The imputation tax system was introduced in April 1973, when considerable changes in the methods of collecting personal and corporation tax were made. The imputation system refers to company taxation in general and to corporation tax in particular. Previously, distributions of company income were discouraged by two factors; (1) corporation tax was payable on total profit and (2) in addition, income tax was payable on the part of profit distributed as dividend.
The imputation system replaced this old practice by abolishing the income tax payable on abolishing the income tax payable on tier corporation tax, which distinguished between the corporation tax on dividends (known as advance corporation tax and payable immediately) and the mainstream corporation tax, payable on the balance of profit not distributed. The tax applies to all profits in a financial year. However, because dividends are paid at a different time and may be paid in a different tax year the rate on the dividends can differ from that on the mainstream profit. Although the abolition of the extra income tax removed the barrier to dividend declarations this was compensated by the increase |n the rate of corporation tax itself, which left less cash available for dividends.
Reference: The Penguin Business Dictionary , 3rd edt.
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