Distributions: general: introduction
The distributions legislation aims to ensure that if a company gives anything to one of its members without the member giving full payment in return, then a tax liability arises.
The legislation applies where the company passes money or assets to members or shareholders in their capacity as members. It does not apply where the company pays members or shareholders for services to the company. Such payments are covered by the provisions of ITEPA03.
(Prior to 6 April 2003 the Schedule E rules applied).
Distributions received by individuals are assessable as income under ITTOIA05/S383.
Distributions received by companies are in most cases exempt from corporation tax under CTA09/S931A. (See INTM651000)
Distributions received by companies are also treated as franked investment income (if non-group). This is relevant for the purposes of small profits relief (CTM03600) and shadow ACT (see CTM18550). Franked investment income means a distribution in respect of which a company is entitled to a tax credit. The amount of the franked investment income is the amount of the distribution and the amount of the tax credit - see CTA10/S1126.
CTA10/S1000 gives a broad definition of ‘distribution’. It identifies particular items that are distributions.
- Dividends CTM15200.
- Bonus securities or redeemable shares (see CTM15450).
- Transfers of assets and of liabilities between a company and its members CTM15250.
- Payments of interest or other distributions to the extent that they exceed a commercial rate (see CTM15500).
- Payments of interest or other distributions on certain ‘special’ results dependent securities (see CTM15500).
- A bonus issue on or following a repayment of share capital (see CTM15420).
- Any other distributions out of assets of the company in respect of shares in the company (see CTM15350).
There are some special provisions that modify the general approach of the distributions legislation. These deal with:
- Companies in liquidation (CTM36130).
- Industrial and provident societies (CTM40560).
- Building societies (CTM49100).
- Mutual traders (BIM24000 onwards).
- Companies which do not and have not carried on a trade or a business of holding investments (CTM15550).
- Groups of companies (CTM80070).
- Stock dividends (CTM17000 onwards).
- Demergers (CTM17200 onwards.
- Purchase of own shares by unquoted trading companies (CTM17500 onwards).
Anti-avoidance provisions, CTA10/S1032, CTA10/S1112
A distribution paid by one UK resident company to another is not chargeable to CT in the hands of the recipient. This opens the possibility of avoidance. To prevent such avoidance, CTA10/S1032 disapplies the distributions legislation in certain circumstances (see CTM15530).
CTA10/S1112 also seeks to counter reciprocal arrangements that aim to side step the distributions legislation (see CTM15560).
CTA10/S1064 treats certain expenses of close companies as distributions (see CTM60500 onwards).
There are special rules relating to distributions in respect of share capital where a company is being wound-up (see CTM36130).
References in the Corporation Tax Acts to distributions do not apply to distributions made in respect of share capital in a winding-up.
The term company in CTA10/S1000 includes an unincorporated association. Such associations can make distributions (see CTM15540).
Either a UK resident or non-resident company can make a distribution. Neither UK resident nor non-resident companies are allowed any deduction for a distribution in computing profits for CT purposes.
90 per cent groups
A 90 per cent group is defined in CTA10/S1072.
Where a company is a member of such a group, it may make a distribution out of its own assets in respect of shares or securities of another group company. If this happens, CTA10/S1072(1) treats the distribution as a distribution for tax purposes. However, CTA10/S1072(3) provides that this does not apply if the distribution is to another UK resident member of the same group.
Reciprocal arrangements, CTA10/S1112
Some companies may enter into arrangements to make distributions to each other’s members. There are rules to deal with this (see CTM15560).
(This content has been withheld because of exemptions in the Freedom of Information Act 2000)