Definition
Advance Corporation Tax (ACT)
Advance Corporation Tax (ACT) was a UK tax system where companies made advance payments of their corporation tax at the time they distributed dividends or certain other qualifying distributions to shareholders. This system was put in place to ensure that taxes on distributed profits were paid earlier rather than waiting until the end of the fiscal period. On April 6, 1999, ACT was abolished, which subsequently required larger companies to pay corporation tax in instalments.
Examples
- Distribution of Dividends: Under the ACT system, when a corporation declared a dividend, it was required to make an advance payment of corporation tax at that same time, calculated as a percentage of the dividend payment.
- Qualifying Payments: Besides dividends, other distributions that qualified for ACT included certain charges on income and distribution out of reserves.
- Recovery of ACT: If the corporation had leftover ACT not offset against its corporation tax liability, it could be carried forward and offset against future tax liabilities or reclaimed upon the distribution of final dividends.
Frequently Asked Questions
1. What exactly was Advance Corporation Tax (ACT)?
ACT was a tax mechanism that compelled companies to prepay some of their corporation tax concurrent with distributions to shareholders.
2. Why was ACT abolished?
ACT was abolished to simplify the UK’s corporate tax system and align with international standards, facilitating the equal treatment of distributed and retained profits.
3. When did ACT come into effect, and when was it abolished?
ACT came into effect on April 1, 1973, and was abolished on April 6, 1999.
4. How did companies benefit from the abolition of ACT?
After the abolition of ACT, larger companies benefited as they no longer had to make advance tax payments on distributions, freeing up cash flow for other uses.
5. What replaced ACT after its abolition?
Post-abolition, larger companies were required to pay their corporation tax in quarterly instalments based on their expected liability.
Related Terms
Corporation Tax
A tax imposed by the UK government on the profits of incorporated entities such as companies and associations.
Qualifying Distribution
Refers to distributions, such as dividends, which fell under the scope of ACT or similar tax legislations.
Instalment Payments
Corporation tax payments made periodically in advance of the final tax settlement of the fiscal year’s profit.
Online Resources
- HM Revenue & Customs - Corporation Tax
- The Institute of Chartered Accountants in England and Wales (ICAEW) - Guide to Corporation Tax
- PwC United Kingdom - Corporate Tax
Suggested Books for Further Studies
- “UK Tax System: A Basic Introduction” by Malcolm Finney - This book provides an overview of the UK tax system and explains various tax components, including corporation tax.
- “Taxation: Finance Act 2022” by Alan Melville - A comprehensive guide that covers the latest updates on UK taxation laws.
- “Tolley’s Corporate Tax 2022-23” by Kevin Walton and Stefan Binner - This book offers detailed insight into the corporate tax regime, relevant to both practitioners and students.
Accounting Basics: “Advance Corporation Tax (ACT)” Fundamentals Quiz
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