2954.This Part sets out what is and what is not a company distribution for the purposes of the Corporation Tax Acts. It rewrites Part 6 and section 418 of ICTA and elements of sections 477A, 486 and 490 of ICTA.
2955.The definition of “the Corporation Tax Acts” in the Interpretation Act 1978 refers to enactments relating to the taxation of company distributions and associated income tax provisions. Some income tax rules are included in this Act. But the income tax effect of some provisions (notably sections 249 and 252 of ICTA) are relocated in ITTOIA.
2956.Provisions of an administrative nature relating to specific aspects of distributions have been located alongside the provisions to which they relate. More general provisions about returns and information are in Chapter 6.
2957.The structure of the Part is as follows.
Chapter 2 sets out what is treated as a distribution.
Chapter 3 sets out what is not a distribution.
Chapter 4 deals with certain special cases.
Chapter 5 deals with demergers.
Chapter 6 contains provisions about returns and information.
Chapter 7 deals with tax credits in connection with distributions.
Chapter 8 provides interpretation.
2958.This section sets out the scope of the Part. It is new.
2959.The section provides signposts to rules that define what is and is not a distribution, to rules that extend the meaning of distribution, and to the power in section 152 of FA 1995 to make modifications in relation to open-ended investment companies. Section 152 of FA 1995 is not being rewritten.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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 |
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.
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). |
3009.This section provides the definition of “equity note”. It is based on section 209(9) of ICTA.
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.
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).
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.
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.
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.
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.
3025.This section sets out certain exceptions to section 1022. It is based on section 210(2) to (4) of ICTA.
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.
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).
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.
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”).
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.
3042.This section sets out the scope of the Chapter. It is new.
3043.The section refers to paragraph 6 of Schedule 12 to FA 1988. This Schedule is about change of status of building societies. It was decided to keep this material together rather than take out one small part. The Schedule has, therefore, not been rewritten.
3044.This section excludes distributions made in a winding up from the scope of distributions for the purposes of the Corporation Tax Acts. It is based on section 209(1) of ICTA.
3045.This section ensures that certain distributions made in the course of a cross-border merger are not treated as distributions for the purposes of the Corporation Tax Acts. It is based on section 209(1A) of ICTA.
3046.Provided certain conditions are met, if a company makes a distribution as part of a cross-border merger and then ceases to exist without being formally wound up, that distribution is not treated as a distribution.
3047.This section qualifies paragraph F in section 1000. It is based on section 212(1) and (3) of ICTA.
3048.The section excludes from the meaning of a distribution amounts paid to companies within the charge to corporation tax, but not if the distribution falls within the rules for non-commercial securities in paragraph E in section 1000.
3049.Schedule 2 contains savings for certain obligations entered into before 9 March 1982, or entered into before 1 July 1982 as a result of negotiations that were in progress before 9 March 1982.
3050.This section sets out the conditions that must apply so that the purchase by an unquoted trading company of its own shares is not treated as a distribution for the purposes of the Corporation Tax Acts. It is based on sections 219 and 229(3) of ICTA.
3051.The consideration for the purchase of own shares potentially falls into the computation of a chargeable gain in the hands of the seller, subject to any necessary matters to be taken into account under the chargeable gains legislation. This was confirmed by the judgement in the Court of Appeal in Strand Options and Futures Ltd v Vojak [2004] STC 64.
3052.This section is supplemented by sections 1034 to 1048.
3053.This section sets out requirements relating to the residence and ordinary residence (for tax purposes) of the seller, and includes cases where the shares are held through a nominee or by a personal representative. It is based on section 220(1), (3) and (4) of ICTA.
3054.This section sets a minimum period throughout which the shares disposed of must have been held, and contains rules to determine, in certain circumstances, when those shares were acquired. It is based on section 220(5), (8) and (9) of ICTA.
3055.This section deems the seller to own the shares in certain periods. It is based on section 220 (6) and (7) of ICTA.
3056.Subject to certain conditions, periods of ownership by a spouse or civil partner of the seller, or by a person whose shares are transferred to the seller under a will or intestacy, are treated as periods of ownership by the seller.
