10% tax credit

10% tax credit

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I recall that there was a reason why the 10% tax credit was set at that level when it was intorduced in 1998/99, but I cannot recall the reason why!!

Can anyone else recall, please?

Replies (14)

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By merlyn
07th Jun 2013 07:32

ACE

Wasn't it because they abolished Advanced Corporation Tax ?

 

http://en.wikipedia.org/wiki/United_Kingdom_corporation_tax

 

Abolition of Advance Corporation Tax [edit]

From 6 April 1999 ACT was abolished,[7] and the tax credit on dividends was reduced to 10%.[5] There was a matching reduction in the basic income tax rate on dividends to 10%, while a new higher-rate of 32.5% was introduced which led to an overall effective 25% tax rate for higher rate taxpayers on dividends (after setting this "notional" tax credit against the tax liability). From 6 April 2010, the top rate of income tax on dividends will be 42.5% (effective rate 36.11%).[18] While non-taxpayers were no longer able to claim this amount from the treasury (as opposed to taxpayers who could deduct it from their tax bill), the 20% ACT (which would have previously been deducted from the dividend before payment) was no longer levied

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By Steve Holloway
07th Jun 2013 08:18

The question should be ....

why isn't it 20% to match the CT paid on the pre-distribution profits!

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Replying to Tim Vane:
Euan's picture
By Euan MacLennan
07th Jun 2013 09:55

I think the question should be ...

Steve Holloway wrote:

why isn't it 20% to match the CT paid on the pre-distribution profits!

Why isn't the tax credit 20% to match the basic rate tax payable by the shareholder?  After all, the tax credit is only relevant to the recipient of the dividend and making it 20% would avoid the need for the special dividend rates of tax at 10% basic, 32.5% higher and 42.5% additional.  However, the 10% rate does work to the individual's advantage if dividends are paid rather than salary, because the divi has to be grossed up by only 10%, thus making less of a dividend being taxable at the higher rate.

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By johngroganjga
07th Jun 2013 09:05

The quid pro quo for the tax credit being less than the full rate of CT paid on the profits is that the rate of tax paid by the individual on gross dividend income is less than the rate that would be paid on other income.

That is part of the answer to your question - but you will look in vain for a precise arithmetical explanation of why 10% is 10%, and not say 9% or 11%.  It's not supposed to be that logical.

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By Steve Kesby
07th Jun 2013 10:26

Winners and losers and smoke an mirrors

Because the circumstances in which a company might pay a dividend might differ - it might pay it out of historic profits while losses are being made, or out of the disposal of shares which satisfy the substantial shareholdings exemption, for example - there may be no actual tax at the time the dividend was paid to frank the dividend with once ACT was abolished.

That means any imputed tax credit had to be non-repayable. A 20% non-repayable tax credit is fine for taxpayers, but non-taxpayers (like pension schemes, who often have a lot of dividend income) seem to be losing out. By having a lower non-repayable tax credit they appear to be losing out by less.

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By gbuckell
10th Jun 2013 16:58

My view

I wondered about this at the time. Remember that non taxpayers including pension funds and charities lost the right to reclaim tax credits at the same time so at first glance it made no sense to introduce such a complex system rather than set the credit at 20% (apart from Steve's clever point about appearances!)

However, it occurred to me that there was a category of taxpayer that lost out - foreign holding companies. Tax treaties allow part of the tax credit to be reclaimed and the change put a sizeable hole in the amount that could be reclaimed.

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By jon_griffey
10th Jun 2013 11:42

I recall..

It had something to do with foreign companies that could reclaim or claim relief for withholding tax and by reducing the tax credit and thus the amount they could claim, it was essentially a stealth tax.  Because of treaty issues the Chancellor (GB I recall) couldn't reduce this to below 10%.

However the cynic in me sees it as just a smoke-and-mirrors trick so the then Chancellor could say 'look I have reduced the tax on dividends to 10%'.

 

 

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By JDBENJAMIN
10th Jun 2013 11:47

The reason it was set at 10% was because that matched the 10%...

....starting rate for Income Tax at the time. The 10% bracket has since been restricted to investment income.

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By Triggle
10th Jun 2013 12:11

CT61's for all

They should bring back ACT for all companies.

This would mean that dividends paid during the year would have to be properly declared out of computed distributable reserves and not, as I suspect is more often than not the case, "created" by a paper trail after the event. Small companies would be forced to produce quarterly management accounts which would assist their business (and mean more work for us).

The Treasury (i.e. you and me as taxpayers) would also collect their tax receipts earlier with the company claiming the tax credit against their mainstream CT as before.

I would also make the tax credit a real tax credit and not a notional one - whether at 10% or 20%. This would mean pension funds and non-taxpayers, especially pensioners, would get all their money back.

Any votes for or against?

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By tom2another
10th Jun 2013 13:38

It was a smoke & mirrors ruse

It was a smoke & mirrors ruse by Gordon (I spit on him) Brown to extract more tax and get out of the problems of ACT.

It's unforseen side effect was the total ruination of the private pension industry, since as they could no longer reclaim the tax credit, they were effectively being taxed on dividend income. As pension companies/schemes were the biggest share holders who were suddenly faced with a fall in income they decided to get out and into interest paying investments(where they could reclaim the tax), the resulting panic sale of shares led to one of the biggest black weekdays that the stock market has ever seen.

So GB killed the pension industry & private pensions, and stole my old age!

I think MP's & especialy Chancellors should be forced in defined contribution pensions that they have to pay for out of their own pockets, that'd sharpen them up!

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By Wiganer Elaine
10th Jun 2013 13:40

Abolish the Dividend Tax Credit

I would say abolish any tax credit on dividends and have them paid gross. You can then at the same time abolish the dividend tax rate and have them taxed at 20%, 40% or 45% as appropriate.

This would also have a knock-on effect on other issues such as IR35, directors' salaries etc as the scope for tax avoidance would be reduced!

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By MJShone
10th Jun 2013 13:41

My memory supports gbuckell and jon_griffey

I think it was to do with the ability of overseas companies to claim tax repayments under tax treaties. The way it worked meant that UK taxpayers were no better or worse off but the amount of the tax credit that could be reclaimed under DTTs was significantly less than it would otherwise have been.

 

Why it was 10% (or 1/9th, depending on how you look at it) I can't recall.

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7om
By Tom 7000
10th Jun 2013 15:02

Because....

Its to make the rules really complicated so the man on the clapham omnibus hasnt the foggiest what its all about and we can charge large fees and look clever....

 

works for me ;o)

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By jonsa
10th Jun 2013 16:44

Scam

tom2another is the only one who is right as this was a (I hate) great Gordon Brown scam.  He had only just become chancellor.  Annually took billions from our private/company pensions.  The poor pensioners who thought they were losing less when they could not reclaim tax was the other part of the scam.  Of course the public just did not understand and it took years for the media to cotton on, while I grumbled about it from the beginning.                                                As for the calculations, the extra tax for higher rate shareholders is equal to 25% as someone said above, as 25% of 80% is the extra 20%.  Remember it may be 10% tax credit, but 20% has been paid in CT.  I know it seems odd at 32.5% in total, but cash in the pocket works out exactly the same as if the proper 20% tax actually paid was used.

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