Chapter 2: Matters which are distributions
Section 998: Overview of Chapter
2960.This section sets out the scope of Chapter 2 and provides signposts to other provisions in the Chapter, including those setting out exceptions. It is new.
Section 999: Priority of negative rules
2961.This section directs that the Chapter is subject to any express exceptions, and lists some of those that most commonly affect what is to be treated as a distribution. It is based on section 209(1) of ICTA.
2962.The section specifically refers to paragraph 6 of Schedule 12 to FA 1988, which sets out a number of tax matters connected with the transfer of the whole of the business of a building society to a successor company. It was decided to keep this material together rather than take out one small part. The Schedule has, therefore, not been rewritten.
Section 1000: Meaning of “distribution”
2963.This section sets out the main circumstances that give rise to a distribution. It is based on sections 209(2) and (4) and 418 of ICTA.
2964.The section sets out the circumstances that give rise to a distribution in paragraphs A to H. A number of later sections refer to one or more of these paragraphs.
2965.The references to the source legislation are as follows:
| Paragraph | Origin (in ICTA). |
|---|---|
| A | section 209(2)(a). |
| B | section 209(2)(b). |
| C | section 209(2)(c). |
| D | section 209(2)(c). |
| E | section 209(2)(d). |
| F | section 209(2)(e). |
| G | section 209(4). |
| H | section 209(2)(f). |
2966.The section also provides signposts to extensions to the meaning of distribution in section 1064 and section 1072.
Section 1001: Provisions related to paragraphs A to H in section 1000(1)
2967.This section provides information and signposts to bring together in one place a table of the main provisions that explain, supplement or limit each of the categories of distribution. It is new.
2968.It is not exhaustive, but provides a set of signposts to aid navigation through the legislation.
Section 1002: Exceptions for certain transfers of assets or liabilities between a company and its members
2969.This section excludes two circumstances from the scope of paragraph B in section 1000. It is based on section 209(5) and (6) of ICTA.
2970.Section 209(5) and (6) of ICTA are written in slightly different terms. Subsection (5) first qualifies section 209(4) of ICTA. This qualification is rewritten in section 1021(1). Subsection (5) then goes on to disapply section 209(2)(b) of ICTA. Section 1002(1) picks up this link, which brings with it the interpretation material of section 209(7) of ICTA, rewritten in section 1021(2) and (3).
2971.Section 209(6) of ICTA is rewritten in section 1002(2) and section 1021(4). This ensures that the qualifications are located close to the rewritten provisions that they modify.
Section 1003: Redeemable share capital
2972.This section explains how the amount of a distribution is identified when a distribution falls within paragraph C in section 1000 because redeemable share capital is issued partly for new consideration. It is based on section 209(2) and (8) of ICTA.
2973.If a premium is payable to the holder of this type of share capital, either on redemption or otherwise, the amount of the premium is added to the value of the share capital for the purposes of calculating the amount of the distribution.
2974.For example, the nominal value of the share capital is £1000 and the premium payable on redemption is £100. The total value calculated by section 1003 is therefore £1100. If the recipient gives, say, £900 for those shares the amount of the distribution is £200.
Section 1004: Securities issued otherwise than for new consideration
2975.This section performs a role similar to that of section 1003, but in this case in relation to paragraph D in section 1000 – securities issued partly for new consideration. It is based on section 209(2) and (8) of ICTA.
Section 1005: Meaning of “non-commercial securities”
2976.This section sets out the definition of a non-commercial security for the purposes of paragraph E in section 1000. It is based on section 209(2)(d) of ICTA.
2977.Sections 1006 to 1014 also affect the scope and amount of a distribution within paragraph E in section 1000.
Section 1006: Distributions exceeding consideration received for issue of security
2978.This section qualifies the meaning of “the principal secured” for the purposes of section 1005 and of paragraph E in section 1000. It is based on section 209(3) of ICTA.
2979.The basic meaning of “principal secured” is not defined in tax statute and takes its general meaning, subject to any relevant specific tax rules.
2980.In measuring the extent to which there is more than a reasonable commercial return for the use of the principal, the “principal secured” cannot be greater than the amount given for the issue of the security.
2981.Section 1117(6) provides a further qualification if securities are issued at a price less than the amount repayable on them, and are not listed on a recognised stock exchange.
Section 1007: Securities issued at premium representing new consideration
2982.This section sets out the effect on the measurement of the “principal secured” if a security is issued at a premium representing new consideration. It is based on section 209(3A) of ICTA.
2983.The amount of the premium is taken into account in determining both the amount of the principal secured and the extent to which the return on the securities is more than a reasonable commercial return.
2984.Section 1008 qualifies this section, and there is a table at the end of the note on section 1013 summarising the interaction of sections 1006 to 1013.
Section 1008: Consideration for issue of security exceeding amount of principal
2985.This section explains what happens when the amount of the consideration paid for securities exceeds the principal secured. It is based on section 209(3AA) of ICTA.
2986.In such a case the principal secured is deemed to be increased to the amount of the consideration, for the purposes of determining whether or to what extent paragraph E in section 1000 applies. The rules in section 1007 concerning issue at a premium do not apply.