3057.The definition in section 1011 of ITA relating to married persons or civil partners living together applies for the purposes of the Income Tax Acts, which in turn include corporation tax provisions which relate to income tax. The purchase of own share rules fall within that scope. The definition of persons “living together” has been provided in this legislation to avoid the need to refer to section 1011 of ITA - see section 1116.
3058.This section is the first of two that place conditions on the seller’s interest in the company after the purchase by the company of its own shares. It is based on section 221(1), (2), (3) and (4) of ICTA.
3059.The seller’s shareholding in the company must be reduced to no more than 75% of what it was before the company’s purchase of its own shares took place. For this purpose, the shareholdings of the seller and any shareholdings of the seller’s associates are looked at as one. The meaning of “associate” is provided by sections 1059 to 1061.
3060.The section is qualified generally by sections 1038 and 1043, and by sections 1039 to 1042 if the company making the purchase is a member of a group.
3061.This section sets out the second condition concerning the seller’s interest in the company after the purchase of its own shares. It is based on section 221(5), (6), (7) and (8) of ICTA.
3062.The seller’s entitlement to the profits of the company after the purchase must be no more than 75% of what it was before the purchase. There are further requirements in section 1039 where the company is a member of a group.
3063.This section supplements the requirements of sections 1037 and 1038 where the company is a member of a group. It is based on section 222(1) and (3) of ICTA.
3064.The seller’s shareholding in all companies in the group must be substantially reduced after the purchase of own shares, taking into account any shares in the group held by any of the seller’s associates – even if the seller holds no shares in the company making the purchase after the purchase has taken place.
3065.There are further qualifications in sections 1040 and 1043.
3066.This section sets out how to determine whether the seller’s shareholding in the purchaser’s group is substantially reduced. It is based on section 222(2), (4), (5) and (6) of ICTA.
3067.The seller’s shareholding in the group, taken together with any shareholdings of the seller’s associates, must be no greater than 75% of what it was before the purchase of own shares took place.
3068.This section stipulates that the seller’s entitlement to the profits of the group must be no greater than 75% of what it was before the purchase of shares took place. It is based on section 222(7) and (8) of ICTA.
3069.This section places certain further requirements on the seller and on the transaction. It is based on section 223 of ICTA.
3070.The definition of “connected” for this purpose is in section 1062.
3071.This section treats the seller as meeting the necessary conditions if the seller agreed to the purchase in order to permit an associate’s shareholding to be substantially reduced. It is based on section 224 of ICTA.
3072.This section permits the company to apply to the Commissioners for HMRC for a decision whether or not section 1033 applies in respect of a particular purchase of own shares. It is based on section 225(1) of ICTA.
3073.The words “the Commissioners for Her Majesty’s Revenue and Customs” have been substituted for the words “the Board” in the source legislation. This gives effect to section 50(1) and (2) of CRCA which requires references to the terms in the source legislation to be taken as references to the substituted terms.
3074.This section sets out time limits and further procedural rules in relation to the consideration of an application under section 1044. It is based on section 225(2) to (5) of ICTA.
3075.This section requires a company to make a return of a payment that it considers is within section 1033. It also provides fora company or any person connected with it to provide information about schemes or arrangements in relation to payments treated as falling within that section and for certain information to be provided where a payment falling within that section is received on behalf of another person It is based on section 226(1), (2) and (4) of ICTA.
3076.This section widens the general meaning of “group” and “51% subsidiary” for the purpose of the purchase of own share rules. It is based on section 222(9) to (12) of ICTA.
3077.This section contains definitions. It is based on section 229 of ICTA.
3078.The term “personal representatives” (used in subsection (3))is defined for all purposes of this Act in section 1119.
3079.The reference to “trading activities” in the source is omitted as that term is not used in this part of the legislation.
3080.This section sets out the treatment of a dividend taken in shares instead of cash, and an issue of bonus shares derived from rights attaching to those shares. It is based on sections 230 and 249 of ICTA.
3081.If the value of the shares is charged to tax as income of the recipient under ITTOIA, the issue of those shares is not treated as a distribution.
