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HMRC internal manual

Company Taxation Manual

Distributions: impact on Corporation Tax: franked investment income - general

When a UK resident company makes a qualifying distribution to any UK resident, the recipient is entitled to a tax credit. Important changes to the ‘imputation’ system introduced by FA72/PART5 were made by FA(2)97 and FA98. The tax credit was reduced but at the same time for individuals special dividend rates of charge were introduced which broadly ensured continuity of effect (for instance, a basic rate taxpayer’s liability is satisfied by the credit). However, the credit was no longer repayable in the absence of income tax liability. For companies, the elaborate system of comparing franked investment income received with franked payments made described in the following paragraphs was swept away, together with group income elections,

Foreign Income Dividends did not entitle the recipient to a tax credit (see CTM21000 onwards). The ACT system together with FIDs was abolished with effect from 6 April 1999.

The tax credit was formerly (in the case of distributions made before 6 April 1999) equal to that proportion of the amount or value of the distribution as corresponded to the ACT rate for the year in which the distribution was made. For 1993-94 slightly different rules applied, see CTM20530 onwards.

For qualifying distributions made on or after 6 April 1999, the tax credit fraction is one-ninth.

Where the recipient is a UK resident company, the company normally receives franked investment income (FII).

This FII is equal to:

  • the amount or value of the distribution (excluding any FID),


  • the amount of the tax credit.

Note that the distribution is not FII if the company receives it on behalf of or in trust for another person.

See CTM80070 regarding the situation where a company paid dividends prior to 6 April 1999 under ICTA88/S247 without accounting for ACT.

A FID received by a company did not give rise to FII. This is because a FID did not carry a tax credit.

The significance of receiving FII was greatly reduced following the abolition of the ACT system. It features in marginal small profits relief calculations.