Marginal relief
| Marginal relief |
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| See also |
Marginal relief means that tax rate grows gradually as the company's profits grow up, to the main corporate tax threshold. Marginal relief is available to companies making profits between £300,000 and £1.5 million, when the CT full rate of 28 per cent applies. Basically, marginal relief is a way of saying that if you make profits of £300,001, this profit is a long way short of the £1.5 million threshold, so a formula is applied to reduce the rate of tax.
On profits between £300,000 and £1.5 million, the rate gently scales up from the small company rate to the main rate of CT[1]. Marginal relief is given where profits fall between the lower and upper limits. Where a company is 'associated' with other active trading companies during the relevant accounting period, or the accounting period is less than 12 months, the relevant limits are reduced an a pro-rata basis[2].
Calculation of marginal relief
Statutory formula To establish the amount of marginal relief by which tax liability is to be reduced, the following statutory formula must be applied:
- (M-P)x(1/P)x Statutory Fraction
Where:
- M- Higher relevant maximum amount
- P- Total profits including non-group dividends
- I- Profits excluding non-group dividends
Statutory Fraction= 3/400(these fractions are set each year by the Finance Act). The figure resulting from application of the statutory formula should then be deducted from the figure resulting from the application of the main rate to the company's profits, to provide the amount of corporation tax payable[3]. Turning to changes in the fraction with which marginal relief is calculated, this is yet another change for small businesses to cope with. The FSB does not have off-the-shelf data about members profits. This is often quite difficult data to obtain as members are reluctant to divulge what is seen as confidential information. Given the window in which to prepare for this inquiry, we were unable to carry out a survey to obtain this information. However, we do have robust data on sales turnover and have used this to test the changes to marginal relief. Just over 10 per cent of the FSB's members have sales turnover of between £500,000 and £1 million, therefore this band are most likely to qualify for marginal relief on profits once costs are taken into account[4].
Calculation of marginal relief where profits include dividends
Where a company's profits include dividends from another company the situation is more complex. These dividends are not actually taxable in the hands of the recipient company but do have an impact on taxable profits because they must be included in the company's profits total to determine the extent to which a company may benefit from marginal relief. This is why the statutory formula shown above makes a distinction between profits including and not including non-group dividends. The basic effect of the statutory formula is that the higher the proportion of total profits which is made up of dividends, the less marginal relief there is available for the actual profits taxed [5].
Footnotes
References
- Rayney P., (2013). Tax Planning for Family and Owner-Managed Companies , A&C Black, Haywards Heath.
- Sims S., (2011). Understanding and Paying Less Property Tax For Dummies , John Wiley & Sons, Chichester.
- Slorach J.S., Ellis J.G., (2013). Business Law , OUP Oxford, Oxford.
- The Finance Bill 2007: 4th report of session , (2007), The Stationery Office, Londyn.
Author: Dominika Grzyb
