Rates

The rates of Corporation Tax are unchanged for the year commencing 1 April 2004 at 30% for companies with profits over £1.5m, 19% for companies with profits between £50,000 and £300,000, and zero for companies with profits up to £10,000. The same marginal rates as before apply to those with profits between £300,000 and £1.5m, and between £10,000 and £50,000.

Small companies

In December, the Chancellor announced that he would take steps to prevent tax avoidance by the owner-managers of small companies taking profits out of the business by dividend rather than salary. Some thought he might impose NIC on dividends, or reintroduce an Investment Income Surcharge, or tax the owners on the income of the company. In the end, the rule change appears much less drastic, although it is not clear yet exactly how it will operate in practice. Where a company with profits of up to £50,000 pays a dividend on or after 1 April 2004, the company has to pay a minimum of 19% in corporation tax on the profits used to pay that dividend. A company with that level of profits would otherwise have a lower corporation tax rate.

Transfer pricing

In the past, the Revenue could require companies to increase their taxable profits if they had sold cheaply to, or bought dearly from, foreign connected companies. Such transactions, which were not at "arm's length prices", had the effect of artificially shifting profits out of the UK, and the "transfer pricing rules" could shift them back again.

It is now clear that European rules, and some other treaties, do not allow such rules only to apply to "foreign" companies - so they will now apply to UK groups of companies as well. From 1 April 2004, UK groups will have to consider whether they need to make adjustments to reflect "arm's length pricing" on transactions between UK trading companies.

Fortunately, there is an exemption for small groups, and medium-sized groups will not have to self-assess an adjustment (the Revenue will only direct one "in exceptional circumstances"). Also, the Revenue have said that they will only enquire into the matter if there is a reasonable amount of tax at stake - if one company pays tax at a significantly different rate to the other.

Small groups are those with fewer than 50 employees and either turnover or assets of less than €10m (about £7m). Medium-sized groups have fewer than 250 employees and either turnover of less than €50m (about £35m) or assets less than €43m (about £30m).

The separate rules on "thin capitalisation", where a foreign holding company introduces a small amount of share capital and a large amount of debt to finance a UK subsidiary, have been brought within the main transfer pricing rules from 1 April 2004.

Management expenses

Until now, investment companies have relieved their running expenses as "management expenses", but trading companies with an investment business have not been eligible for this relief. Relief will be extended to trading companies from 1 April 2004. On the other hand, the rules will specifically deny a deduction for management expenses which are capital in nature, after the courts recently held that existing rules did not disallow them.

Research and development

The rules on R&D are amended to make enhanced reliefs available to companies for accounting periods ending on or after 1 April 2004 for large companies, and from a later date to be announced for small and medium companies. The definition of qualifying R&D has been simplified, and a wider range of types of expenditure will now qualify, to include software, power, fuel and water used for qualifying R&D.

Community Amateur Sports Clubs (CASCs)

The CASC scheme, introduced in 2002, gives some of the benefits of charitable status to qualifying sports clubs. These are extended from 1 April 2004 to exempt trading income of up to £30,000 and property income of up to £20,000 from corporation tax. An exempt CASC will not have to complete a tax return every year.