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HMRC internal manual

Company Taxation Manual

ACT: FID: general: overview

Subject to certain conditions, a company could elect for a cash dividend paid by it on or after 1 July 1994 to be treated as an FID.

An FID received did not constitute franked investment income and the recipient was not entitled to a payable tax credit. In the non-UK corporate recipient’s hands the FID wastreated like a stock dividend.

A company accounted for ACT on the excess of FID paid over FID received. ACT on FID was accounted for separately from that due on franked payments. The accounting procedure was the same except that tax credits were not considered when calculating the excess, in other words there was no ‘grossing up’.

Repayment of ACT on FID

After the end of an accounting period a company could make a claim to repayment of surplus ACT. The repayment would be the smaller of:

  • the actual surplus to the extent that it had not already been used, and
  • the surplus that would have arisen if the company’s profits were confined to the overseas profits out of which the FID was treated as having been paid.

The first of these figures - the actual ACT surplus - was worked out in the usual way. The second figure required a little additional work.

This involved understanding the meaning of foreign source profits (FSP) and distributable foreign profits (DFP). These were defined as follows.

  • Foreign source profits were foreign profits brought into charge to CT that carried double taxation credit relief.
  • Distributable foreign profits were FSP less the greater of the foreign tax and the UK CT there on before DTR.

The second surplus (the surplus that would have arisen if the company’s profits were confined to the overseas profits out of which the FID is treated as having been paid) was the surplus ACT on the following basis.

  1. The FID paid by a company were matched on a pound for pound basis with DFP of accounting periods beginning on or after 1 July 1993.
  2. The matched FID were treated as the only distributions made by the company, while the FSP from which the matched DFP derive were treated as the only profits chargeable to CT for the accounting period in which the FID was paid.
  3. The ACT paid on the matched FID was set-off as far as possible against the CT on the matched FSP after DTR.

International headquarters company

An international headquarters company was a company that was largely foreign owned throughout the accounting period. It did not have to pay ACT when paying an FID. However, ACT could be payable later so that the international headquarters company ultimately ended up in the same position as it would have been if it had paid ACT and later received the repayment to which it was entitled.

Electing to treat a dividend as an FID - streaming

FID did not carry a payable tax credit (since the ACT that funded the tax credit may have been repayable). Because of this exempt shareholders (such as pension funds) to whom any tax credit would have been payable would have preferred to receive an ordinary dividend. The legislation sought to prevent dividends being streamed so that FID went to shareholders that were liable to tax while those who were not received ordinary dividends. It did this by stopping the company from electing for a dividend to be treated as an FID where streaming might be involved.