page_title: United Kingdom corporation tax
section_title: Advance Corporation Tax
hierarchical_section_title: United Kingdom corporation tax / History / Advance Corporation Tax
caption_attribution_description: English: IMFC Chairman Gordon Brown, U.K. Chancellor of the Exchequer, at press conference after the International Monetary and Financial Committee meeting. IMFC press conference, Prague Congress Centre
context_page_description: 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.
  Until 1 April 1965, companies were taxed at the same income tax rates as individual taxpayers, with an additional profits tax levied on companies. Finance Act 1965 replaced this structure for companies and associations with a single corporate tax, which took its basic structure and rules from the income tax system. Since 1997, the UK's Tax Law Rewrite Project has been modernising the UK's tax legislation, starting with income tax, while the legislation imposing corporation tax has itself been amended, the rules governing income tax and corporation tax have thus diverged. Corporation tax was governed by the Income and Corporation Taxes Act 1988 prior to the rewrite project.
context_section_description: The basic structure of the tax, where company profits were taxed as profits, and dividend payments were then taxed as income, remained unchanged until 1973, when a partial imputation system was introduced for dividend payments. Unlike the previous imputation system, the tax credit to the shareholder was less than the corporation tax paid (corporation tax was higher than the standard rate of income tax, but the imputation, or set-off, was only of standard rate tax). When companies made distributions, they also paid the advance corporation tax (known as ACT), which could be set off against the main corporation tax charge, subject to certain limits (the full amount of ACT paid could not be recovered if significantly large amounts of profits were distributed). Individuals and companies who received a dividend from a UK company received a tax credit representing the ACT paid. Individuals could set off the tax credit against their income tax liability.
  On introduction, ACT was set at 30% of the gross dividend (the actual amount paid plus the tax credit). If a company made a £70 dividend payment to an individual, the company would pay £30 of advance corporation tax. The shareholder would receive the £70 cash payment, plus a tax credit of £30; thus, the individual would be deemed to have earned £100, and to have already paid tax of £30 on it. The ACT paid by the company would be deductible against its final "mainstream" corporation tax bill. To the extent that the individual's tax on the dividend was less than the tax credit – for example, if his income was too low to pay tax (below £595 in 1973–1974) – he would be able to reclaim some or all of the £30 tax paid by the company. The set-off was only partial, since the company would pay 52% tax (small companies had lower rates, but still higher than the ACT rate), and thus the £70 received by the individual actually represented pre-tax profits of £145.83. Accordingly, only part of the double taxation was relieved.
  ACT was not payable on dividends from one UK company to another (unless the payor company elected to pay it). Also, the recipient company was not taxed on that dividend receipt, except for dealers in shares and life assurance companies in respect of some of their profits. As the payor company would have suffered tax on the payments it made, the company that received the dividend also received a credit that it could use to reduce the amount of ACT it itself paid, or, in certain cases, apply to have the tax credit repaid to them.
  The level of ACT was linked to the basic rate of income tax between 1973 and 1993. The March 1993 Budget of Norman Lamont cut the ACT rate and tax credit to 22.5% from April 1993, and 20% from April 1994. These changes were accompanied with a cut of income tax on dividends to 20%, while the basic rate of income tax remained at 25%. Persons liable for tax were lightly affected by the change, because income tax liability was still balanced by the tax credit received, although higher rate tax payers paid an additional 25% tax on the amount of the dividend actually received (net), as against 20% before the change.
  The change had bigger effects on pensions and non-taxpayers. A pension fund receiving a £1.2 m dividend income prior to the change would have been able to reclaim £400,000 in tax, giving a total income of £1.6 m. After the change, only £300,000 was reclaimable, reducing income to £1.5 m, a fall of 6.25%.
  Gordon Brown's summer Budget of 1997 ended the ability of pension funds and other tax-exempt companies to reclaim tax credits with immediate effect, and for individuals from April 1999. This tax change has been blamed for the poor state of British pension provision, while usually ignoring the more significant effect of the dot-com crash of 2000 onwards when the FTSE-100 lost half its value to fall from 6930 at the beginning of 2000 to just 3490 by March 2003. Despite this, critics such as Member of Parliament Frank Field described it as a "hammer blow" and the Sunday Times described it as a swindle, with the hypothetical £1.5 m income descri
caption: Gordon Brown, the Chancellor of the Exchequer who abolished ACT and introduced the quarterly instalment regime in 1999.
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