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HMRC internal manual

International Manual

From
HM Revenue & Customs
Updated
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UK residents with foreign income or gains: corporation tax: Accounting periods ending on or after 3 June 1986 and on or before 5 April 1999; accounting periods beginning on or after 6 April 1999: ACT

For accounting periods beginning on or after 3 June 1986, ICTA88/S797 (4) and (5) ensure that the set off of Advance Corporation Tax (‘ACT’) is restricted as below. ACT was abolished for distributions made on or after 6 April 1999 and ICTA88/S797(4) and (5) were repealed for accounting periods beginning on or after 6 April 1999.

Accounting periods beginning on or after 3 June 1986 and before 6 April 1999

The Corporation Tax attributable to any doubly taxed foreign income is first reduced by the amount of the tax credit relief allowable on that income.

The company may then allocate the ACT against the Corporation Tax, as reduced by the tax credit relief, attributable to its various sources of income as it thinks fit. It must not, however, allocate to the Corporation Tax, as reduced by the tax credit relief on each item of income, more than the lesser of:

  • the Corporation Tax attributed to each item of income and
  • the ACT which would have been payable by the company (assuming that it had no franked investment income) on a distribution made at the end of the relevant accounting period of an amount which, together with the ACT so payable, is equal to that income.

Accounting periods beginning on or after 6 April 1999

The requirement for UK resident companies to account for and pay ACT was abolished for distributions made on or after 6 April 1999. Relief for any amount of unrelieved surplus ACT (‘USACT’) at 6 April 1999 of a company, or a company in the same group, is subject to the shadow ACT regulations of SI1999/358.

Shadow ACT is set against a company’s capacity to utilise unrelieved surplus ACT (USACT), but not so as to reduce the amount of its corporation tax liability. Shadow ACT acts to limit the company’s ability to set off USACT against its corporation tax liability and the shadow ACT regulations are intended to ensure that USACT is accessed to broadly the same extent as would have been the case under the previous ACT rules.

Where foreign tax falls to be allowed in accordance with TIOPA10/S42, the amount of shadow ACT to be set against the company’s corporation tax liability for an accounting period in respect of profits, which do not include income or gains in respect of which relief for foreign tax is due, is computed in accordance with CTM18670.

Income or gains in respect of which relief for foreign tax is due are known as relevant income or gain. The amount of shadow ACT to be set against the relevant income or gain is the lesser of:

  • the limit, calculated in accordance with CTM18670, on the basis that the relevant income or gain were the company’s only income or gain for the accounting period
  • the amount of corporation tax for which, after taking account of the reduction for foreign tax, the company is liable in respect of that income or gain.

Example 1

A company has profits of £100,000.

The company’s total corporation tax liability is £100,000 @ 30% = £30,000.

There are no foreign income or gains.

It has Unrelieved Surplus ACT to use of £50,000.

It has no shadow ACT brought forward.

It has paid a dividend of £60,000.

The ACT capacity of the accounting period is:

  • £100,000 @ 20% = £20,000.

Shadow ACT to be set against that capacity is:

  • the amount of the dividend £60,000 @ 25% = £15,000.

The amount of Unrelieved Surplus ACT which may be set off is:

  • ACT capacity less Shadow ACT
  • £20,000 less £15,000 = £5,000

Example 2

A company has profits of £300,000 consisting of:

  • income or gains in respect of which foreign tax is due, i.e. relevant income or gains, of £100,000
  • other income or gains of £200,000

Foreign tax to be set against Corporation Tax liability on the relevant income or gains is £25,000.

The ACT capacity of the company is:

  1. Relevant income or gains totalling £100,000

The lesser of the amount of :

  • shadow ACT treated as paid on a distribution which, together with shadow ACT thereon, is equal to relevant income or gains of £100,000 i.e. £100,000 @ 20% = £20,000, and
  • corporation tax on the relevant income or gains of £100,000
£100,000 @ 30% £30,000
   
less the relief due foreign tax of £25,000
i.e. £5,000

The ACT capacity is, therefore, the lesser amount of £5,000

  1. The amount of ACT treated as paid on a distribution which, together with ACT thereon, is equal to other income or gains of £200,000:

£200,000 @20% = £40,000

The total ACT capacity is £45,000:

  1. £5,000 plus
  2. £40,000

If the company paid a dividend of £60,000 as in Example 1 above, the shadow ACT to be set against the ACT capacity is:

  • the amount of the dividend £60,000 @ 25% = £15,000.

The amount of Unrelieved Surplus ACT which may be set off is:

  • ACT capacity less Shadow ACT
  • £45,000 less £15,000 = £30,000