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 introduced in 1973, was abolished in 1999 by then Chancellor of the Exchequer Gordon Brown; however, a 10% tax relief on dividend income remained.

Understanding the Advance Corporation Tax (ACT)

Companies paid the Advance Corporation Tax (ACT) before its main corporation taxes, when it paid dividends to shareholders. Companies deducted the amount paid in ACT from the main corporation taxes. A company's ACT payments meant that those receiving dividends had already paid a basic rate tax on any dividend income. The company could factor the amount paid in ACT in its profit and loss statements, thereby potentially reducing its corporate tax burden.

The United Kingdom introduced ACT at a 30% rate identical to the individual income tax rate. The rates remained equal until 1993 when the U.K. set the ACT rate at 22.5% and lowered the income tax on dividends to 20%. This marked the first time tax rates on dividends differed from rates on other income. Pension funds and other tax-exempt institutions that did not pay taxes on dividends were entitled to be reimbursed by HM Treasury for any advance corporation taxes paid.  

Gordon Brown believed 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 substituted an obligation for larger companies to pay their corporation taxes in installments. Tax credits were also no longer repayable to companies, pension funds, or individuals.

Companies domiciled in the U.K. pay corporation taxes on the profits of their business. Profits include all sources of income other than dividends. U.K. companies pay corporation tax on their worldwide profits, subject to double taxation relief for foreign taxes. Companies not domiciled in the U.K., but which generate profits in the U.K. pay corporation tax on their U.K. source profits if 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 exceeded their ability to offset the tax against regular corporation tax. Companies could roll forward surplus ACT indefinitely and set it off against corporation tax in later accounting periods. They could carry back surplus ACT for up to six years and, in certain circumstances, surrender it to 51% subsidiaries. Rules were introduced through shadow ACT to deal with surplus ACT built up prior to April 6, 1999.

Shadow ACT refers to the system adopted to determine the extent to which companies can set off surplus ACT carried forward after April 5, 1999, against corporation tax arising on or after April 6, 1999.

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