Finance Act 1965

Section 65.

SCHEDULE 17 Supplementary Provisions about Dividend Stripping.

Application of Schedule.

1 This Schedule has effect for the interpretation of section 65 of this Act (" the principal section ") and for its modification in particular cases, and for transitional purposes relating to that section or section 4 of the [1955 c. 17 (4 & 5 Eliz. 2.).] Finance (No. 2) Act 1955.

Construction of references to holdings.

2 (1) Subject to sub-paragraph (3) below, references to a holding in a company refer to a holding of shares, securities or rights by virtue of which the holder may receive distributions made by the company, but so that a person's holdings of different classes, and a person's holdings of the same class acquired at different times, shall be treated as separate holdings.

(2) Holdings of shares, securities or rights which differ in the entitlements or obligations they confer or impose shall be regarded as holdings of different classes.

(3) References to a holding in a company shall not apply, unless the contrary intention appears, to a holding consisting of shares which satisfy the following conditions:—

(a) that they are fully paid and do not carry any right to dividends other than dividends at a rate per cent. of the nominal value of the shares which is fixed or fluctuates only with the standard rate of income tax ; and

(b) that the rights which they carry in respect of dividends and capital are comparable with those general for fixed-dividend shares quoted on stock exchanges in the United Kingdom; and

(c) that no part of the share capital represented by the shares has at any time been treated as paid up otherwise than by the receipt by the company of new consideration.

(4) Sub-paragraph (3) above shall not operate in relation to any acquisition of such a holding as is there mentioned if either—

(a) at the time of that acquisition dividends on the shares were more than twelve months in arrear and would or might become payable thereafter ; or

(b) as a sequel to or in contemplation of that acquisition or any related acquisition of a holding in the company (but before the making of the distribution which is in question under the principal section) there has been any alteration of the rights attached to the shares or, so as materially to affect those rights or the operation of those rights, any alteration of the rights attached to or comprised in holdings of any other class in the company.

For purposes of this sub-paragraph " related acquisitions " are acquisitions by the same person or by persons acting in concert and acquisitions together comprised in arrangements made by any person.

3 (1) In the application of subsection (1)(a) of the principal section all the recipient's holdings of the same class in the company are to be treated as ingredients constituting a single holding, together with such holdings of other persons as are mentioned below, except that no account shall be taken under any provision of this paragraph of a person's holdings acquired before the year 1960-61.

(2) A person's holding in a company shall be treated as an ingredient in the same holding as the recipient's if the holdings are - of the same class, and either—

(a) the transaction in pursuance of which he acquired the holding in question and the transaction in pursuance of which the recipient acquired any holding of that class were entered into by them in concert or were together comprised in arrangements made by any person ; or

(b) he and the recipient are both dealers, and his trade as dealer is under the same control as that of the recipient.

For purposes of this sub-paragraph two trades shall be regarded as under the same control if they are carried on by persons one of whom is a body of persons over whom the other has control (within the meaning assigned to that expression by section 333 of the [1952 c. 10.] Income Tax Act 1952), or both of whom are bodies of persons under the control (as so defined) of a third person ; and for this purpose " body of persons " includes a partnership.

(3) A holding acquired in right of another holding shall be included under sub-paragraph (2)(a) above where that other holding would be so included ; and for this purpose holdings acquired in pursuance of an offer or invitation made in respect of any holdings in the company and restricted to the holders thereof shall be treated as acquired in right of their holdings.

Time of acquisition.

4 (1) A person having more than one holding of the same class in a company and selling or otherwise disposing of a part only shall be regarded as selling or disposing of a holding or part of a holding acquired earlier rather than one acquired later.

(2) Where at the time when a dealer's trade is set up and commenced (or is to be treated in computing the trading income for corporation tax or income tax as set up and commenced) a holding is included in the trading stock, or profits from a sale of it would otherwise form part of the trading profits, the holding shall be regarded as having been acquired at that time; but where there is a change in the persons engaged in carrying on a trade, and a new trade is not on that change to be so treated as set up and commenced, the principal section shall apply to the person so engaged after the change as if there had been done to or by him anything done to or by his predecessor since the time when the trade was set up and commenced (or is to be so treated as having been set up and commenced).

(3) A company acquiring from another company (neither of them being a dealer) a holding in a third company at a time when the three companies are associated shall, for the purpose of determining how far, if at all, a distribution made in respect of the holding is made out of profits arising to the third company since the acquisition, be treated as having acquired the holding at the time when that other company acquired it (or, if this sub-paragraph applies also to that acquisition, is to be treated as having acquired it) or at the time, if it is later, when the said three companies became associated.

For this purpose " associated " means as regards two companies, that one is a subsidiary of the other or both are subsidiaries of a third company and, as regards three or more companies, that one is associated with each of the others ; and a company shall be deemed to be a subsidiary of another if (within the meaning of section 42 of the [1938 c. 46.] Finance Act 1938) more than one-half of its ordinary share capital is owned by that other, whether directly or through one or more bodies corporate or partly directly and partly through one or more bodies corporate.

Relation of distribution to profits.

5 (1) Subject to paragraph 7 below, the question how far a distribution made in respect of a holding of any class is to be treated as made out of profits arising to the company since the time when the holding was acquired shall be determined by taking the profits arising to the company since that time and seeing what proportion of that distribution and the distributions made with it on other holdings of the same class can be met out of those profits, after allowing for previous distributions made since that time on holdings of that class and for distributions made or not yet made on holdings not of that class (including any such holdings as are described in paragraph 2(3) above); and for this purpose there shall be treated as included in any distribution or part of a distribution the income tax thereon for which the company is liable to account under this Act.

