HMRC internal manual

Company Taxation Manual

Shadow ACT: outline of the scheme

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The overwhelming majority of companies and groups will have set-off any ACT that they have paid against the CT liability for accounting periods beginning before 6 April 1999. The regulations will therefore apply to only a small minority. Most of those will have unrelieved surplus ACT because:

  • they have paid dividends through the lower part of the economic cycle in excess of their CT profits (cyclical surpluses), or
  • all or a substantial proportion of their income has been foreign and has suffered foreign tax, the set-off of which eliminated or limited the scope for set-off of ACT (structural surpluses).

The former would not have expected to reduce their surplus until later in the economic cycle when their profits had risen above their dividend level. The latter, bearing in mind that the foreign income dividend scheme was not to apply to distributions made on or after 6 April 1999, might well have not been able to access the unrelieved surplus for some years, if at all.

The Regulations substantially maintain existing expectations. They allow the unrelieved surplus ACT to be accessed to broadly the same extent as would have been the case had the previous regime been preserved.

There is a limit of 20%, which mirrors that in ICTA88/S239 (2). This is met firstly by any shadow ACT that is treated as having been paid on any distributions made on or after 6 April 1999. It is only where the shadow ACT does not exhaust the limit of 20% that unrelieved surplus ACT can be set off against the liability to CT for the accounting period. Shadow ACT is a purely notional amount. It does not involve any payment; nor does it reduce the CT payable. The same order applies where there is controlled foreign companies liability.

Surplus shadow ACT is carried back to accounting periods beginning on or after 6 April 1999 and within the six years preceding the accounting period in question. As under Section 239 (3), the set off is against capacity of a later period before that of a remoter period. For the period beginning 24 months before the end of the accounting period in question, the capacity is calculated disregarding any unrelieved surplus ACT set against the CT liability. In that period the surplus shadow ACT can displace unrelieved surplus ACT and as a result increase the liability. Where the company is a member of a group any unused amount is then allocated to other members of the group up to the amount of their capacity. Any amount that cannot be allocated to another group member is carried forward in the same way that surplus ACT was carried forward under Section 239 (4).

The maximum amount that can be allocated to another group member is the amount of its capacity for the relevant accounting periods less any shadow ACT of its own and any surplus shadow ACT of another group member already allocated to it. In the typical case where the accounting periods are coterminous the relevant accounting periods will be theone which begins and ends on the same dates as that of the transferring company and any period or part of an accounting period falling in the previous 12 months.

There is no provision for a company’s unrelieved surplus ACT to be set off against the liability of any other company.