2987.An example is where the security is linked to movement in the value of a basket of shares. The amount received back by the investor could be lower than the amount paid for the security, so the value of the principal secured could be very small in such an example. This could on one view appear to be above a commercial return for that principal, but not so when viewed in relation to the amount actually paid by the investor for the security.
Section 1009: Securities reflecting dividends on certain shares etc: exclusion of section 1008
2988.This section is the first of two that qualify section 1008. It is based on section 209A(1), (2) and (4) of ICTA.
2989.The section applies where a security is linked to shares of the issuing company or any of its associated companies. The effect is that if the consideration given for the security exceeds the principal secured, the increase provided for by section 1008 is not made, but the rules in section 1007 concerning issue at a premium do apply.
2990.Section 1009 does not apply if the link to shares of a company or its associated companies arises solely because a bank or securities house has issued, as part of its normal business, securities based on a “qualifying index”. This could happen if the basket of shares forming the subject matter of the index includes shares in the issuing bank itself or in one of its associated companies.
2991.The second qualification is in section 1012.
Section 1010: Meaning of “qualifying index” in section 1009
2992.This section defines “qualifying index”. It is based on section 209A(3) of ICTA.
2993.The index must include shares of at least one company that is not either the issuing company or one of its associated companies, and those shares must be a “significant proportion” of the market value of the shares that make up the index.
Section 1011: Meaning of “associated company” in section 1009
2994.This section defines the term “associated company” as it applies in section 1009. It is based on section 209A(5) to (7) of ICTA.
2995.The section sets out how a person can control a company for this purpose. Any shares held on trading account (but not as part of an insurance company’s long-term insurance fund) are disregarded for this purpose.
Section 1012: Hedging arrangements
2996.This section provides the second exception to section 1008. It disapplies section 1008 if there are “hedging arrangements” in place. It is based on section 209B(1) and (3) of ICTA.
2997.Section 1012 takes effect either from the time when the hedging arrangements come into effect, or from a later time in relation to earlier hedging arrangements (but only if those arrangements were in place on or after 17 April 2002). An example of the latter is where a distribution in respect of a security did not initially fall within paragraph E in section 1000, but did so subsequently and there were hedging arrangements in place before the distribution fell within paragraph E.
2998.At any time when section 1012 takes effect, paragraph E in section 1000 operates from that time as if the adjustment under section 1008, increasing the principal secured to the consideration given on issue, had not been made.
2999.For example, a security with principal secured of £100 is issued for £120. Section 1008 would normally deem the principal secured to be increased to £120, and the return would be evaluated against that amount for the purposes of paragraph E in section 1000. If hedging arrangements are subsequently put in place, the principal secured from that point onwards is £100.
3000.The definition of “hedging arrangements” is in section 1014.
Section 1013: Exception to section 1012
3001.This section sets out a series of circumstances in which section 1012 does not apply, and hence section 1008 does apply. It is based on section 209B(2), (4), (5), (6), (7) and (9) of ICTA.
3002.All the four conditions A to D must be met and have been met at all times in which any hedging arrangements have been in place in relation to that security (but only on or after 17 April 2002).
3003.Once any one of the conditions A to D in this section is not met, section 1012 applies from that point onwards, and continues to apply even if all the conditions are subsequently satisfied.
3004.The following table summarises the interaction of sections 1006 to 1013.
| Section 1008 applies? | Section 1007applies? | |
|---|---|---|
| Security issued at a premium representing new consideration and the consideration is not greater than the principal secured – section 1007(1) | NO | YES |
| New consideration received exceeds the principal secured | YES | NO |
| Section 1009(1) applies – securities linked to shares | NO | YES |
| Section 1009(2) applies, overrides section 1009(1) | YES | NO |
| Section 1012 applies – hedging arrangements | NO | YES |
| Section 1013 applies, overrides section 1012 | YES | NO |
Section 1014: Meaning of “hedging arrangements”
3005.This section defines “hedging arrangements” for the purposes of sections 1012 and 1013. It is based on section 209B(8) of ICTA.
3006.The “hedging arrangements” are looked at from the point of view of the issuing company. The essence of the definition is that there is an amount of income or gain that offsets amounts that the company has to meet in relation to the security.
Section 1015: Meaning of “special securities”
3007.This section defines “special securities” for the purpose of paragraph F in clause 1000. It is based on, and covers, the various circumstances that are set out in section 209(2)(e) of ICTA.
3008.There are five sets of circumstances listed, corresponding as follows to the provisions in section 209(2)(e) of ICTA:
| Condition A | section 209(2)(e)(i). |
| Condition B | section 209(2)(e)(ii). |
| Condition C | section 209(2)(e)(iii). |
| Condition D | section 209(2)(e)(vi). |
| Condition E | section 209(2)(e)(vii). |
Section 1016: Meaning of “equity note” in section 1015
3009.This section provides the definition of “equity note”. It is based on section 209(9) of ICTA.
Section 1017: Section 1015: other interpretation
3010.This section provides additional definitions for the purpose of section 1015. It is based on section 209(2), (3B), (10) and (11) of ICTA.