(2) The allowance to be made under sub-paragraph (1) above for previous distributions made since the time there referred to on holdings of the same class is the amount which, in the case of those distributions, is treated under that sub-paragraph as made out of the profits arising to the company since that time.

(3) The allowance to be made under sub-paragraph (1) above for distributions on holdings not of the class in question shall be such amount, whether fixed or proportionate to the amount of the profits, as ought justly and reasonably to be set aside for making such distributions, having regard to the respective rights comprised in or attaching to holdings in the company, and on the assumption that the total amount available for distributions by the company over any period will be proportionately greater or less than the profits taken into account under sub-paragraph (1) above, according as that period is longer or shorter than the period so taken into account; and regard may be had to the fact (if it is so) that distributions for which allowance is to be made under this sub-paragraph have been treated for purposes of the principal section as paid wholly or partly out of profits arising before the period so taken into account.

6 (1) For purposes of paragraph 5 above, the profits arising to a company in the period between a person's acquisition of a holding and the making of a distribution on the holding shall be arrived at by ascertaining in accordance with the following sub-paragraphs the profits or loss for any accounting period wholly or partly comprised in that period and, where necessary, by the division and aggregation or apportionment of the profits or losses so ascertained.

(2) Except as provided by sub-paragraph (3) below, the profits for any accounting period shall be ascertained according to the rules applicable under Part IV of this Act to the computation for corporation tax of the total profits of the company (losses of any description except those related to chargeable gains being deducted from profits of any description), except that—

(a) franked investment income and group income shall be included ; and

(b) no regard shall be had—

(i) to any investment allowances, initial allowances or balancing charges, to any scientific research allowance in respect of expenditure incurred after 5th November 1962 or to so much of any writing down allowance made at a rate determined under section 38 or 39 of the [1963 c. 25.] Finance Act 1963 (free depreciation in development districts) or under section 14 of this Act as exceeds an allowance at a yearly rate of fifteen per cent. of the relevant amount of expenditure; or

(ii) to any deduction falling to be made in respect of losses, allowances or expenses of management of any other period, except any deduction falling to be made against chargeable gains in respect of losses incurred before the accounting period; or

(iii) to any restriction on the deduction that may be made for directors' remuneration ;

(c) there shall be deducted—

(i) any charges on income; and

(ii) the corporation tax payable by the company in respect of the accounting period and any surtax paid by it in that period under section 249 of the [1952 c. 10.] Income Tax Act 1952 as applied by the provisions of Part IV of this Act about close companies.

This sub-paragraph shall apply for ascertaining a loss sustained by a company in an accounting period as it applies for ascertaining the profits of a company for an accounting period.

(3) Where a company has a holding in another body corporate resident in the United Kingdom, and—

(a) that holding was acquired by it before the recipient acquired his holding in the company ; and

(b) on the assumption that the company's holding and any other relevant holdings in the body corporate were acquired when the recipient acquired his holding in the company, the company's holding in the body corporate would be treated for purposes of the principal section as amounting to, or being an ingredient in a holding amounting to, ten per cent. of all holdings of the same class in the body corporate;

then any distribution made to the company in respect of that holding shall be brought into account under sub-paragraph (2) above only to the extent to which it would, on the said assumption, be treated under this Schedule as made out of profits arising to the body corporate since the time when the holding was acquired:

Provided that this sub-paragraph shall not apply to a distribution which, on the said assumption, would fall within subsection (8) of the principal section.

Transitional.

7 (1) For the application of section 4 of the [1955 c. 17 (4 & 5 Eliz. 2.).] Finance (No. 2) Act 1955 to dividends paid before the year 1966-67 the profits or gains arising in any period from a trade shall, notwithstanding that those profits or gains are within the charge to corporation tax, be computed in accordance with paragraph 5(2)(a) of Schedule 3 to that Act as if they were within the charge to income tax.

(2) As regards distributions made in or after the year 1966-67 in respect of holdings acquired before that year.—

(a) paragraphs 5 and 6(1) and (2) above shall be applied in relation to the period beginning with that year, as if the acquisition had been made at the beginning of that year, and paragraph 6(3) shall not apply; but

(b) as regards the period before the beginning, of that year there shall be ascertained, as if for purposes of section 4 of the [1955 c. 17 (4 & 5 Eliz. 2.).] Finance (No. 2) Act 1955, whether there were profits of the company arising since the date of the acquisition and available at the beginning of that year for payment of the distribution or, if not, whether the company had incurred a loss between the date of the acquisition and the beginning of that year, and any such profits or loss shall be brought into account under paragraph 6(2) above by adding the amount of the profits or deducting the amount of the loss in the computation for the accounting period or part of an accounting period ending first after the beginning of that year.

8 (1) As respects dividends paid before the year 1966-67 section 4 of the Finance (No. 2) Act 1955 shall have effect for corporation tax notwithstanding the exclusion from the charge to corporation tax of distributions received from companies resident in the United Kingdom ; and any other enactment operating by reference to the said section 4 shall apply accordingly.

(2) Where—

(a) a company carries on a trade other than such a trade as is mentioned in subsection (1) of section 4 of the Finance (No. 2) Act 1955 ; or

(b) the business of a company consists wholly or mainly in the making of investments;

and in the year 1965-66 the company receives a dividend the net amount of which would, if the company carried on such a trade as is mentioned in the said subsection (1), be required to any extent to be brought into account for tax purposes as a trading receipt which has not borne tax, then so much of the said net amount as would have been required to be brought into account as aforesaid shall for the purpose of corporation tax in respect of chargeable gains be treated as if it were a capital distribution (within the meaning of Part III of this Act) received in respect of the stock or shares on which the dividend is paid, and to that extent paragraph 2(1) of Schedule 6 to this Act shall not apply thereto.