3082.The section is supplemented by sections 1050 and 1051, and there are special rules in Schedule 2 for share capital issued before 6 April 1975.
3083.Section 249(3) of ICTA is not rewritten as it is no longer needed. It introduces specific rules for income tax where two or more persons are entitled to the share capital that has been issued and provides how those rules are applied in such a case. This provision is already made for income tax by section 413(5) of ITTOIA, for the purposes of the rules in Chapter 5 of Part 4 of that Act, and has no effect for corporation tax.
3084.Schedule 1 contains consequential amendments to the provisions of ITTOIA that deal with the income tax provisions for stock dividends.
3085.This section sets out the tax treatment of the shares issued in an exchange or conversion of shares that were themselves bonus shares taxed as a stock dividend. It is based on section 249(9) of ICTA.
3086.If the stock dividend was taxed as income then the issue of the replacement shares:
is not taxed as a stock dividend,
is not treated as a distribution, and
is not regarded as issued for new consideration – subsection (5).
3087.Some bonus issues do not fall within the rules of the provisions that section 1049 rewrites, either because they were issued before the original rule was introduced (section 34 of the F(No 2)A 1975) or because the rights to the bonus issue were contained in shares issued before 6 April 1975 (the transitional rule in section 249(8) of ICTA, rewritten as paragraph 78A of Schedule 2 to ITTOIA).
3088.If this is the case, section 1049 does not apply to the replacement shares. Therefore, the issue of those shares is treated as a distribution and they are not treated as issued for new consideration – see subsection (3).
3089.This section provides interpretation for the stock dividend rules. It is based on sections 249(1) and 251(1) of ICTA.
3090.This section makes provision for certain returns to be made in relation to stock dividends. It is based on section 250(1), (3), (4), (5) and (6) of ICTA.
3091.This section sets out the return periods for the purposes of section 1052. It is based on section 250(2) of ICTA.
3092.This section ensures that interest or dividends paid in respect of accounts held with a building society are not treated as distributions for corporation tax purposes. It is based on section 477A(3)(b) and (9) of ICTA.
3093.Such payments are charged to income tax as interest by section 372 of ITTOIA, and to corporation tax by section 498 of CTA 2009.
3094.This section states that payments made to members by an industrial or provident society in the form of a share of profits – for example the traditional “divi” from the Co-op – is not treated as a distribution for corporation tax purposes. It is based on section 486(1) and (12) of ICTA.
3095.Such payments are charged to income tax as interest by section 379 of ITTOIA, and to corporation tax, as interest under a loan relationship, by section 499 of CTA 2009.
3096.This section ensures that any payment made by an industrial and provident society that is deductible for corporation tax by virtue of section 132 of CTA 2009 is not treated as a distribution. It is based on section 230A of ICTA.
3097.This section provides the same treatment for payments made to members in the case of UK agricultural or fishing co-operatives as section 1055 provides for an industrial and provident society. It is based on section 486(1), (9) and (12) of ICTA.
3098.This section provides definitions for the purpose of section 1057. It is based on section 486(9) and (12) of ICTA.
3099.The reference in section 486(12) of ICTA to “the Department for Agriculture for Northern Ireland” is rewritten in subsection (4) as “the Department of Agriculture and Rural Development”, its current title.
3100.This section contains the basic definition of “associate” for the provisions contained in Chapter 3. It is based on section 227(1), (2), (3), (4) and (7) of ICTA. As for section 1036 the definition of persons “living together” has been brought directly into the legislation – see section 1116.
3101.Further rules in sections 1060 and 1061 extend the meaning in the case of trustees and personal representatives.
3102.This section supplements the definition of “associate” in section 1059. It is based on section 227(5), (8) and (9) of ICTA.
3103.This section also supplements the definition of “associate” in section 1059. It is based on section 227(6) and (9) of ICTA.
3104.The term “personal representatives” is defined for all purposes of this Act in section 1119.
3105.This section sets out rules for identifying a “connected person” for the purposes of Chapter 3. It is based on section 228(1) to (5) of ICTA.
