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HMRC internal manual

Company Taxation Manual

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HM Revenue & Customs
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Distributions: general: interest or other value in respect of securities - which reflects return on issuer's own shares or those of associated companies

CTA10/S1008 and CTA10/S1009

CTA10/S1008 applies for returns on investments on or after 17 April 2002 in certain circumstances where the principal secured is less than the amount of the new consideration. It operates by treating the amount of principal secured for the purposes of CTA10/S1000 (1) E as increased so that it equals the amount of new consideration.

CTA10/S1008 can apply to securities issued by any kind of company but, in practice, it will usually be relevant only to financial institutions such as banks and securities houses because other companies are likely to fall outside the conditions of CTA10S1009 and CTA10/S1012.

The anti-avoidance provisions of CTA10/S1009 and CTA10/S1012 are intended to prevent some companies:

  • converting returns on equities into interest and obtaining interest relief on the distribution of their profits, and
  • receiving income in non-taxable form whilst obtaining a deduction for the interest paid out.

In some cases CTA10/S1015 (4) (see CTM15515) may apply to re-characterise returns on distributions, where the return is to any extent dependent on the results of the company’s business, regardless of the application of CTA10/S1008.

CTA10/S1008

However, the anti-avoidance provisions of CTA10/S1000 are designed to catch securities with returns falling within CTA10/S1008 which fall outside CTA10/S1015 (4) This could happen where returns on a security:

  • reflect to a significant extent the performance of an associated company’s shares,
  • reflect to a significant extent the performance of the issuer’s own shares, for example, when a bank holds its own shares as trading assets.

In the above circumstances, CTA10/S1009 (1):

  • disapplies CTA10/S1008 and
  • CTA10/S1000 (1) E will apply to the security in the normal way.

Associated companies and control are defined in CTA10/S1011 (1) and (2) though the definition of control is amended in CTA10/S1011 (3) for banks and securities houses.

Banks and securities houses

Banks and securities houses are excluded from the provisions of CTA10/S1009 (1) because they are often companies featured in the types of index that are reflected in the securities they issue.

CTA10/S1009 (2) provides that CTA10/S1008 can apply:

  • to securities issued in the ordinary course of business,
  • by banks and securities houses,
  • where the return on the securities reflect the performance of a qualifying index.

A qualifying index is one reflecting the performance of:

  • shares of the issuer of the security and/or its associated companies,

and

  • other shares which represent a significant proportion of the market value of the components of the index.

The meaning of ‘significant proportion’ will depend on the facts of the index but the other shares could constitute less than 50% of the market value if there were a genuine commercial reason for their inclusion in the qualifying index.

A qualifying index is not required to be a recognised index, such as the FTSE100 index.

The definition of control for the purposes of defining an associated company in CTA10/S1009 is amended by CTA10/S1011 (3) for banks and securities houses. This provision is intended to take account of the fact that a banks and securities house may, for purely commercial reasons, have a controlling interest in a company which is a special purpose vehicle (SPV) for its business. The SPV may be used, for example, to manage the risks associated with a security issued by the bank or securities house and the security itself may reflect the performance of the shares of the SPV. In such circumstances:

  • the transactions in the shares of the SPV will be reflected in the trading account of the issuer, and
  • CTA10/S1011 (3) provides for the exclusion of such shares when applying the control test to determine associated companies.

The exclusion of shares within CTA10/S1011 (3) does not apply to shares that are assets of an insurance company’s long-term insurance fund.