Advance corporation tax

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In the United Kingdom, the advance corporation tax (ACT) was part of a partial dividend imputation system introduced in 1973 under which companies were required to withhold tax on dividends before they were distributed to shareholders. The scheme was similar to the way banks were required to withhold an amount at a set rate on interest earned on bank deposits before it is paid to the account holder.

United Kingdom Country in Europe

The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom or Britain, is a sovereign country located off the north­western coast of the European mainland. The United Kingdom includes the island of Great Britain, the north­eastern part of the island of Ireland, and many smaller islands. Northern Ireland is the only part of the United Kingdom that shares a land border with another sovereign state, the Republic of Ireland. Apart from this land border, the United Kingdom is surrounded by the Atlantic Ocean, with the North Sea to the east, the English Channel to the south and the Celtic Sea to the south-west, giving it the 12th-longest coastline in the world. The Irish Sea separates Great Britain and Ireland. The United Kingdom's 242,500 square kilometres (93,600 sq mi) were home to an estimated 66.0 million inhabitants in 2017.

Dividend imputation is a corporate tax system in which some or all of the tax paid by a company may be attributed, or imputed, to the shareholders by way of a tax credit to reduce the income tax payable on a distribution. In comparison to the classical system, it reduces or eliminates the tax disadvantages of distributing dividends to shareholders by only requiring them to pay the difference between the corporate rate and their marginal rate.

A withholding tax, or a retention tax, is an income tax to be paid to the government by the payer of the income rather than by the recipient of the income. The tax is thus withheld or deducted from the income due to the recipient. In most jurisdictions, withholding tax applies to employment income. Many jurisdictions also require withholding tax on payments of interest or dividends. In most jurisdictions, there are additional withholding tax obligations if the recipient of the income is resident in a different jurisdiction, and in those circumstances withholding tax sometimes applies to royalties, rent or even the sale of real estate. Governments use withholding tax as a means to combat tax evasion, and sometimes impose additional withholding tax requirements if the recipient has been delinquent in filing tax returns, or in industries where tax evasion is perceived to be common.

Contents

In general, this payment meant that the recipients of the dividend were considered to have already paid basic rate tax on the dividend income. Non-taxpayers, such as pension funds, who would not otherwise have paid income tax on the dividend income, became entitled to claim a refund of the ACT amount, or after 1993 a lesser amount. The refund of ACT for non-taxpayers was scrapped in 1997, and in 1999 the ACT was itself scrapped, effectively making dividend income of non-taxpayers tax-free again.

The amount of ACT paid by a company could also be offset against the company's profits reducing its final corporation tax bill. The ACT was scrapped in 1999.

United Kingdom corporation tax corporate tax levied in the United Kingdom on the profits made by UK-resident companies and on the profits of entities registered overseas with permanent establishments in the UK

Corporation tax in the United Kingdom is a corporate tax levied in on the profits made by UK-resident companies and on the profits of entities registered overseas with permanent establishments in the UK.

History

Until 1973, company profits were taxed as profits, and dividend payments were then taxed as income. In 1973, a partial imputation system was introduced for dividend payments, under which companies were required to withhold tax on dividends, called an advance corporation tax, before they were distributed to shareholders. UK companies could set off the ACT amount withheld against the overall company tax liability, subject to certain limits. [1] (The full amount of ACT paid could not be recovered if significantly large amounts of profits were distributed.) Shareholders of a UK company who received a dividend received a tax credit representing the ACT paid, [2] which could be set off against their overall income tax liability. [3] Non-taxable shareholders, such as pension funds, were entitled to a refund of the ACT amount.

A tax credit is a tax incentive which allows certain taxpayers to subtract the amount of the credit they have accrued from the total they owe the state. It may also be a credit granted in recognition of taxes already paid or, as in the india, a form of state support.

