Finance (No. 2) Bill 2006 — Abolition of corporation tax starting rate and non-corporate distribution rate — 2 May 2006 at 21:45

The majority Aye voters agreed to abolish the corporation tax starting rate^[1] in the Finance Bill (No. 2) 2006. They also abolished a number of other measures relating to corporation tax.

Corporation Tax starting rate

Corporation tax is, very simply, a tax on profits made by companies resident in the UK. The starting rate for corporation tax was a measure introduced by Gordon Brown in his 1999 budget^[2]. This meant companies who made a profit between £0 and £10,000 per year were taxed at 10% on those profits.

However, in the 2002 budget Gordon Brown reduced this starting rate to 0%^[3] meaning, of course, companies with profits of no more than £10,000 paid no corporation tax.

Nevertheless, in the 2006 budget Brown decided to get rid of the starting rate entirely^[4]. This meant companies with profits of between £0 and £10,000 would now be charged at the small companies' corporation tax rate which in 2006 was 19%^[5]. Small companies corporation tax rate applies to companies whose profits do not exceed £300,000 per year.

Why scrap the starting rate?

This particular vote was on whether the corporation tax starting rate should be abolished. Labour wanted to scrap the starting rate because when it was set to 0% in 2002 this resulted in a large number of small businesses turning themselves into companies^[6]. Consequently, many of these businesses were avoiding paying corporation tax.

In 2004 the Chancellor introduced a 'non-corporate distribution rate (NCDR)'^[7] to try to recover more tax from businesses who were becoming companies (NCDR was also abolished in this vote). However, in the 2006 budget the government thought this was still a major issue and removed the starting rate entirely. As John Healey MP explains^[8]:

• 'In the Budget in March we therefore stated that we continue to believe that all individuals and businesses must pay their fair share of national insurance contributions and tax, irrespective of legal form.'

The Conservatives and Liberal Democrats both opposed these changes in corporation tax. Mark Hoban MP of the Tories explains as follows^[9]:

• 'In 2002, we supported the introduction of the zero rate, and we oppose its being scrapped in the Finance Bill. We welcomed the relief that it provided for small businesses and object to the burdens that it places on them today. We want to support our small businesses, not attack them when they feel vulnerable because of increased regulation and red tape.'

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• [1] Motion to abolish measures relating to corporation tax, House of Commons, 28 March 2006
• [2] Finance Act 1999, Section 28
• [3] Finance Act 2002, Section 32
• [4] Finance Act 2006, Section 26
• [5] Finance Act 2006, Section 25
• [6] BBC News, 16 March 2004
• [7] Wikipedia entry, retrieved on 2010-02-27
• [8] John Healey MP, House of Commons, 2 May 2006
• [9] Mark Hoban MP, House of Commons, 2 May 2006

Debate in Parliament | Source |