3106.These rules are supplemented by section 1063.
3107.This section supplements the definitions in section 1062. It is based on section 228(6), (7) and (8) of ICTA.
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.
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.
3116.This section sets out the second exception to section 1064. It is based on section 418(5) and (6) of ICTA.
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.
3120.This section defines “participator” for the purposes of sections 1064 to 1067. It is based on section 417(1) and (2) of ICTA.
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.
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.
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.
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.
3131.This Chapter rewrites the provisions concerning exempt distributions and chargeable payments in sections 213 to 218 of ICTA.
3132.This section provides signposts to the key terms used in this Chapter, and to the reference to chargeable payment in section 1028. It is new.
3133.This section explains the purpose of the rules concerning demergers and explains what provisions are included within the term “the provisions about demergers”. It is based on section 213(1) of ICTA.
3134.This section states that an exempt distribution is not a distribution for the purposes of the Corporation Tax Acts, and provides a signpost to the categories of exempt distribution set out in the following three sections. It is based on sections 213(2) and (3), 213A(1) and (2) and 218(1) of ICTA.
3135.This section defines the circumstances giving rise to the first type of exempt distribution. It is based on section 213(2) and (3) of ICTA.
3136.Conditions A to D are in section 1081, conditions E and F are in section 1082 and conditions L and M are in section 1085.
3137.This section defines the circumstances giving rise to the second type of exempt distribution. It is based on section 213(2) and (3) of ICTA.
3138.Conditions A to D are in section 1081, conditions G to K are in section 1083 and conditions L and M are in section 1085.
3139.This section defines the circumstances giving rise to the third type of exempt distribution. It is based on section 213A(1) of ICTA.
3140.This section defines the term “the distributing company” for the purposes of sections 1080 to 1099. It is based on sections 213(3) and 213A(3) of ICTA.
3141.This section defines the term “relevant company” for the purposes of sections 1076, 1077 and 1078. It is based on sections 213(3) and 213A(3) of ICTA.
3142.This section sets out the conditions (A to D) for an exempt distribution to be treated as such, and covers all exempt distributions of the first or second type – see sections 1076 and 1077. It is based on section 213(4), (5), (10) and (11) of ICTA.
3143.Subsection (1) reflects the amendment of section 213(4) of ICTA by the Corporation Tax (Implementation of the Mergers Directive) Regulations 2009 (SI 2009/2797). The regulations substituted the words “resident in a memberState” for the words “UK resident” to ensure that the United Kingdom is fully compliant in this context with its obligations under Directive 90/434/EEC of the European Council on cross-border mergers etc of limited liability companies.
3144.The section is supplemented by sections 1082 and 1083 which set out conditions that must be met in relation to specific types of exempt distribution.
3145.This section supplements section 1081 by requiring additional conditions (E and F) to be met if the exempt distribution is of a type involving the distribution by a company to its members of shares in one or more of its 75% subsidiaries. It is based on section 213(6), (7) and (12) of ICTA.
3146.Subsection (1) sets out conditions relating to the company whose shares are transferred and subsection (2) sets out conditions relating to the company making the transfer.
3147.Condition F in subsection (2), the requirement for the company making the transfer to be a trading company after the distribution, does not apply if that company is itself a 75% subsidiary. Instead, section 1085 applies.
3148.This section supplements section 1081 by requiring additional conditions (G to K) to be met if the exempt distribution consists of the transfer of a trade or trades, or shares in one or more 75% subsidiaries, followed by the issue of shares in the receiving company to the members of the company making the transfer. It is based on section 213(8) of ICTA.
3149.The company making the transfer must dispose of substantially the whole of its interest in the trade or shareholding that it transfers.
3150.Section 1084 further qualifies this section.
3151.This section qualifies section 1083 by setting out circumstances where one of its conditions, condition K, does not apply. It is based on section 213(9) and (12) of ICTA.
3152.This section applies instead of either condition F in section 1082 or condition K in section 1083 if the distributing company is itself a 75% subsidiary. It is based on section 213(12) of ICTA.
