CREC071300 - Expenditure credit redemption: Step 2

S1179CC CTA 2009 

Step 2 compares the amount of credit remaining after Step 1 with the initial amount of credit (before Step 1 is applied) minus a notional tax charge at the main rate of Corporation Tax (CT). 

If the first amount is higher than the second, the first amount is reduced so that it is equal to the second amount before it can be carried forward to Step 3. If the first amount is lower than the second, no reduction occurs. 

The amount of the reduction, if any, is the amount withheld at Step 2 (CREC071400). 

How to apply Step 2 

A: Find the amount of credit remaining after Step 1. 

B: Find the initial amount of credit before Step 1 was applied. Reduce this amount as if it were subject to tax at the main rate of CT. 

C: Compare the amounts at A and B. The smaller amount is the amount that can be carried forward to Step 3. 

D: If the amount at A is higher than the amount at B, deduct the amount at B from the amount at A to find the amount of the reduction. This is the amount withheld at Step 2.

Examples 

Production Company A had an initial amount of credit of £200,000. After Step 1, it had £125,000 remaining. 

A: The amount of credit remaining after Step 1 is £125,000. 
 

B: The initial amount of credit is £200,000. 
 
Notional tax charge at the main rate of CT (currently 25%): £200,000 x 25% = £50,000 
Initial amount minus notional tax charge: £200,000 - £50,000 = £150,000 
 

C: The amount at A is £125,000 and the amount at B is £150,000. The smaller amount of £125,000 is the amount of credit remaining to carry forward to Step 3. 
 

D: The amount at A is not higher than the amount at B, so D is not needed. There is no amount withheld at Step 2.

Production Company B had an initial amount of credit of £300,000. After Step 1, it had £260,000 remaining. 

A: The amount of credit remaining after Step 1 is £260,000. 
 

B: The initial amount of credit is £300,000. 
 
Notional tax charge at the main rate of CT (currently 25%): £300,000 x 25% = £75,000 
Initial amount minus notional tax charge: £300,000 - £75,000 = £225,000 
 

C: The amount at A is £260,000 and the amount at B is £225,000. The smaller amount of £225,000 is the amount of credit remaining to carry forward to Step 3. 
 

D: Amount at A minus amount at B: £260,000 - £225,000 = £35,000. This is the amount withheld at Step 2.