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HMRC internal manual

Company Taxation Manual

HM Revenue & Customs
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Particular topics: dividend-stripping: exempt bodies: overview

An exempt body, for example, a Pension Fund or Charity is entitled to claim payment of the tax credit attached to dividends and other qualifying distributions that it receives. When such a body acquires shares or other rights in a company prior to the payment of a dividend, the tax credit claimed by the exempt body may relate to dividends paid out of company profits which arose before the exempt body acquired any interest in that company. ICTA88/S235 prevents the exploitation by an exempt body of its tax-exempt status by denying the exempt body payment of tax credit to the extent that the distribution received has not been paid out of profits earned after the date on which the exempt body acquired the shares in respect of which the dividend was paid. The income represented by that part of the distribution on which repayment of tax credit is denied is also subject to tax at the additional rate in force at the time of the distribution. In addition, it is not available to cover charges or for interest relief.