3153.Without this section a 75% subsidiary would not be able to meet the overarching requirement in section 1074(1), namely that the outcome of an exempt distribution is that a trade must be divided between two companies not in the same group or two independent groups. The categories of exempt distribution all involve transfers of shares to the members of the distributing company, and in the case of a 75% subsidiary the members would be the immediate holding company. Hence the conditions could not be met as everything would remain within the one group.
3154.The “trading company or group” condition in condition F or K of the relevant section is replaced by a requirement in subsection (1)about the group to which the company belongs.
3155.This section then requires further distributions, each of which must meet all the relevant tests – apart from condition F or K where the distributing company is a 75% subsidiary. The final exempt distribution in this process must therefore be made by a company which is not itself a 75% subsidiary and which is capable of meeting the requirements of section 1074(1).
3156.This section sets out how a chargeable payment is charged to corporation tax or income tax, together with the condition that the charge only applies where the payment is made within five years after an exempt distribution. It is based on sections 214(1), (1A), (1B), and (6) and 215(4) of ICTA.
3157.This section sets out the corporation tax treatment for the payer of a chargeable payment made within five years after an exempt distribution. It is based on section 214(1) of ICTA.
3158.The chargeable payment is treated as a distribution for corporation tax purposes in the case of the payer. That is, the payer does not get a deduction for the payment. If the recipient is a company it is chargeable to corporation tax on the receipt – see section 1086 – despite the treatment in the hands of the payer as a distribution.
3159.This section sets out four conditions A to D, all of which must be met for a payment to be treated as a chargeable payment. It is based on section 214(2) and (3) of ICTA.
3160.This section is supplemented by section 1089 if any company concerned in the exempt distribution is an unquoted company.
3161.This section expands the circumstances in which Condition A in section 1088 is met if a company concerned in an exempt distribution is an unquoted company. It is based on section 214(2) and (3) of ICTA.
3162.The section sets out conditions B1, C1 and D1. These are the parallel conditions to conditions B, C and D of section 1088. They have been given different but related labels to highlight the relationship.
3163.This section defines the term “company concerned in an exempt distribution” for the purposes of the Chapter. It is based on section 214(4) and (5) of ICTA.
3164.This term is used in the conditions in section 1088 and the extension in section 1089.
3165.This section allows a company to seek a ruling from the Commissioners for HMRC as to whether a distribution is treated as an exempt distribution. It is based on section 215(1) of ICTA, and is supplemented by section 1093.
3166.The words “the Commissioners for Her Majesty’s Revenue and Customs” have been substituted for the words “the Board” in the source legislation. This gives effect to section 50(1) and (2) of CRCA which require references to the terms in the source legislation to be taken as references to the substituted terms.
3167.This section provides companies with an opportunity to seek advance clearance that a payment is not treated as a chargeable payment. It is based on section 215(2) and (3) of ICTA.
3168.This section sets out how an application under section 1091 or section 1092 must be made and the time limits that must be observed by the Commissioners and the company. It is based on section 215(5) of ICTA.
3169.This section sets out the time limit in which the Commissioners must make a decision on an application under section 1091 or section 1092 and the process for referring the application to the tribunal. It is based on section 215(6) to (8) of ICTA.
3170.This section requires a company to make a return of an exempt distribution. It is based on section 216(1) of ICTA.
3171.This section requires returns to be made in relation to chargeable payments connected with an exempt distribution. It is based on section 216(2), (3) and (4) of ICTA.
3172.This section enables an officer of Revenue and Customs to require certain information of a person who receives a chargeable payment on behalf of another person, or the person on whose behalf it is received. It is based on section 217(4) of ICTA.
3173.This section defines “unquoted company” for the purposes of the Chapter. It is based on section 218(1) of ICTA.
3174.This section contains further interpretation for the purposes of the Chapter. It is based on section 218(1), (2) and (3) of ICTA.
3175.This Chapter contains sections of an administrative nature that apply generally across the distributions legislation.
3176.This section enables the recipient of a qualifying distribution to require certain information from the payer. It is based on section 234(1) and (2) of ICTA.