When introduced in 1973, the ACT rate on the gross dividend (the amount distributed plus the ACT withheld) was 30%, the basic rate of income tax at the time. Until 1993 the income tax rate payable on dividends was the same as all other income, and the ACT rate was adjusted to align it to changes in the basic rate of income tax. From April 1993, the ACT rate was cut to 22.5% while the tax rate on dividend income was set at 20%, the first time it was set at a different rate to that payable on other income (25%). The tax credit was tied to the 20% rate rather than the ACT rate of 22.5%, meaning that non-taxpayers could no longer claim a refund for the full amount that had previously been paid as ACT. The ACT rate was cut to 20% from April 1994.

In 1997, the tax credit was scrapped for non-taxpayers (except charities and PEPs), which had a particular impact on pension funds, which could no longer claim a refund for any amount that had previously been paid as ACT. The effect of the change was that pension funds became effectively taxed on dividend income by way of the now non-refundable ACT, thus lowering pension returns and allegedly resulting in the winding up of some pension funds. Treasury argued that the change was crucial to long-term economic growth: the existing corporation tax system created biased incentives for corporations to pay out profits as dividends to shareholders (including pension funds, who could then reclaim the tax paid) rather than to reinvest them into company growth (which would result in corporation tax being paid). The old system of corporation tax was widely viewed by economists as a constraint on British economic growth. [4] The Times obtained documents under the Freedom of Information Act in April 2007 that showed the chancellor Gordon Brown had been advised that pension funds would suffer a £67 billion loss of the actuarial value of their assets as a net result of a combination of policies including the ACT change. [5]

A personal equity plan was a form of tax-privileged investment account in the United Kingdom, introduced by Nigel Lawson in the 1986 budget to encourage equity ownership among the wider population. PEPs were allowed to contain collective investments such as unit trusts. The single company PEP, which was allowed to contain shares of a single company, was introduced in 1992.

<i>The Times</i> British daily compact newspaper owned by News UK

The Times is a British daily national newspaper based in London. It began in 1785 under the title The Daily Universal Register, adopting its current name on 1 January 1788. The Times and its sister paper The Sunday Times are published by Times Newspapers, since 1981 a subsidiary of News UK, in turn wholly owned by News Corp. The Times and The Sunday Times do not share editorial staff, were founded independently, and have only had common ownership since 1967.

Freedom of Information Act 2000 United Kingdom legislation

The Freedom of Information Act 2000 (c.36) is an Act of the Parliament of the United Kingdom that creates a public "right of access" to information held by public authorities. It is the implementation of freedom of information legislation in the United Kingdom on a national level. Its application is limited in Scotland to UK Government offices geo-located in Scotland. The Act implements a manifesto commitment of the Labour Party in the 1997 general election, developed by Dr David Clark as a 1997 White Paper. The final version of the Act is believed to have been diluted from that proposed while Labour was in opposition. The full provisions of the act came into force on 1 January 2005.

ACT was scrapped from 6 April 1999, [6] and replaced by a tax credit on dividend income of 10%. From 6 April 2016, the tax credit was itself abolished and replaced with a tax-free dividend allowance of £5,000. [7]

See also

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References

  1. ↑ Company Taxation Manual CTM20105 – ACT: set-off against CT on profits: introduction, HMRC. Retrieved 13 April 2007
  2. ↑ Company Taxation Manual CTM16120 – Distributions: impact on CT: franked investment income: general, HMRC. Retrieved 12 April 2007
  3. ↑ Company Taxation Manual CTM15150 – Distributions: general: tax consequences, HMRC. Retrieved 12 April 2007
  4. ↑ That pensions raid, Evan Davis 2 April 2007.
  5. ↑ Gloomy predictions that the Chancellor chose to ignore - Times Online
  6. ↑ HM Revenue & Customs: A modern system for corporation tax payments Archived March 7, 2007, at the Wayback Machine
  7. ↑ HM Revenue & Customs Policy paper: Dividend Allowance factsheet

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