Chapter 6: Sales of foreign dividend coupons
Overview
2465.This Chapter rewrites the charge to tax in section 18(3B) to (3E) of ICTA on the proceeds of the sale of coupons attached to foreign shares, where the sale is made through a bank in the United Kingdom or to a dealer in coupons in the United Kingdom.
2466.Although these provisions include coupons on both securities and shares, for corporation tax purposes the charge applies in effect to the sale of coupons on shares only.
2467.Chapter 2 of Part 4 of FA 1996 charges to tax all profits and gains arising to a company from its loan relationships. Profits and gains include (section 81(5) and 84(1) of that Act) payments payable in pursuance of any rights under a loan relationship. The sale of a coupon on a security is charged to tax in the same way as any sale in pursuance of a right under a loan relationship. Section 18(3B) of ICTA as it applies to coupons on securities is therefore unnecessary for corporation tax purposes and section 80(5) of FA 1996 applies to give the loan relationship provisions precedence in any event.
2468.Section 18(3B) of ICTA requires Schedule D Case IV in section 18(3) to be read as including proceeds of the sales of coupons for foreign dividends. Subsection (3B) does not explain how the charge is allocated between Schedule D Case IV and Case V. The obvious assumption is that where the coupon is issued in respect of a security out of the United Kingdom it falls within Case IV (which charges income from overseas securities) and otherwise within Case V (which charges income from possessions outside the United Kingdom).
2469.Section 18(3A) of ICTA requires “Case III” as set out in that subsection to be substituted for “Case IV” in section 18(3) of ICTA. The effect of this is to bring the extended meaning of Case IV required by section 18(3B) of ICTA into a Case III charge which incorporates a charge under the loan relationships provisions which, as explained above, already charges to tax the sale of coupons in respect of securities.
2470.Whether or not it was intentional that a Case IV charge for corporation tax should remain within section 18(3B) to (3E) of ICTA to be brought within Case III by section 18(3A) of ICTA is unclear. Subsections (3B) to (3E) were introduced in FA 1996, the same Finance Act that introduced section 18(3A) of ICTA. Either way the effect of section 18(3B) to (3E) of ICTA is simply to bring within the loan relationships provisions the sale of coupons on securities even though they are already within the provisions on first principles.
2471.For these reasons section 18(3B) to (3E) of ICTA has been rewritten to exclude the sales of coupons on foreign securities.
Section 974: Charge to tax under this Chapter
2472.This section applies the charge to corporation tax to income which is treated as arising from foreign holdings where a dividend coupon attached to the holding is (a) sold or otherwise realised by a bank in the United Kingdom or (b) sold to a coupon dealer in the United Kingdom by someone other than a bank or a coupon dealer. It is based on section 18(3), (3B) and (3E) of ICTA. The corresponding rule for income tax is in section 570 of ITTOIA.
2473.Subsection (3) applies where the coupon is sold by the bank on behalf of another. See Change 75 in Annex 1.
2474.Subsection (4) applies where a person who is neither a bank nor another coupon dealer sells the dividend coupons to a coupon dealer in the United Kingdom. Section 18(3B)(b) of ICTA refers to a dealer in coupons in the United Kingdom. See Change 75 in Annex 1.
Section 975: Meaning of “foreign holdings” etc
2475.This section gives the meaning of “foreign holdings” and “dividend coupons”. It is based on section 18(3B), (3C), (3D) and (3E) of ICTA. The corresponding rule for income tax is in section 571 of ITTOIA.
2476.For reasons given above the extended definition of “dividends” to include interest or other annual payments has been omitted as part of the exclusion of coupons in respect of securities. It is considered that “dividends” alone in section 18(3D) of ICTA is sufficient to refer to any income from shares.
2477.The definition in subsection (1) of “foreign holdings” as shares outside the United Kingdom which are issued by or on behalf of a non-UK resident body of persons reflects the wording of section 18(3C) of ICTA. Section 18(3B) states that the references in Schedule D Cases IV and V to income arising from securities or possessions out of the UK are to be taken in the case of relevant foreign holdings as including the various categories of proceeds detailed under paragraphs (a) and (b). This is construed as meaning that where the securities or possessions are out of the United Kingdom and are relevant foreign holdings references to income from them include the proceeds under those paragraphs (but not in other cases). In other words there is no assumption of a complete overlap between securities or possessions out of the United Kingdom and relevant foreign holdings. Whether a security or possession is within Cases IV and V as a security or possession out of the United Kingdom may depend on a number of factors (see Westminster Bank Executor and Trustee Co (Channel Islands) Ltd v National Bank of Greece SA (1970), 46 TC 472 HL).
