March 2006.

Chargeable profits x no. of days in the period:

We need to consider whether £20,000 will fall within the starting rate limits of £10,000 and £50,000. However in doing this, the second relevant amount of £50,000 and first relevant amount of £10,000 need to be reduced proportionally to the length of the period from 1 October 2005 to 31 March 2006 that is treated as a separate accounting period.

The lower limit will be:

The upper limit will be:

The chargeable profit of £20,000 falls between the lower starting rate limit of £5,000 and the upper starting rate limit of £25,000 and so the chargeable profits will be charged at the small companies' rate with marginal starting rate relief due.

Less marginal relief:

Where R2 = the proportionally reduced second relevant amount.

P = the chargeable profits + non-group franked investment income (see CTM03600 or see details in ICTA88/S13AA (7)).

I = the chargeable profits; and 19 / 400 is the appropriate fraction for the financial years in question.`

• (£25,000 - £20,000) x £20,000 / £20,000 x 19 / 400 = £237.50.
• CT due £3562.50.

For the period ended 30 September 2006.

Chargeable profits x no. of days in the period:

Although £20,000 falls within the starting rate first and second relevant amounts of £5,000 (proportionally reduced for a six-month accounting period - £10,000 x 183 / 366) and £25,000 (proportionally reduced for a six-month accounting period - £50,000 x 183 / 366), no relief is due as the starting rate was withdrawn from 1 April 2006 and the part of an accounting period falling after this date is treated as a separate accounting period.

£20,000 is however below the lower relevant maximum amount of £150,000 (£300,000 x 6 / 12) for the purposes of small companies' rate and so CT due will be:

£20,000 x 19% = £3,800.