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HMRC internal manual

Company Taxation Manual

Close companies: close investment holding companies: restriction on payment of tax credit

ICTA88/S231 (3A) to (3D)

There was a secondary target in the 1989 close investment-holding company (CIC) legislation to replace the apportionment regime. This was the diversion of distributions to shareholders who were not liable to tax, for example, minor children with no other income. The counter-action provided by Section 231 (3A) to (3D), for distributions made before 6 April 1999, was the restriction of the right of such shareholders to payment of the tax credit on these distributions.

This restriction of payment of tax credits applied where:

  • arrangements of any kind (whether in writing or not) had been made, and
  • the arrangements were made in an accounting period at the end of which the company making the distribution of profits was a CIC, and
  • the main purpose, or one of the main purposes, of the arrangements was to enable a payment or increased payment of tax credit to one or more individuals under Section 231 (3), and
  • an ‘eligible person’ (that is, an individual resident in the UK who would, apart from these provisions, be entitled to payment of tax credit in respect of the distribution) received,
  • payment made by a company on the redemption, repayment or purchase of the company’s shares which was a qualifying distribution, or
  • any other qualifying distribution in respect of shares or securities of the company of a greater amount or value than might have been expected but for the arrangements.

The amount of the restriction was not specified - it was to be of such amount as appeared to the Inspector to be just and reasonable. But no restriction at all was to be made in respect of a dividend paid by the company on its ordinary share capital provided that throughout the period:

  • it had only one class of ordinary share capital, and
  • no person waived his entitlement to any dividend which would have become payable in the period or otherwise failed to received any dividend which had become due and payable in the period.

If a person had both tax credits which fell to be restricted under Section 231 and other tax credits which did not fall to be so restricted, then the credits were to be set against IT in the order that resulted in the greatest payment to the person.

This provision prevented persons obtaining a tax advantage by so arranging matters that distributions from a CIC, which would otherwise have gone to a lower rate or higher rate taxpayer, went instead to someone else - possibly relatives or connected trusts - who could then claim a greater payment.

One situation where this might have arisen is where the tax-paying shareholder waived a right to a dividend and, as a result, tax-exempt shareholders received a greater dividend and a greater payment of tax credit than they would have received without the arrangement.

Another is where the company had more than one class of share capital and greater dividends were paid on the shares held by exempt persons than on the shares held by taxpayers liable at the lower or higher rates.

If you come across a case in which the provision might be applicable, whether for these or other reasons, you should send the case to CTIS (Technical) before taking any action.

Significant changes were made to the distributions legislation with effect from 6 April 1999 as a result of which individuals resident in the UK were no longer entitled to payment of tax credit. There was therefore no continuing need for the special rules at Section 231 (3A) to (3D), which were repealed with effect from that date.