Taxation: Corporation Tax

House of Lords written question – answered on 30th March 2006.

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Photo of Lord Forsyth of Drumlean Lord Forsyth of Drumlean Conservative

asked Her Majesty's Government:

Further to the Written Answer by the Lord McKenzie of Luton on 15 March (WA 243–4), for the latest year for which figures are available, what would be the net cost to the Exchequer of abolishing marginal relief at the small companies rate if the main rate of corporation tax (a) remained at 30 per cent; (b) was reduced to 29 per cent; (c) was reduced to 28 per cent; (d) was reduced to 27 per cent; (e) was reduced to 26 per cent; and (f) was reduced to 25 per cent for profits over £300,000.

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

The full-year yield for 2006–07 from abolishing marginal relief for profits over £300,000 would range from around £0.5 billion against a main rate of corporation tax of 30 per cent to around £0.1 billion against a main rate of 25 per cent. The lower figure of £410 million for cost of relief against the 30 per cent rate given in the previous reply related to 2003–04, the latest year for which actual figures were available.

As published in the 2005 Tax Ready Reckoner located at www.hm-treasury.gov.uk/media/FA1/96/pbr05–taxreadyreckoner–223.pdf, the full-year cost for 2006–07 of reducing the main rate of corporation tax from 30 per cent to 29 per cent would be around £1.5 billion, ignoring behavioural effects. The full year direct revenue effect of a one percentage point reduction in main rate and abolition of marginal relief for profits over £300,000 would therefore be a net cost in excess of £1 billion.

It is not appropriate to extrapolate the cost of reducing the main rate to lower values because a change of this magnitude would be likely to have a major impact on company behaviour and therefore major indirect as well direct effects on tax revenues.

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