Income Tax (Trading and Other Income) Act 2005

Tax credits and payment and deduction of tax

397 Tax credits for qualifying distributions: UK residents and eligible non-UK residents

(1) A UK resident or eligible non-UK resident receiving a qualifying distribution made by a UK resident company is entitled to a tax credit equal to one-ninth of the amount or value of the distribution (but see subsections (3) and (6)).

(2) Such a person may claim to deduct the tax credit from—

(a) the income tax charged on the person’s total income for the tax year in which the distribution is made, or

(b) the income tax charged on the person’s income under section 3 of ICTA (certain income charged at basic rate) for that year.

(3) Subsection (1) only applies so far as the distribution is brought into charge to tax, and accordingly if the person’s total income is reduced by any deductions which fall to be made from the distribution, the tax credit for the distribution is reduced in the same proportion as the distribution.

(4) For the purposes of this section “eligible non-UK resident”, in relation to a qualifying distribution, means an individual who at any time in the tax year in which it is received is a non-UK resident within section 278(2) of ICTA (Commonwealth citizens, EEA nationals etc.).

(5) If a distribution is, or is treated under any provision of the Tax Acts as, the income of a person (“P”) other than the recipient (“R”), P (not R) is treated as receiving it for the purposes of this section (and so P (not R) is entitled to a tax credit if P falls within subsection (1)).

(6) This section is subject to the following provisions—

• section 231AA of ICTA (no tax credit for borrower under stock lending arrangement or interim holder under repurchase agreement),

• section 231AB of ICTA (no tax credit for original owner under repurchase agreement in respect of certain manufactured dividends),

• section 469(2A) of ICTA (no tax credit for trustees of a unit trust scheme that is neither an authorised unit trust nor an umbrella scheme), and

• section 171(2B) of FA 1993 (no tax credit for distributions in respect of assets in Lloyd’s member’s premium trust fund).

398 Increase in amount or value of dividends where tax credit available

(1) If a person is entitled to a tax credit in respect of a dividend or other distribution, the amount or value of the dividend or other distribution is treated as increased by the amount of the tax credit for all income tax purposes (except section 397(1)).

(2) Subsection (1) does not apply if the distribution is dealt with under Chapter 2 of Part 2 unless the trade consists of the underwriting business of a member of Lloyd's.

399 Qualifying distributions received by persons not entitled to tax credits

(1) This section applies if a person is not entitled to a tax credit for a qualifying distribution included in the person’s income for a tax year.

(2) The person is treated as having paid income tax at the dividend ordinary rate on the amount or value of the distribution (but see subsection (7)).

(3) For the purposes of subsection (2), if the person is non-UK resident the amount or value of the distribution is treated as the grossed up amount, unless the person is a company which is beneficially entitled to the income.

(4) If the person is non-UK resident and the distribution is income to which section 686 of ICTA applies (accumulation and discretionary trusts: special rates of tax), for the purposes of that section the amount or value of the distribution is treated as the grossed up amount.

(5) In this section “the grossed up amount” means the actual amount or value of the distribution, grossed up by reference to the dividend ordinary rate for the tax year.

(6) The income tax treated as paid under subsection (2) is not repayable.

(7) Subsection (2) is subject to the following provisions—

• section 231AA(1A) of ICTA (which disapplies subsection (2) for borrower under stock lending arrangement or interim holder under repurchase agreement),

• section 231AB(1A) of ICTA (which disapplies subsection (2) for original owner under a repurchase agreement in respect of certain manufactured dividends), and

• section 469(2B) of ICTA (which disapplies subsection (2) for trustees of a unit trust scheme that is neither an authorised unit trust nor an umbrella scheme).

400 Non-qualifying distributions

(1) This section applies if a person’s income in a tax year includes a non-qualifying distribution.

(2) The person is treated as having paid income tax at the dividend ordinary rate on the amount or value of the distribution.

(3) The income tax treated as paid under subsection (2) is not repayable.

(4) If the distribution is income to which section 686 of ICTA applies (accumulation and discretionary trusts: special rates of tax), the trustees' liability for income tax at the dividend trust rate on the amount or value of the whole or any part of the distribution is reduced.

(5) The amount of the reduction is equal to income tax at the dividend ordinary rate on so much of the distribution as is assessed at the dividend trust rate.

(6) In this section and section 401 “non-qualifying distribution” means a distribution which is not a qualifying distribution.

401 Relief: qualifying distribution after linked non-qualifying distribution

(1) Where a person pays an amount in respect of extra liability for a non-qualifying distribution, the person’s extra liability for a subsequent qualifying distribution is reduced by that amount if conditions A and B are met.

(2) Condition A is that the non-qualifying distribution consists of the issue of share capital or security.

(3) Condition B is that the qualifying distribution consists of a repayment of the share capital or the principal of the security.

(4) A person’s extra liability for a distribution charged to tax for the tax year 1999-2000 or a later tax year is the amount by which the person’s liability to income tax on the distribution exceeds the amount it would be if it were charged only at the dividend ordinary rate.

(5) A person’s extra liability for a distribution charged to tax for a tax year after the tax year 1992-93 and before the tax year 1999-2000 is the amount by which the person’s liability to income tax on the distribution exceeds the amount it would be if it were charged only at the lower rate.

(6) A person’s extra liability for a distribution charged to tax for a tax year before the tax year 1993-94 is the amount by which the person’s liability to income tax on the distribution exceeds the amount it would be if it were charged only at the basic rate.

(7) In this section “security” has the meaning given in section 254(1) of ICTA.