Controlled Foreign Companies: guidance relating to superseded legislation
Set off of surplus ACT: accounting periods ending on or before 5 April 1999
Set off of surplus ACT
ICTA88/SCH26/PARA2Where a Chapter IV assessment has been made for tax on an apportioned amount of chargeable profits on a United Kingdom company, the company may claim to set ACT against this tax. It can claim any amount of ACT, up to the ‘relevant maximum’ – see below. This is ACT that would otherwise be surplus for the accounting period for which the Chapter IV assessment was made. This relief can be given in addition to relief for relevant allowances.
However, relevant allowances have priority. ACT can only be set off if relief cannot be given for relevant allowances under ICTA88/SCH26/PARA1.
Take, for example, a company that has trading losses, etc. These may be enough, if claimed, to wipe out the tax on chargeable profits. But the company may choose not to make a claim or not to make a full claim. If so, the company cannot claim any relief by way of an ACT set- off. The company may have trading losses, charges, etc, which it could use to reduce partially the Chapter IV tax. But it may choose not to make a claim or not to make a full claim. If so, the ACT can only be set off against part of the tax. It is for that part against which the company could not otherwise have claimed relief.
The meaning of surplus ACT is in ICTA88/S239 (3). It is only this surplus that a company can set off against Chapter IV tax. It must be, therefore, ACT which the company accounts for on its own distributions. Or it must be ACT which a group member surrenders to the company under ICTA88/S240 (1). The company, however, must not be able to use the ACT against its own tax on profits. This might be possible because of an insufficiency of profits. The profits are those for the accounting period for which the Chapter IV tax has been assessed. However, the company may have used the ACT in some other way. This might be, for example, by surrender to a subsidiary. Or it might be by set-off against its own liability for an earlier or a later period. In that case the company cannot include it in a claim under.
Any ACT set against tax charged under Chapter IV is not regarded as surplus. It is no longer surplus ACT within the meaning of ICTA88/S239. Once the company uses it in a claim under ICTA88/SCH26/PARA2, it can no longer use it in any other way.
ICTA88/SCH26/PARA2 (3)There is a limit on the amount of surplus ACT that can be set against Chapter IV tax. The Act calls this limit the ‘relevant maximum’. This means the amount of Advance Corporation Tax which a company would (apart from ICTA88/S241) pay on a distribution. The distribution is one made at the end of the accounting period for which the Chapter IV tax has been assessed. It is one which, together with the ACT on it, is equal to
- the chargeable profits apportioned to the company for which the Chapter IV assessment was made, less
- any amount of relevant allowances for which relief has been given for that period.In general, relevant allowances are deducted from the chargeable profits and the result is multiplied by the basic rate of income tax, using the rate in force at the end of the appropriate accounting period. The reference above to ICTA88/S241 relates to any franked investment income. This is left out of account when working out the relevant maximum.
Time limit for ACT set off
The Act does not give a time limit for making a claim to set surplus ACT against Chapter IV liability. TMA70/S43 therefore applies. This means that the company must make a claim within six years of the end of the accounting period to which it relates.
Form of claim for ACT set off
There is no set form for a claim under ICTA88/SCH26/PARA2. However, the company should make it to the Inspector in writing. The claim should state
- the name of the claimant company
- the accounting period
- date of issue and reference number of the assessment against which the company claims relief
- the amount of ACT for which it claims relief.The company may get some or all of the ACT by way of surrender. If so, the claim under ICTA88/S240 (1) by the surrendering company should come with the claim. That is where no surrender claim has previously been made.