Advance Corporation Tax (ACT)
Contents
Demystifying Advance Corporation Tax: A Comprehensive Guide
Advance Corporation Tax (ACT) has been a significant component of corporate taxation in the United Kingdom, shaping dividend payments and tax obligations for companies and shareholders alike. In this comprehensive guide, we delve into the intricacies of ACT, its historical context, and its impact on corporate tax management.
Understanding Advance Corporation Tax (ACT)
ACT, introduced in 1973, mandated prepayment of corporate taxes by companies distributing dividend payments to shareholders in the UK. Essentially, companies deducted ACT payments from their main corporation taxes, resulting in shareholders effectively prepaying a basic rate tax on dividend income. This mechanism allowed companies to mitigate their corporate tax burden by factoring in ACT payments.
The introduction of ACT initially set the rate at 30%, aligning with the individual income tax rate. However, in 1993, the UK government reduced the ACT rate to 22.5%, concurrently lowering the income tax on dividends to 20%. This adjustment marked a pivotal shift, as it was the first time dividend tax rates deviated from rates on other income sources.
The Abolition of Advance Corporation Tax
In 1999, then Chancellor of the Exchequer Gordon Brown abolished ACT amid concerns of abuse by companies and pension funds claiming repayment. Instead, larger companies were required to pay corporation taxes in installments, with tax credits no longer repayable to entities or individuals. This move fundamentally reshaped the landscape of corporate taxation in the UK.
Implications for Companies and Shareholders
For companies domiciled in the UK, corporation taxes apply to profits generated from business activities, excluding dividends. Additionally, UK companies are subject to taxation on worldwide profits, with provisions for double taxation relief for foreign taxes. Non-UK companies generating profits within the UK are liable for corporation tax on UK source profits derived through a permanent establishment.
Surplus ACT and Shadow ACT
Prior to its abolition, companies often accumulated surplus ACT when dividend-related tax payments exceeded their ability to offset against regular corporation tax. This surplus could be carried forward indefinitely, carried back for up to six years, or surrendered to subsidiaries in specific circumstances. Shadow ACT regulations were later introduced to address surplus ACT accumulated before April 6, 1999, ensuring a smooth transition in tax treatment.