In the Budget, Gordon Brown finally let us know what he meant by 'small businesses paying a fair amount of tax'.
What does IR591 mean?
In the 2002 Budget he introduced a zero rate of corporation tax for the first £10,000. This measure was intended to promote growth amongst small companies. However, the consequences were not really thought through. Whilst it did indeed promote growth for small business, it also promoted huge numbers of previously self employed people to save tax by incorporating. Levels of new applications rose to around 8,000 a week. It was costing the treasury too much money.
To correct the error by the treasury IR591 was announced in the Pre-Budget in Dec 2003. When they were finally unveiled in the Budget they amounted to a dressed up retraction of the previous measure introduced under headlines such as 'plugging a tax loophole' and 'countering tax avoidance'.
In a nutshell, the measure simply means that a company cannot take advantage of the zero rate unless it retains profit. This gives incentives for those real companies that are attempting to expand rather than individuals using the corporate structure for tax advantages. Some would argue that he should have done this in the first place in 2002. Ho hum.
How Do I Calculate Corporation Tax Post April 1st?
Step 1:
Calculate corporation tax as normal to attain an underlying rate of
tax.
Step 2:
Split the profits into two parts: retained (undistributed) and
distributed.
Corporation tax for the retained part is charged at the underlying rate.
Corporation tax for the distributed part is charged at 19%.
An Example:
Profit = £40,000; Retained = £15,000
Step 1:
Corporation tax @ 19% = £40,000 x 19% = £7,600
Marginal Relief = (£50,000 - 40,000) x (19/400) = (£475)
Tax charge = £7125
Underlying rate = 17.81%
Step 2:
Retained @ £17.81% = £15,000 * 17.81% = £2,672
Distributed @ 19% = £25,000 * 19% = £4,750
Corporation Tax = £7,422
In this example the extra tax to pay = £297.
How Much Extra Tax Will I Have To Pay If I do Not Retain Tax?
This depends on how much your profits are.The table and chart below show how much extra you will need to pay:
| Profit | Extra Tax |
| 500 | £95 |
| 1000 | £190 |
| 2000 | £380 |
| 5000 | £950 |
| 10,000 | £1,900 |
| 20,000 | £1,425 |
| 30,000 | £633 |
| 40,000 | £297 |
| 50,000 | £0 |
