Advance Corporation Tax (ACT)

What Is the Advance Corporation Tax?

Advance Corporation Tax (ACT) is the prepayment of corporate taxes by companies in the United Kingdom that distributed dividend payments to shareholders. The tax, which was presented in 1973, was canceled in 1999 by then Chancellor of the Exchequer Gordon Brown; nonetheless, a 10% tax relief on dividend income remained.

Understanding the Advance Corporation Tax (ACT)

Companies paid the Advance Corporation Tax (ACT) before its primary corporation taxes, when it paid dividends to shareholders. Companies deducted the amount paid in ACT from the primary corporation taxes. A company's ACT payments implied that those getting dividends had previously paid a fundamental rate tax on any dividend income. The company could factor the amount paid in ACT in its profit and loss statements, in this way possibly diminishing its corporate tax burden.

The United Kingdom presented ACT at a 30% rate indistinguishable from the individual income tax rate. The rates stayed equivalent until 1993 when the U.K. set the ACT rate at 22.5% and brought down the income tax on dividends to 20%. This noticeable whenever tax first rates on dividends contrasted from rates on other income. Pension funds and other tax-exempt institutions that didn't pay taxes on dividends were qualified for be repaid by HM Treasury for any advance corporation taxes paid.

Gordon Brown accepted there was too much abuse by companies and pension funds claiming repayment of the ACT. In place of a company's obligation to pay ACT, he subbed an obligation for bigger companies to pay their corporation taxes in portions. Tax credits were additionally as of now not repayable to companies, pension funds, or individuals.

Companies domiciled in the U.K. pay corporation taxes on the profits of their business. Profits incorporate all sources of income other than dividends. U.K. companies pay corporation tax on their worldwide profits, subject to twofold taxation relief for foreign taxes. Companies not domiciled in the U.K., however which generate profits in the U.K. pay corporation tax on their U.K. source profits whenever derived through a permanent establishment.

Advance Corporation Tax Carried Over as Surplus ACT

Prior to the abolishment of ACT on April 6, 1999, companies accumulated surplus ACT when the ACT paid on corporate dividends surpassed their ability to offset the tax against standard corporation tax. Companies could roll forward surplus ACT endlessly and set it off against corporation tax in later bookkeeping periods. They could carry back surplus ACT for as long as six years and, in certain conditions, surrender it to 51% auxiliaries. Rules were acquainted through shadow ACT with deal with surplus ACT developed prior to April 6, 1999.

Shadow ACT alludes to the system adopted to decide the degree to which companies can set off surplus ACT carried forward after April 5, 1999, against corporation tax emerging on or after April 6, 1999.