Corporation Tax

Corporation Tax

Rates

The corporation tax rates for small and large companies will be aligned at 20% from April 2015. This will remove the need for the associated companies rule and the marginal rate of corporation tax will disappear. The rates for the three financial to 31 March 2016 have been announced as:

Different rates apply to profits from North Sea oil and gas.

Banks pay a special bank levy in addition to these rates of corporation tax.

Proposed changes:

Legislation will be introduced in Summer Finance Bill 2015 to reduce the main rate of CT for all non-ring fence profits to 19% for Financial Year 2017, set the rate at 19% for Financial Years 2018 and 2019, and reduce it to 18% for Financial Year 2020.

Companies (up to 2014/15): the marginal relief calculation

Marginal relief is given by: 

(Upper limit – profits) x (basic profits÷profits) x fraction

  1. The upper limits are currently £300,000 or £1,500,000.
  2. Basic profits are the companies profits, and,
  3. Profits are basic profits + franked investment income, which is grossed up by 100/90.
  4. Group dividends are from 51% groups (51% + subsidiaries or fellow 51% + subsidiaries of a parent).
  5. The fraction depends upon the financial year applies, and when a company’s accounting period spans two financial years it may be necessary to time apportion the profits. This does not affect associates unless there is a change in the relevant bands.

Upper and lower limits are reduced where:

  1. There is a short period of account, and, or,
  2. There are associated companies, by dividing the limits by one plus the number of associated companies, which the company has at any time during its accounting period.

Alternatively, you can calculate corporation tax on slices of profit using marginal rates: 

  • The first £300,000 of profit is taxed at the small company rate (20%)
  • The next £1,200,000 is taxed at the marginal rate (variable)
  • Profits over £1,500,000 are taxed at the main rate (24%.

Research and Development (R&D)

Companies can claim enhanced deductions for expenditure on R&D projects at rates broadly dependent on the size of the company as follows:

  • Small and medium(SME): 225% of qualifying expenditure
  • Large: 130% of qualifying expenditure

Where the SME deduction for R&D is claimed and the company makes a loss, it can claim a cash credit from HMRC of 11% of that loss. This rate is increased to 14.5% where the R&D expenditure is incurred from 1 April 2014.

Enterprise Zones

Around 46 enterprise zones have been formed around the country to encourage investment and job formation. Businesses in some of those zones can claim 100% capital allowances on the equipment they use within the zone. The period for which those 100% allowance are available has been extended by three years to 31 March 2020.