Rates

The main rate of Corporation Tax is unchanged for the year commencing 1 April 2006 at 30% for companies with profits over £1.5m, and the small companies rate is also unchanged at 19% for companies with profits up to £300,000 (both limits are divided between associated companies). The marginal rate of tax for companies with profits between £300,000 and £1.5m remains 32.75%.

The 0% "starting rate", which was introduced in 2002 for companies with profits up to £10,000, led to many companies being set up to take advantage of the low tax opportunity. This in turn forced the Chancellor to introduce a minimum tax rate of 19% on dividends paid by small companies in 2004, which greatly complicated the tax affairs of small companies. From 1 April 2006, both the starting rate and the non-corporate distribution rate are abolished, putting corporation tax back to where it was before 2002. However no other changes were made to the taxation of small companies, which continue to enjoy tax advantages over unincorporated small businesses.

Group relief

Following a decision of the European Court of Justice, the rules on group relief are amended with effect from 1 April 2006 to allow UK companies to claim relief for the losses of subsidiaries which are not resident in the UK. The losses must be incurred either by a subsidiary resident in the European Economic Area (EEA), or by a subsidiary's permanent establishment in the EEA.

This extension of group relief only applies where the losses cannot be relieved in the subsidiary's country of residence.