3011.Subsection (1) qualifies condition C in section 1015 if the return on a security is dependent on the results of the company’s business. This is based on section 209(3B) of ICTA.
3012.Subsection (2) expands the meaning of “securities connected with shares in the company” for the purpose of condition Din section 1015. It is based on section 209(2)(e)(vi) of ICTA.
Section 1018: The principal secured: special securities
3013.This section qualifies the meaning of “principal secured” for the purposes of section 1015 if securities are issued at a premium. It is based on section 209(3) and (3A) of ICTA.
3014.The section performs the same function in relation to securities as section 1007(2) does in relation to shares. Note however that there is no equivalent of section 1007(3).
Section 1019: Relevant alternative finance return
3015.This section ensures that returns from certain alternative finance arrangements are not treated as distributions for the purposes of the Corporation Tax Acts. It is based on section 209(6A) of ICTA.
Section 1020: Transfers of assets or liabilities treated as distributions
3016.This section treats a company as making a distribution, and describes how to calculate the amount of the distribution, if assets or liabilities are transferred by a company to its members or vice versa (paragraph G in section 1000). It is based on section 209(4) of ICTA.
3017.The value of the benefit to the member is determined, and is then compared with the amount of any new consideration. If the amount given by the member is less than the value provided to the member, a distribution arises equal to the difference.
3018.This section is subject to the exceptions in section 1021.
Section 1021: Section 1020 exceptions
3019.This section sets out two circumstances where section 1020 does not apply. It is based on section 209(5) to (7) of ICTA.
3020.Subsection (1) sets out the two exceptions. Subsections (2) to (5) contain further interpretation.
3021.Note that if subsection (1) disapplies section 1020 and thereby takes something out of being a distribution, it is not to be treated as a distribution under paragraph B in section 1000. Section 1002(2) makes the necessary link.
Section 1022: Bonus issue following repayment of share capital treated as distribution
3022.This section sets out how a distribution can arise when a company makes a bonus issue of shares following a repayment of share capital. It is based on section 210(1) of ICTA.
3023.This section is qualified by section 1023.
3024.The rules for a repayment of share capital following a bonus issue of shares are in section 1026.
Section 1023: Exceptions to section 1022
3025.This section sets out certain exceptions to section 1022. It is based on section 210(2) to (4) of ICTA.
Section 1024: Premiums paid on redemption of share capital
3026.This section works with section 1025 to determine what is treated as a repayment of share capital. It is based on section 211(7) of ICTA.
3027.The starting point is that a premium paid on redemption of share capital is not treated as a repayment of share capital. This is further qualified by section 1025.
3028.The source legislation in section 211(7) of ICTA is not expressly limited in its application, but analysis of the legislation has shown that its practical application is limited to matters within the distributions legislation. This has now been made explicit by limiting its effect to this Chapter. See Change 57in Annex 1.
Section 1025: Share capital issued at a premium representing new consideration
3029.This section provides further interpretation of what constitutes a repayment of share capital. It is based on section 211(5) and (6) of ICTA.
3030.If a premium is paid by the purchaser on the issue of share capital, the amount of the premium is considered to be part of the value of that share capital for the purpose of determining what is subsequently to be treated as a repayment of share capital or as a distribution.
3031.For example, taking sections 1024 and 1025 together, if share capital with a nominal value of £100 is issued at par and is later repaid with a redemption premium of £20 then only £100 is considered to be a repayment of share capital.
3032.If, however, that same share capital was issued at an issue premium of £10, then £110 of the £120 would be regarded as a repayment of that share capital. However, all or part of the £10 issue premium is not regarded as a repayment of share capital to the extent that it has already been applied in paying up any share capital – see subsection (3).
Section 1026: Distributions following a bonus issue
3033.This section sets out the circumstances in which certain distributions are not treated as repayments of share capital because they follow an earlier issue of bonus shares. It is based on section 211(1), (2) and (4) of ICTA.
3034.The section applies only if the issue of bonus shares does not fall to be treated as a qualifying distribution under another provision. A qualifying distribution is any distribution other than one that is a distribution solely because of paragraph C or D in section 1000 (see section 1136 for the definition).
3035.Distributions made more than ten years after any bonus issue can be treated as repayments of share capital provided that section 739 does not apply to the company, and provided that the shares are not redeemable share capital.
3036.Section 1027 contains a further qualification.
3037.Schedule 2 contains savings for certain bonus issues that took place before 7 April 1973.
Section 1027: Cap on amount of distributions affected by section 1026
3038.This section qualifies section 1026. It is based on section 211(1) and (3) of ICTA.
3039.The section limits the amount of the distribution to the total value of any previous bonus issues that:
have not already been treated as distributions, and
have not been met by new consideration (defined as the “cap”).
Section 1028: Certain payments connected with exempt distributions
3040.This section affects section 1022 by treating chargeable payments made within five years of an exempt distribution as not being repayments of share capital for the purposes of those sections. It is based on sections 214 and 218(1)of ICTA.
3041.Exempt distributions and chargeable payments are dealt with in Chapter 5 (demergers). Chargeable payments are charged to income tax and corporation tax by section 1086.
