CTM03652 - Corporation Tax: small companies: example 2

This example involves considering whether starting rate relief is due as in CTM03651 but includes other variants including a short accounting period and associated companies.

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

The company had one associated company from 1 June 2006 onwards.The ICTA88/S13 (7) profits are chargeable profits (£35,000) + franked investment income received (£0) = £35,000.

The accounting period straddles 1 April 2006 when the starting rate limits were withdrawn and so the profits will need to apportioned up to and from this date and the two parts treated as separate accounting periods in order to consider whether the starting rate limits will be applicable. The two parts of the nine-month period will also be treated as separate accounting periods for the purpose of associated companies.

For the period ended 31 March 2006 

Profits x no. of days in the period.

We need to consider whether £11,625 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 January 2006 to 31 March 2006 that is treated as a separate accounting period. The lower limit will be:

The upper limit will be:

Because the straddling nine-month period will be treated as two separate accounting periods, the company will be treated as having no associated companies in the period ended 31 March 2006 as the association only commenced on 1 June 2006.

The chargeable profit of £11,625 falls between the lower starting rate limit upper starting rate limit 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.`

• (£12,432 - £11,625) x £11,625 / £11,625 x 19 / 400 = £38.33.

CT due £2170.42.

For the period ended 30 September 2006 

Chargeable profits x no. of days in the period.

Although £23,375 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.

In considering whether the small companies' rate will apply, the lower relevant maximum amount and the upper relevant maximum amount need to be restricted to take into account the short accounting period. The lower relevant maximum amount will be:

The upper relevant maximum amount will be

However as well as this, the small companies rate limits need to be reduced for the one associated company that the company has from 1 June 2000. The limits are divided by one plus the number of associated companies and so the lower relevant maximum amount will be further reduced to:

and the upper relevant maximum amount will be:

The chargeable profits will be charged at the small companies' rate as the apportioned chargeable profit of £23,375 is below the lower relevant maximum amount of £75,000,.

The tax due for the period ended 30 September 2006 will be:

This example treats the nine month accounting period straddling 1 April 2006 as two separate accounting periods in order to see whether the profits will fall within the starting rate limits. It would not be necessary to split the accounting period for the purposes of ICTA88/S13 (small companies' relief) unless starting rate relief or marginal starting rate relief was due in the part of the accounting period ending on 31 March 2006 (FA06/S26 (10)).