Following the budget yesterday the following points may be of interest to business owners.
Corporation tax rates
The main rate of corporation tax which applies to companies with profits of more than £1.5 million has already been set at 28% for the year commencing 1 April 2010. The same rate is to apply for the year commencing 1 April 2011.
The small companies corporation tax rate which applies to companies with up to £300,000 of profits is currently 21%. An increase to 22% is planned to take effect from 1 April 2011.
The effective marginal corporation tax rate for profits between £300,000 and £1.5 million is 29.75%.
Associated companies for corporation tax rates
The upper and lower limits for corporate tax rates are divided equally between a company and its ‘associated’ companies. A company is associated with another company if one of them has control of the other or if both are under the control of the same company or person(s).
The shares of direct relatives, business partners and some trustees can be attributed to the person for the control test. So even if a husband owns no shares in a company, he may be deemed to own the company via his spouse’s shareholding.
In October 2009 HMRC issued a consultation proposal to amend the circumstances in which rights held by linked persons are attributed between them to establish control. Those circumstances are where there are ‘relevant tax planning arrangements’.
Broadly the proposal suggested that the rules will only apply to those cases involving ‘fragmentation’ of the business activities. This includes circumstances where related business activities have not been aggregated into the business of a single company.
When considering whether there has been any fragmentation, HMRC will have regard to the degree of financial, economic or organisational links which exist, or have existed, or might be expected to exist between the relevant activities/companies involved.
It has been announced in the Budget that the change to the associated company rules will be included in the Finance Bill 2011.