Chapter 4: Special rules for distributions made by certain companies
Section 1064: Certain expenses of close companies treated as distributions
3108.This section extends the meaning of “distribution” to include certain expenses incurred by a close company in providing benefits for participators. It is based on section 418(1), (2) and (4) of ICTA.
3109.Expenses that fall within the rules are treated as distributions, the amount of the distribution being measured in the same way as under the income tax code if a benefit is provided to an employee.
3110.Clarification has been provided in subsection (2)(b) in relation to the question of amounts “made good” by the participator. The source legislation measures the amount of the “expense” in section 418(4) of ICTA by reference to the income tax legislation relating to employee benefits in kind – see subsection (3). The amount found under those rules is the net amount after any amounts made good or contributed by the employee.
3111.The purpose of section 418(2) of ICTA is to set out the conditions for an amount to be treated as a distribution. Section 418(2) also provides that the amount of the “expense” is reduced by any amount “made good”. In plain words, an amount can only be “made good” if it has been borne by the company – and if the participator has already made good any amount in arriving at the calculation in section 418(4) of ICTA then it is not possible to make it good again because the company has not borne the expense (or that part of it). Subsection (2)(b) makes this explicit.
3112.Where an amount contributed by the participator is not taken into account in the computation made using the employee benefit in kind rules, the reduction provided for in section 418(2) of ICTA can then take effect.
3113.Sections 1065 and 1066 set out two exceptions. Section 1067 contains supplementary material.
Section 1065: Exception for benefits treated as employment income etc
3114.This section sets out the first circumstance where section 1064 does not apply. It is based on section 418(3) of ICTA.
3115.The exceptions are set out in a table. The exceptions arise where the participator is also an employee within the benefit in kind rules of ITEPA (the benefits in kind rules apply instead), or in the case of certain death or retirement benefits for dependents of participators.
Section 1066: Exception for certain transfers between UK resident companies
3116.This section sets out the second exception to section 1064. It is based on section 418(5) and (6) of ICTA.
Section 1067: Companies acting in concert or under arrangements
3117.This section deals with the situation where two or more close companies act together to provide benefits to each other’s participators. It is based on section 418(7) of ICTA.
3118.In such a case the benefits are deemed to be provided by a close company to its own participator and hence treated as a distribution.
3119.Subsection (2) makes clear that this provision applies only for the purposes of the sections rewriting section 418 of ICTA.
Section 1068: Meaning of “participator” in sections 1064 to 1067
3120.This section defines “participator” for the purposes of sections 1064 to 1067. It is based on section 417(1) and (2) of ICTA.
Section 1069: Additional persons treated as participators
3121.This section makes two extensions to the meaning of “participator” in section 1068. It is based on sections 416(2) to (6), 417(1) and (3) and 418(8) of ICTA.
Section 1070: Companies carrying on a mutual business
3122.This section restricts the application of the rules about distributions in the case of a company carrying on a mutual business. It is based on sections 6(4), 490(1) to (3) and 834(2) of ICTA.
3123.The rules about distributions only apply to such a company to the extent that distributions are made out of taxable profits or franked investment income (FII). But this limitation applies only if the distribution is made to persons who participate in the mutual business.
3124.The inclusion of FII allows the company in effect to pass dividend income to its members as its own distribution so that the members are taxable on the amount received as if they had received the dividends directly instead of earning them “through” the mutual company.
3125.If the business is a mutual life business then the distribution rules do not apply at all (that is, there is no qualification in terms of being made out of taxable profits or FII) in the case of distributions made to persons participating in that business.
Section 1071: Companies not carrying on a business
3126.This section restricts the application of the rules about distributions in the case of a company that does not carry on, or has never carried on, a trade or a business of holding investments nor has held an office. It is based on sections 6(4), 490(4) and 834(2) of ICTA.
3127.In such a case the rules about distributions are limited to amounts distributed out of taxable profits or franked investment income.
3128.Although the section reflects the application of the definition of “trade” in section 6(4) of ICTA, as applied to section 490 of ICTA by section 834(2) of ICTA, the term does not include any reference to a profession or vocation. See Change 4 in Annex 1.
Section 1072: Members of a 90% group
3129.This section extends the meaning of distribution in the case of a company and its 90% subsidiaries. It is based on section 254(1), (3) and (4) of ICTA.
3130.If this provision applies, the distribution rules are expanded to encompass anything distributed out of assets of the company in respect of shares or securities of any company in the group, unless the distribution is to another company in the group which is UK resident.
