CREC071400 - Expenditure credit redemption: treatment of amounts withheld at Step 2

S1179CD CTA 2009

The amount withheld at Step 2 for any given accounting period is the difference, if any, between the amount of credit remaining after Step 1 and the amount of credit carried forward to Step 3. It is referred to in this section as the Step 2 amount.

Step 2 amounts are not paid to companies in cash but are used to give tax relief in other ways. The legislation is in section 1179CD of Corporation Tax Act 2009.

In the period in which the amount is withheld

In the accounting period in which the Step 2 amount arises, due to an amount being withheld at Step 2, a company may choose to surrender some or all of the Step 2 amount to a group member. This is optional.

There are specific rules for how to use a surrendered amount (CREC072000).

If the company cannot surrender the amount or chooses not to do so, the amount is rolled over and carried forward to the next accounting period.

In subsequent accounting periods

In later periods, Step 2 amounts brought forward are used up in two ways. First, they must be used at the pre-Step 1 restriction (CREC071100) to discharge any Corporation Tax (CT) liability of the company for the accounting period. Unlike surrender to a group member, this is mandatory.

Any remaining CT liability of the company after the restriction can then be partially or wholly discharged at Step 1, using credit arising in the current period.

Step 2 amounts must be used before the amount of credit arising in the current period, so it is important that companies remember to apply the pre-Step 1 restriction before moving on to Step 1.

Example 1

Production company A is producing a film. Production is expected to take three years and A is now making a claim for its second accounting period. In A’s first accounting period, £25,000 was withheld at Step 2. Production Company A chose not to surrender any of the Step 2 amount to a group member and so the whole amount was carried forward into the current period.

Therefore, in the current period A has £25,000 Step 2 amount brought forward from the previous accounting period. It also has £150,000 credit arising in this period, and a CT liability of £40,000.

Production Company A must use the Step 2 amount brought forward to discharge the CT liability first, followed by the credit arising in the current period.

Therefore, Production Company A applies the pre-Step 1 restriction. The amount brought forward is fully used up and the CT liability is partially discharged, leaving £15,000 outstanding.

Production Company A then applies Step 1. The remaining CT liability is fully discharged using the £150,000 credit arising in the period and is reduced to nil. Production Company A has £135,000 credit remaining to carry forward to Step 2

End of example

Any Step 2 amounts brought forward which cannot be used up at the pre-Step 1 restriction may be surrendered to a group member. Like in the first period, this is optional.

Example 2

If Production Company A from Example 1 had a CT liability of only £10,000, it would have £15,000 of brought forward credit remaining after applying the pre-Step 1 restriction. It could choose to surrender some or all of that amount to a group member.

End of example

Amounts not surrendered to a group member are rolled over again and carried forward into the next accounting period, and the process repeats: they are used at the pre-Step 1 restriction and any amount remaining after that can be surrendered to a group member or carried forward once more.

Step 2 amounts can be carried forward indefinitely until they are used up at the pre-Step 1 restriction or surrendered to a group member. If the company winds down and they have not been used up, they are lost.