What is Recoverable Advance Corporation Tax (ACT)?
Recoverable Advance Corporation Tax (ACT) was a UK corporate tax system where companies that paid dividends had to prepay a portion of their expected corporation tax. This prepaid tax could later be offset against the company’s overall corporation tax liability, either in the current year or up to six years prior.
Key Features:
- Prepayment: Companies paid a portion of their tax liability upfront when distributing dividends.
- Set-off Mechanism: The prepaid tax, or ACT, could be set off against the gross corporation tax due.
- Flexibility: If the prepaid tax exceeded the current year’s gross corporation tax, it could be carried back to offset tax liabilities from previous accounting periods (up to six years).
- Abolishment: ACT was abolished on 1 April 1999, and the UK shifted to a different method of handling corporate taxes and dividends.
Examples
Example 1: Setting Off in the Current Year
A company declares dividends and pays £100,000 as ACT in the current year. At the end of the year, its total corporation tax liability is £150,000. The company can offset the £100,000 ACT against this liability, reducing the amount it needs to pay to £50,000.
Example 2: Carrying Back to Previous Years
In another scenario, a company pays £100,000 ACT but has no corporation tax liability in the current year. The company can carry this ACT back and offset it against the corporation tax it paid in the past six years, potentially receiving a tax refund.
Frequently Asked Questions (FAQs)
Q1: When was Advance Corporation Tax (ACT) first introduced? A1: ACT was introduced in the UK in 1973 as a means to manage the timing of tax revenues from corporate dividends.
Q2: Why was ACT abolished in 1999? A2: ACT was abolished as part of broader reforms to modernize and simplify the UK corporation tax system, improve investment incentives, and eliminate complexities associated with tax credits on dividends.
Q3: Can companies still benefit from Carry-Back claims post-abolishment of ACT? A3: No, since ACT was abolished with effect from 1 April 1999, companies can no longer make new ACT payments or claims related to ACT carry-back.
Q4: What replaced ACT after its abolition? A4: Post-abolition, the UK implemented a new system without ACT, which focused on allowing companies to handle dividend distributions without a prepayment of corporation tax.
Q5: Did the abolition of ACT impact existing credits and claims? A5: Companies had to transition under the new rules, and any outstanding ACT credits were handled differently under transitional arrangements set by the Inland Revenue.
Related Terms
Gross Corporation Tax
Definition: The total tax liability calculated on a company’s profits before any deductions, credits, or adjustments.
Dividend
Definition: A portion of a company’s earnings distributed to shareholders, usually in the form of cash payments, from profits.
Corporation Tax
Definition: A tax imposed on the profits of a company, applicable to both domestic and foreign corporations under a jurisdiction’s tax laws.
Set-Off
Definition: The process of reducing a tax liability by deducting allowable credits or prepayments from the gross amount due.
Online References
Suggested Books for Further Studies
-
Taxation: Finance Act 2023 by Melville, Alan
- An in-depth guide on the UK taxation system, including corporate tax.
-
UK Corporation Tax: Practice and Principles by Davis, Steven
- Comprehensive insight into the principles and practice of UK corporation tax law.
-
Bloomsbury’s Tax Rate and Tables 2023/24 by Marr, Bloomsbury Professional
- Essential reference for up-to-date tax rates including corporation tax specifics.
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