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.
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
|Does your company pay CT at less than 19%?
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
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.
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.