3177.This section requires the payer of a distribution that is not a qualifying distribution to make certain returns and provide certain information to HMRC. It is based on section 234(5) to (8) of ICTA.
3178.The definition of what is and is not a qualifying distribution is in section 1136.
3179.This section enables an officer of Revenue and Customs to require the provision of certain information in relation to distributions that are not qualifying distributions. It is based on section 234(9) of ICTA, and paragraphs 3 and 4 of Schedule 12 to FA 1989.
3180.Paragraphs 3 and 4 of Schedule 12 to FA 1989 have been rewritten here rather than being applied by cross-reference.
3181.This section enables the Commissioners for HMRC to lay regulations amending sections 1101 and 1102. It is based on section 253 of ICTA.
3182.This section requires a company to provide a tax certificate when it makes a distribution. It is based on section 234A(1), (2) and (3) of ICTA.
3183.The meaning of “company” is that in section 1 of the Companies Act 2006, which came into effect from 1 October 2009 as a result of article 3(a) of The Companies Act 2006 (Commencement No 8, Transitional Provisions and Savings) Order 2008, SI 2008/2860. The Companies Act 2006 (Consequential Amendments) (Taxes and National Insurance) Order 2009, SI 2009/1890 article 3 made the necessary amendment of section 234A of ICTA.
3184.Section 234A(6) has been omitted as having no effect because interest that is treated as a distribution can only be a qualifying distribution. See Change58 in Annex 1.
3185.This section places certain duties on nominees who receive distributions on behalf of others. It is based on section 234A(4) and (5) of ICTA.
3186.This section sets out what is required in a “tax certificate” in this Chapter and provides certain other definitions. It is based on section 234A(7), (8) and (8A) of ICTA.
3187.Section 234A(6) has been omitted as having no effect because interest that is treated as a distribution can only be a qualifying distribution. See Change58 in Annex 1.
3188.This section provides for penalties to be charged for failure to provide a tax certificate. It is based on section 234A(9) of ICTA.
3189.This section enables the Commissioners for HMRC to lay regulations providing for alternative methods by which a person may comply with obligations under section 1104 or section 1105. It is based on section 234A(10) and (11) of ICTA.
3190.This Chapter provides the rules under which a company is entitled to a tax credit and related administrative provisions. It is based on sections 231 and 252 of ICTA and paragraphs 3 and 4 of Schedule 12 to FA 1989.
3191.Sections 231AA and 231AB of ICTA are rewritten in Part 17 of this Act (see sections 808, 809 and 810). Section 231B of ICTA is not rewritten as it has only a very limited future application.
3192.This section sets out the conditions to be met for a company to be entitled to a tax credit in relation to a distribution that it receives. It is based on section 231 of ICTA and paragraphs 3 and 4 of Schedule 12 to FA 1989. The corresponding provision for income tax is section 397 of ITTOIA.
3193.One of the conditions is that the distribution is a qualifying distribution. This term is defined in section 1136.
3194.This section enables an officer of Revenue and Customs to make assessments to recover tax and/or interest where a tax credit has been overpaid or a set-off of tax credit is excessive. It is based on section 252(1) and (2) of ICTA.
3195.Schedule 1 inserts the equivalent income tax provision into ITTOIA as section 401A.
3196.This section makes further provision relating to the recovery provisions in section 1110. It is based on section 252(3) and (5) of ICTA.
3197.This section extends the meaning of distribution to encompass arrangements between two or more companies to make distributions to each other’s members. It is based on section 254(8) of ICTA.
3198.This section provides interpretation of the term “in respect of shares in the company”. It is based on section 254(1), (2), (4) and (12) of ICTA.
3199.This section provides interpretation of the term “in respect of securities in the company”. It is based on section 254(1), (2), (4) and (12) of ICTA.
3200.This section provides interpretation of the term “new consideration”. It is based on section 254(1), (5), (6) and (7) of ICTA.
3201.This section contains the definition of “living together”. It is based on section 1011 of ITA.
3202.This section provides further interpretation. It is based on sections 218(1) and 254(1), (9), (10), (11) and (12) of ICTA.
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