CREC071100 | Expenditure credit redemption: the pre-Step 1 restriction

S1179CC CTA 2009

A company may receive amounts of credit surrendered by a group member. In accounting periods after the first, a company may also have an amount of credit that was withheld at Step 2 in previous periods and brought forward into the current one. These amounts are used before Step 1 to discharge the company’s Corporation Tax (CT) liability in the current period. This is known as the pre-Step 1 restriction.

When a CT liability is discharged, the CT liability itself is not reduced. Rather, the amount the company has to pay for the liability is reduced.

The CT liability must be discharged in a particular order:

1. First, use amounts of credit brought forward from previous accounting periods.

2. Second, use amounts of credit surrendered by a group member that were surrendered by that group member after being withheld at Step 2 of its own redemption calculation.

3. Third, use amounts of credit surrendered by a group member at Step 4 of its own redemption calculation.

If the company has low or no CT liability, there may be some amounts left over after applying the pre-Step 1 restriction.

Any amount brought forward from a previous period and not used up can be surrendered to a group member or carried forward again into the next accounting period (CREC071400).

Any amount received from a group member and not used up is treated as if it were never surrendered. The surrendering company should adjust its calculations as necessary to reflect this.

Example 1:

Production company A has £80,000 of credit withheld at Step 2 in an earlier accounting period and brought forward into the current accounting period. It has a CT liability of £60,000 in the current accounting period.

At the pre-Step 1 restriction, the CT liability is discharged in full and reduced to nil.

Of the remaining £20,000 of credit brought forward, Production Company A decides to surrender £5,000 of it to a group member. The other £15,000 is carried forward again into the next accounting period.

Example 2:

Production Company B has £50,000 of credit withheld at Step 2 in the previous accounting period and brought forward into the current accounting period. It has also received £100,000 credit surrendered by another company in the same group, Company C. The whole of the £100,000 was surrendered at Step 4 by Company C.

Production Company B has a CT liability of £75,000 in the current accounting period.

At the pre-Step 1 restriction, the £50,000 of credit brought forward is used up first to discharge £50,000 of the CT liability.

As the whole amount received from Company C was surrendered at Step 4, there is no need to apply any part of it before the rest. The remaining £25,000 CT liability is reduced to nil by the amount received from Company C.

The remaining £75,000 of the amount received from Company C is returned to Company C as if it had not been surrendered.