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HMRC internal manual

International Manual

Distribution exemption: Interpretation: acceptable distribution policy dividends

No claim to ADP exemption for accounting periods beginning on or after 1 July 2009

ADP exemption from CFC apportionment may not be claimed at all for any accounting period that begins on or after 1 July 2009. If a period begins before 1 July 2009 but ends on or after that date, ADP exemption may be claimed for the part of the period that falls before 1 July 2009, because FA09/SCH16/PARA7 treats the period as two periods for CFC and DTR purposes.

A dividend that is an ADP dividend may therefore be specified as paid for a period ending before 1 July 2009, or where a period straddles that date, it may be specified as paid for the part period ending on 30 June 2009.

This specification will normally be effective for the purposes of both ICTA88/SCH25 and TIOPA10/S57. A dividend can only be an ADP dividend if it is taken into account for corporation tax purposes, so if a dividend falls into an exempt class, an election must be made under CTA09/S931R in order to make it taxable if it is to be taken into account as an ADP dividend.

A company must elect for a dividend to be taxable in order for that dividend to be an ADP dividend. A company cannot split a single dividend. The whole of a dividend must be taxable in order for the dividend to qualify.

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Interaction with CTA09/S931H

An ADP dividend is likely to fall within the CTA09/S931E exempt class, making the S931R election necessary. If so, or if the dividend falls into any exempt class other than CTA09/S931H then when considering S931H, if there are any profits that are “relevant profits” for the purposes of S931H, then subsection (3) will apply and not subsection (4).

If no other exempt class applies to the dividend, or if there are no relevant profits, then S931H(4) will apply and so if profits exist in the company paying the dividend that are not relevant profits (i.e. “bad profits”), the dividend will be treated as having been paid in respect of those profits. This means that in accordance with TIOPA10/S59 (previously ICTA88/S799(3A) ICTA), the dividend will be a relevant dividend for the purposes of S59. Consequently, irrespective of the dividend specification, the “bad profits” will be the relevant profits for S59 purposes.

In such a case there is the possibility of a mismatch between the ICTA88/SCH25 specification of the dividend and the identification of relevant profits for TIOPA10/S59 purposes. In the event of such a mismatch, ICTA88/SCH25/PARA2(3) brings the ADP specification into line with the S59 profits. Consequently, the dividend may be an ADP dividend for the specified period only to the extent that the specified period contains S931H “bad profits” that may be identified with the dividend. It does not matter if there are other such profits in other periods, provided there are sufficient to match with the ADP dividend in the specified period.