Opinion ID: 683244
Heading Depth: 2
Heading Rank: 1

Heading: The United Kingdom Finance Act of 1972

Text: 6 The system of corporate taxation that was instituted by the United Kingdom Finance Act of 1972 was designed, inter alia, to eliminate double taxation of the same profits, at both the corporate and shareholder levels. This was achieved by imputation to resident shareholders of the tax paid by the corporation on distributions to the shareholders. In accordance with the Finance Act of 1972 a United Kingdom corporation must pay 1) mainstream corporation tax, which is a tax on corporate income, and 2) advance corporation tax (ACT), a tax on any qualifying distribution to shareholders. Section 85 of the Finance Act of 1972 provides that ACT payments can be used by a United Kingdom corporation to offset its mainstream corporation tax (the Section 85 offset). However, the ACT must be paid by the United Kingdom corporation when the shareholder distribution is made, regardless of the corporation's mainstream tax liability or offset opportunity. 7 The ACT is payable whether or not the corporation has any profits. ACT is not refundable, whether or not it is used as a Section 85 offset by the United Kingdom corporation that paid the tax. 2 Unused Section 85 offset can be carried back to the two preceding taxable periods or carried forward indefinitely. 8 Section 92 of the Finance Act of 1972 permits the distributing corporation that paid the ACT to surrender, at any time, all or part of its Section 85 offset to a United Kingdom subsidiary that is 51% or more owned by the distributing corporation. The subsidiary can then use the surrendered offset against its own mainstream corporation tax. The right to carry forward or surrender Section 85 offset to subsidiaries is useful, for example, when the United Kingdom parent corporation has excess foreign tax credits, because those credits must be used in the year they are earned. 9 Section 86 of the Finance Act of 1972 provides that a United Kingdom resident shareholder is entitled to a tax credit for the ACT paid by the corporation. This is called the Section 86 credit: 10 86(1) [Entitlement to Credit] Where a company resident in the United Kingdom makes a qualifying distribution after 5th April 1973 and the person receiving the distribution is another such company or a resident in the United Kingdom, not being a company, the recipient of the distribution shall be entitled to a tax credit under this section.... 11 86(2) [Purpose and amount of tax credit] The tax credit in respect of a distribution shall be available for the purposes specified in the section and the subsequent provisions of this Act, and shall be equal to such proportion of the amount or value of the distribution as corresponds to the rate of advance corporation tax in force for the financial year in which the distribution is made. 12 In this way double taxation on dividends is alleviated for United Kingdom residents. The Section 86 credit can not be withdrawn or withheld by the United Kingdom tax authorities. 13 The resident shareholder receives the Section 86 credit when the dividend is received. However, the Finance Act of 1972 excluded non-resident shareholders from this benefit. In a document entitled Reform of Corporation Tax Presented to the Parliament by the Chancellor of the Exchequer by Command of her Majesty, April 1972, at p. 11 p 32, it was stated that one of the reasons for denying non-resident shareholders the Section 86 credit was to require tax treaty partners to renegotiate the treaty terms, whereby the British government hoped to obtain balancing concessions.