Marginal Relief (Small Companies Relief)

Definition

Marginal Relief (also known as Small Companies Relief) is a tax relief available in the United Kingdom, specifically targeting companies whose profits chargeable to corporation tax lie between a lower and an upper limit for a financial year. As of the current guidelines, this margin exists between £300,000 and £1,500,000. The relief serves to ease the transition between different rates of corporation tax, ensuring that smaller companies do not face a sudden, significant increase in their tax liabilities as their profits grow.

Examples

Example 1: If a company has chargeable profits of £1,000,000, they fall within the margin for marginal relief and can thereby reduce their corporation tax payable under the provisions provided for such relief.
Example 2: A company earning £350,000 in chargeable profits will qualify for some level of Marginal Relief, decreasing their overall tax bill compared with a company earning just above the £300,000 lower limit.
Example 3: A company with profits at £1,600,000 will fall above the upper limit of £1,500,000, thus not qualifying for Marginal Relief and will have to pay corporation tax at the full rate applicable.

Frequently Asked Questions

1. What is the main purpose of Marginal Relief?

Answer: The purpose of Marginal Relief is to smooth out the transition between different corporation tax rates, providing smaller companies falling within designated profit margins a more gradual increase in their tax responsibilities.

2. Who qualifies for Marginal Relief?

Answer: Companies with chargeable profits ranging between £300,000 and £1,500,000 in a financial year qualify for Marginal Relief.

3. How is Marginal Relief calculated?

Answer: Marginal Relief is calculated based on the amount by which a company’s profits exceed the lower profit limit (£300,000) but fall below the upper profit limit (£1,500,000), utilizing specific formulas provided by the HRMC (Her Majesty’s Revenue and Customs).

4. Can Marginal Relief apply to groups of companies?

Answer: Yes, if companies are part of a group, the limits of £300,000 and £1,500,000 are divided by the number of associated companies.

5. Does Marginal Relief apply automatically?

Answer: Marginal Relief needs to be calculated and claimed when completing a company’s tax return.

6. Has Marginal Relief always existed?

Answer: The specifics of Marginal Relief have evolved over the years with changes in the taxation laws, it aims always to provide a favorable tax environment for smaller profit companies.

7. What happens if profits fall exactly at the lower limit (£300,000)?

Answer: If profits fall at the exact lower limit, the company will not qualify for Marginal Relief, as this relief starts applying above £300,000 profit mark.

8. What is Partial Marginal Relief?

Answer: Partial Marginal Relief might apply if the company’s accounting period is shorter than 12 months, or if it has associated companies dividing the total profit limits.

9. What was the previous upper limit before legislative changes?

Answer: This limit has varied with legislative changes and might have been different before the current standard of £1,500,000.

10. Who administers Marginal Relief?

Answer: HM Revenue & Customs (HMRC) administers Marginal Relief and provides guidance and forms for claiming it.

Corporation Tax: A tax imposed on the profit of a corporation.
Financial Year: A year as reckoned for taxing or accounting purposes.
Associated Companies: Companies that are connected in terms of ownership and control, influencing profit limit calculations for Marginal Relief.
Chargeable Profits: The profits of a company that are subject to corporation tax.

Online Resources

Suggested Books for Further Studies

“UK Tax System: An Introduction” by Malcolm James
“Taxation: Finance Acts 2021” by Alan Combs and Malcolm Anderson
“Student’s Guide to Accounting Standards” by Robert Brammer
“Corporation Tax Planning” by Malcolm Finney

Accounting Basics: “Marginal Relief” Fundamentals Quiz

### What is the primary purpose of Marginal Relief? - [ ] To ensure large companies pay more taxes. - [ ] To abolish corporation tax overtime. - [x] To smooth out the transition between different corporation tax rates. - [ ] To increase the profit margin for small companies. > **Explanation:** The primary purpose of Marginal Relief is to smooth out the transition between different corporation tax rates, preventing smaller companies from experiencing dramatic increases in tax liabilities as their profits grow. ### At what profit threshold does Marginal Relief start applying? - [ ] £1 - [ ] £100,000 - [ ] £200,000 - [x] £300,001 > **Explanation:** Marginal Relief starts applying to company profits above the lower limit threshold of £300,000. ### A company's profit is £1,600,000. Does it qualify for Marginal Relief? - [ ] Yes - [x] No - [ ] Only if it's a small business - [ ] Only during its first year > **Explanation:** A company with £1,600,000 in profits falls above the upper limit of £1,500,000 and therefore, does not qualify for Marginal Relief. ### How are profit limits affected when a company is part of a group of associated companies? - [ ] They double - [ ] They are irrelevant - [x] They are divided by the number of associated companies - [ ] They decrease by 50% > **Explanation:** For groups of associated companies, the limits of £300,000 and £1,500,000 are divided by the number of associated companies. ### Who administers Marginal Relief? - [ ] Companies House - [x] HM Revenue & Customs (HMRC) - [ ] Bank of England - [ ] UK Parliament > **Explanation:** HM Revenue & Customs (HMRC) administers Marginal Relief, providing the necessary regulations and forms for claiming it. ### Which of the following is a common term related to Marginal Relief? - [ ] Inflation rate - [x] Corporation Tax - [ ] Exchange rate - [ ] VAT > **Explanation:** Corporation Tax is a common term related to Marginal Relief as it is calculated on the chargeable profits of a company. ### Is Marginal Relief applied automatically when filing taxes? - [x] No, it must be calculated and claimed - [ ] Yes, it is automatic - [ ] Only for new companies - [ ] Only for companies without accountants > **Explanation:** Marginal Relief must be calculated and claimed on a company's tax returns and is not applied automatically. ### Can a company claim Marginal Relief if their profits are exactly £300,000? - [x] No - [ ] Yes - [ ] Only if they have no employees - [ ] Only if they operate in a specific industry > **Explanation:** If profits fall exactly at £300,000, the company will not qualify for Marginal Relief, which starts applying above that profit limit. ### What benefit does Marginal Relief provide? - [ ] It increases the value of company stocks. - [ ] It minimizes employees' tax liabilities. - [x] It reduces corporation tax liability. - [ ] It provides funding for small business loans. > **Explanation:** Marginal Relief provides the benefit of reducing a company's corporation tax liability if their profits fall between certain defined limits. ### What must happen if Marginal Relief applies to a partial accounting period? - [ ] No adjustments are needed. - [ ] The relief is forfeited. - [x] Partial Marginal Relief may apply. - [ ] The company must request an extension. > **Explanation:** Partial Marginal Relief might apply if the company’s accounting period is shorter than 12 months or it has several associated companies, leading to profit limit adjustments.

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