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HMRC internal manual

Company Taxation Manual

Distributions: demergers: chargeable payments


Even though HMRC may have given clearance for a demerger, the demerger may later be exploited for avoidance.

To counter this, the legislation introduces the concept of chargeable payments. Broadly, these are payments of any kind by a company to its members, directly or indirectly, which are money payments or the transfer of money’s worth.

However, chargeable payments do not include:

  • distributions, or
  • exempt distributions, or
  • payments made for genuine commercial reasons.

CTA10/S1086 deals with payments made within five years of an exempt distribution by:

  • any of the companies involved in the demerger, or
  • any company connected with the companies involved in the demerger, or
  • in certain circumstances, by a person other than a company.

A chargeable payment is chargeable to income tax or to corporation tax on income by virtue of CTA10/S1086 (2). Where charged to income tax, the payment is treated as an amount of income under subsection (3), the charge is on the value or amount of payment made (subsection (4)) and the person liable is the person receiving or entitled to the income (this reproduces the consequences of the former charge under Case VI Schedule D) in the hands of the recipient. The tax deduction mechanism of ITA07/PART15/CHAPTER15 or CHAPTER 16 applies unless the payment is not a money payment - see ITA07/S928. The payer must deduct tax at the basic rate and account for this tax to HMRC.

Officers should receive advance notification of a chargeable payment from either the payer’s local office or from the Clearance and Counteraction Team, Counter-Avoidance.

Officers who see a chargeable payment in a return, computation or repayment claim etc without first receiving such advance notification should make a report to the Clearance and Counteraction Team.

A similar procedure applies if the payer discloses a chargeable payment and the Clearance and Counteraction Team have not supplied guidance on dealing with the demerger.

A chargeable payment does not give rise to any deduction or relief for the payer. It may have other consequences, such as the reinstatement of a charge under TCGA92/S178 or TCGA92/S179.

Where a company or other person proposes to make a payment, which might be a chargeable payment, a clearance application may be made under CTA10/S1092 - see CTM17260.

A company that becomes, or ceases to be, connected with a company that was previously involved in a demerger may seek a general clearance under CTA10/S1092 (4). This will apply to any future payments it might make, whether or not it currently plans to make any such payments. The clearance will provide that no payment the company makes to which the clearance relates will be treated as a chargeable payment solely because of the connection with the company that had been involved in the demerger.

Under CTA10/S1096 the payer:

  • must make a return within 30 days of any payment which is, or may be a chargeable payment, unless
  • HMRC has given clearance specifically under CTA10/S1092 (5) in respect of the payment - CTA10/S1096 (5).

A chargeable payment that is a money payment (see above) is subject to the tax deduction and accounting rules in ITA07/PART15. Hence the payer must make a return under the provisions in IT07/PART15/CHAPTER15 (if the payer is a UK resident company) or CHAPTER16 (otherwise).

The payer must make a return of a chargeable payment that is not a money payment within 30 days of the date of the payment.

The legislation contains powers to obtain information in connection with demergers and chargeable payments.