Its accountants are uncertain as to the rate of tax to apply, so they prepare the corporation tax computations on two bases, as shown below:
Non- Statutory Method: £300,000 at 21% £1,200,000 at 29.75%
63,000
357,000 _______ 420,000
Total
Statutory Method £1,500,000 at 28%
420,000 - _______ 420,000
Less: marginal relief: 7/400 x (£1.5m - £1.5m)
Total
1.7 If the profits in the above example had been £1,200,000, the non-statutory method of calculation is that £300,000 is taxed at 21%, and £900,000 at 29.75%, giving a tax charge of £330,750 and an overall rate of tax of 27.56%. The statutory method is to tax £1,200,000 at 28% and then to reduce this by 7/400 of £300,000. This is £336,000 less £5,250, which is also £330,750. The non-statutory method is the tax planners’ tool as it reflects the fact that each £1 of additional profit between £300,000 and £1.5 million is taxed at 29.75%. 1.8 The limits of £300,000 and £1,500,000 are divided by the number of active companies under common control. It is important to realise that this is not restricted to UK companies, but includes all companies, world-wide. It is therefore quite possible that the Company may enjoy the rate bands in full whilst owned by the Sellers, but then have insignificant rate bands once part of a larger group. This is the reason for the common exclusion referring to Tax Liabilities increasing as a result of this factor. 1.9 There is a common exclusion in a tax covenant which states that the Sellers should not be liable for Taxation to the extent that it is caused by an increase in the rates of corporation tax as a result of the Company joining the Buyer’s Group. This is the reason for the common exclusion.
2Tax Computations
2.1 For a trading company the starting point for the tax computations is the profit before tax as shown by the accounts for the relevant accounting period. The profits are then increased and decreased for a number of different adjustments as provided for in the taxing statutes.
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