Corporation Tax: introduction: distributions
This guidance summarises the provisions relating to distributions, defined in ICTA88/S209 +. There is more extensive guidance on:
- Distributions at CTM15000 onwards.
- Advance Corporation Tax at CTM20000 onwards.
- Non Corporate Distribution Rate at CTM14000 onwards.
- Foreign Income Dividends at CTM21000 onwards.
The ACT, NCDR and FID regimes have all been abolished.
Distributions received by a company
The old rule was that distributions received by a company from another UK company were not chargeable to CT (CTA09/S1285, formerly ICTA88/S208). FA09/SCH14 introduced a new regime covering all distributions. It was aimed mainly at replacing the tax credit system for foreign dividends, but also replaces the old ICTA88/S208 exemption.
Before 6 April 1999 any tax credit attaching to distributions received could be taken into account in arriving at the ACT payable by a company in respect of distributions, other than FID, it made. Normally any tax credit attaching to distributions received was not payable to a company.
But there were circumstances in which the tax credit attaching to distributions could be paid to a company. There were provisions in ICTA88/S242 and ICTA88/S243 which let a company claim that franked investment income (FII) received should be treated as profits chargeable to CT for the purpose of setting off:
- trading losses,
- charges on income,
- management expenses,
- certain capital allowances,
- losses on unquoted shares,
- non trading deficits or loan relationships or deficits of insurance companies.
Where a company made such a claim the tax credit included in the FII was paid to the company.
ICTA88/S242 to S244 were repealed for any accounting period beginning on or after 2 July 1997.
Distributions made by a company
Before 6 April 1999, where a company made a qualifying distribution it had to account for ACT at the rate in force at the time the qualifying distribution was made. Qualifying distributions were broadly all distributions except a bonus issue of redeemable shares or securities (CTM20070).
The ACT was calculated separately in respect of FID paid and other qualifying distributions.
A franked payment was:
- the amount or value of a qualifying distribution (excluding an FID) made, plus
- the relevant ACT.
Franked investment income is:
- the amount or value of a qualifying distribution (excluding an FID) received
- the tax credit attaching to the distribution.
The ACT was worked out by reference to the excess of the franked payments over the franked investment income, except where a distribution was an FID. In that case the ACT was calculated as the excess of the FID paid over the FID received. The machinery for the collection of ACT was in ICTA88/SCH13.
A company which made a non-qualifying distribution was not liable to account for ACT in respect of it. But the company had to return details of the non-qualifying distribution under ICTA88/S234 (CTM15900 onwards).
ICTA88/S247 (1) allowed companies in particular circumstances to make an election that dividends (but not other forms of qualifying distributions and not FID) could be paid without the paying company having to account for ACT on those dividends. Broadly an election could be made in respect of dividends paid by:
- a subsidiary to its parent, or
- a subsidiary to a co-subsidiary, or
- a trading company owned by a consortium of companies.
Dividends to which this election applied were called group income.
No ACT is payable in respect of any distribution made on or after 6 April 1999.
Set-off of ACT
The ACT paid by a company in respect of qualifying distributions made by it in any accounting period was set-off against the CT chargeable on its profits for that accounting period. But there were certain limitations to this. A company could have been in the position where the whole of the ACT it paid in respect of distributions made in an accounting period could not be set-off against CT chargeable for that accounting period. The amount it could not set-off was known as surplus ACT. Subject to certain limitations, the company could claim to have the surplus ACT set-off against CT on its profits for accounting periods beginning in the six previous years. Any surplus ACT not used in this way was carried forward and set-off against CT on profits for later accounting periods.
Relief for ACT that was available for set off but had not been set off against the liability of an accounting period beginning before 6 April 1999 (‘unrelieved surplus ACT’) is dealt with under the ‘Shadow’ ACT Regulations (see CTM18000 onwards).
Surrender of ACT
A parent company that paid ACT in respect of dividends paid in an accounting period could surrender the whole or part of that ACT to its subsidiaries. Then a subsidiary got relief for ‘surrendered’ ACT as if it was ACT paid in respect of its own qualifying distributions. However the subsidiary could not claim to set-off any ‘surrendered’ ACT against CT on its profits for earlier accounting periods.
Repayment of ACT
A company that paid ACT in respect of FID paid may have been able to obtain set off or repayment of surplus ACT.
Non-corporate distribution rate
Where a company made distributions to a person other than a company during the period 1 April 2004 to 31 March 2006 it could be affected by the NCDR legislation in ICTA88/S13AB and ICTA88/SCHA2. The thrust of these provisions was to impose a minimum rate of CT on profits paid out as distributions to non-corporate members. There is detailed guidance on the NCDR at CTM14000 onwards.