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HMRC internal manual

Company Taxation Manual

Shadow ACT: computation of: introduction

SI1999/358, Reg. 3 (1), Reg. 7, Reg. 8, Reg. 9, Reg. 10, Reg. 11 (1) & (2)

Shadow ACT arises when the franked distributions made by the company in the accounting period exceed the aggregate of:

  • nine-eighths of its franked investment income, and
  • the amount of any surplus franked investment income brought forward from the previous accounting period.

The rate is 25% on an amount which, when the shadow ACT is added to it, is equal to the excess.

Franked distributions’ are the amount or value of a relevant distribution and such proportion of that amount or value as corresponds to the rate of shadow ACT.

Relevant distributions’ means any, not just a qualifying, distribution made on or after 6 April 1999 excluding:

  • manufactured dividends,
  • intra group distributions other than those that the company has elected should not be excluded.

‘Franked investment income’ means a distribution in respect of which the company is entitled to a tax credit and is the aggregate of the amount or value of the distribution and the credit except that it does not include:

  • income which was interest or which replaces interest as a result of action, the main purpose of which was to reduce the amount of shadow ACT,
  • income which accrued as a consequence of arrangements to pass on the value of franked investment income,
  • a distribution or payment which is to be taken into account in computing the profits of a dealer chargeable under Case 1,
  • intra group distributions except those to which an election under Regulation 11(3) applies,
  • distributions received from a company that is not a member of the same group at that time but arrangements in place at the time are such as to give a reasonable expectation that the company will join or rejoin the group,
  • distributions received from a company that is no longer a member of the group where the distributions are made by reference to the shareholdings at a time when the two companies were members of the same group.