Advance corporation tax

3 key takeaways

• ACT was a prepayment of corporate tax on distributed profits in the UK.
• It was used to offset the company’s overall corporation tax liability.
• ACT was abolished in 1999, simplifying the corporate tax system.

What is Advance Corporation Tax (ACT)?

Advance Corporation Tax (ACT) was a system in the United Kingdom where companies paid tax in advance on the dividends they distributed to shareholders. This tax was then offset against the company’s overall corporation tax liability. Essentially, it was a way for the government to receive tax revenue earlier and ensure companies accounted for the tax on distributed profits.

Importance of Advance Corporation Tax

ACT played a significant role in the UK’s tax system by ensuring that tax on distributed profits was paid upfront. This system helped streamline tax collection and provided the government with a steady flow of tax revenue. For companies, ACT required careful financial planning to manage both the prepayment of tax and the subsequent offset against their total corporation tax liability.

How Advance Corporation Tax worked

• Dividend distribution: When a company decided to pay dividends to its shareholders, it calculated the amount of ACT due on those dividends.
• ACT payment: The company paid the ACT to the Inland Revenue (now HM Revenue & Customs) at the time of distributing dividends.
• Offsetting ACT: The paid ACT was then set off against the company’s total corporation tax liability for the year. If the ACT exceeded the corporation tax due, the company could carry forward the excess to offset future liabilities.

Examples of Advance Corporation Tax

• Dividend distribution: A company distributes £1,000,000 in dividends. Under the ACT system, it would pay ACT on these dividends, which would then be credited against its total corporation tax bill.
• Tax offset: If the company’s corporation tax liability for the year was £500,000 and it had already paid £200,000 in ACT, it would only need to pay an additional £300,000 to settle its tax bill.

Real-world application

Before its abolition, ACT affected how companies planned their dividend distributions and managed their tax liabilities. For example, a company planning a large dividend payout needed to ensure it had sufficient funds to cover the ACT payment, impacting cash flow management and financial planning.

Understanding Advance Corporation Tax is essential for historical context in the evolution of corporate tax systems in the UK. While ACT is no longer in use, its principles influence current tax practices and corporate financial planning.

Related topics you may wish to learn about include corporation tax, dividend taxation, and historical tax reforms in the UK. These areas provide further insights into the impact and legacy of Advance Corporation Tax.