Distributions: general: tax consequences
You should check the other guidance available on GOV.UK from HMRC as Brexit updates to those pages are being prioritised before manuals.
CTA09/S3 (1)(b), ITTOIA05/S383, CTA09/S931A, ITTOIA05/S397, & CTA09/S1305
A distribution by a UK resident company has the following tax consequences.
For distributions made on or after 6 April 1999
If a person other than another UK resident company receives the distribution, then it is income chargeable to income tax under ICTA88/S20 for the years up to and including 2004-05, and ITTOIA05/S383 for 2005-06 onwards. If the distribution is a qualifying distribution (see below) the amount of the income is the amount of the distribution plus the tax credit. From 1999-2000, the tax credit fraction is one-ninth of the distribution. If the distribution is a non-qualifying distribution see CTM15950 for the tax treatment in relation to companies and SAIM5130 for individuals.
A distribution chargeable under ITTOIA05/S383 (or before 2005-06 ICTA88/S20) is not chargeable under any other provisions of the Income Tax Acts - see ITTOIA05/S366 (3) and ITEPA03/S716A.
More guidance on how persons other than companies are taxed on distributions can be found at SAIM5000
A distribution paid by a UK resident company or a non-resident company trading in the UK through a permanent establishment (previously, branch or agency) is not deductible in computing its CT profits, CTA09/S1305.
A distribution made by a UK resident company and received by a UK resident company is generally not included in the recipient company’s CT profits. Similarly, such a distribution received by a non-UK resident company trading through a UK permanent establishment is not generally included in the CT profits of that permanent establishment. However, the way in which distributions received by companies are treated for tax purposes changed from 1 July 2009:
- Until 1 July 2009, ICTA88/S208 (and for a brief period CTA09/S1285) provided that corporation tax was not chargeable on distributions from UK resident companies.
- From 1 July 2009, the way in which distributions from UK resident companies are taxed was aligned with the treatment of distributions from non-UK companies in CTA09/S931A. (Previously, distributions from non-UK resident companies were charged to corporation tax as income from foreign possessions under ICTA88/S18, that is, under Case V of Schedule D). CTA09/S931A charges distributions from UK and non-UK resident companies to corporation tax, but then exempts these from charge in most cases. In practice, this means that most distributions - UK and non-UK sourced - are not chargeable to corporation tax unless these form part of avoidance arrangements. More detailed guidance can be found at INTM651000
CTA10 and distributions from non-UK incorporated companies
The Part 23 CTA10 definition of distribution is used in determining whether a payment from a UK resident or non-UK resident falls within the scope of CTA09/S931A. Applying the legislation to companies incorporated in foreign territories can be problematic since the relevant company law may be very different from UK company law. Following the judgment of the Court of Appeal in the case of HMRC v First Nationwide [2012] EWCA Civ 278, HMRC’s view is that if a dividend payment is a distribution permitted in accordance with the law that governs the foreign company then in the absence of any evidence calling into question the legal form of the payment it will be treated as a dividend for the purposes of CTA10/S1000 (1) A, and
any other distribution out of the assets of the company made in respect of shares will be a distribution under CTA10/S1000 (1) B except to the extent that (a) the distribution represents repayment of capital on the shares, or (b) is equal in amount or value to any new consideration received by the company for the distribution.
For foreign companies, it may be unclear what capital on the shares consists of. The facts may vary between cases, but HMRC would normally expect to treat as a distribution an amount that:
- is distributable in accordance with the relevant company law, and
- is not made on winding up or as part of a procedure under the relevant company law for reducing share capital.
For the purposes of determining whether an amount is a repayment of capital on the shares, CTA10/S1027A treats a distribution out of a reserve CTM15440
Qualifying and non-qualifying distributions
A qualifying distribution is any distribution within CTA10/S1000 or CTA10/S1064 (close companies - see CTM60500 onwards) except the following distributions which are non-qualifying distributions:
- a distribution of bonus redeemable share capital, or
- a distribution of bonus securities
which in relation to the company making it are distributions by virtue only of CTA10/S1000 (1) C or D - see CTM15450 and CTM20075.
Company A may make a distribution of bonus share capital or securities directly or indirectly to Company B. This may be a distribution by virtue only of CTA10/S1000 (1) C or D. If Company B later distributes that same share capital or securities this later distribution is also a non-qualifying distribution.
The amount of the non-qualifying distribution for the purposes of CTA10/S1000 (1) C or D is:
- for redeemable share capital, the excess of the nominal amount of the share capital together with any premium payable on redemption or in a winding-up or in any other circumstances over any new consideration received, and
- for any security, the excess of the principal amount secured including any premium payable at maturity or in a winding-up or in any other circumstances over any new consideration received.