Advance Corporation Tax (ACT)

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Advance Corporation Tax (ACT)

What Is the Advance Corporation Tax?

Advance Corporation Tax (ACT) is the payment of corporation taxes in advance by firms in the United Kingdom that pay dividends to shareholders. The tax, imposed in 1973, was repealed in 1999 by then-Chancellor of the Exchequer Gordon Brown; however, a 10% tax break on dividend income remained.

Understanding the Advance Corporation Tax (ACT)

When companies paid dividends to shareholders, they paid the Advance Corporate Tax (ACT) before the normal corporation taxes. The sum paid in ACT was deducted from the main corporate taxes. Because of a company’s ACT payments, dividend recipients have already paid a basic rate tax on any dividend income. The amount paid in ACT might be included into the company’s profit and loss accounts, thus lowering its corporate tax burden.

The United Kingdom implemented ACT at a 30% rate, the same as the individual income tax rate. The rates remained constant until 1993, when the United Kingdom raised the ACT rate to 22.5% and reduced the income tax on profits to 20%. This was the first time that dividend tax rates diverged from other income tax rates. Pension funds and other tax-exempt entities that did not pay dividend taxes were entitled to HM Treasury reimbursement for any advance corporation taxes paid.

Gordon Brown claimed that firms and pension funds were abusing the system by requesting repayment of the ACT. He replaced a responsibility for bigger corporations to pay their corporate taxes in installments for a company’s requirement to pay ACT. Tax credits were no longer reimbursable to businesses, pension funds, or individuals.

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Companies based in the United Kingdom pay corporation taxes on their earnings. Profits encompass all revenue streams other than dividends. Companies in the United Kingdom pay corporation tax on their global earnings, subject to double taxation relief for overseas taxes. Companies that are not domiciled in the United Kingdom but produce profits in the United Kingdom must pay corporation tax on revenues generated in the United Kingdom via a permanent establishment.

Advance Corporation Tax Carried Over as Surplus ACT

Companies collected excess ACT prior to the repeal of ACT on April 6, 1999, when the ACT paid on company profits exceeded their capacity to offset the tax against ordinary corporation tax. Companies may carry over excess ACT forever and deduct it from corporation tax in following accounting periods. They might keep back excess ACT for up to six years and relinquish it to 51% subsidiaries in specific conditions. To cope with surplusACT built up before to April 6, 1999, rules were implemented through shadow ACT.

The phrase “Shadow ACT” refers to the mechanism used to assess the amount to which corporations may set off excess ACT carried over after April 5, 1999, against corporation tax originating on or after April 6, 1999.

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