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HMRC internal manual

Savings and Investment Manual

Dividends and other company distributions: meaning of distribution

‘Distribution’ follows its meaning for Corporation Tax purposes

The term ‘distribution’ is not expressly defined in ITTOIA05/PART4/CHAPTER3. Its meaning comes from CTA10/S1119, which refers to CTA10/PART23 (company distributions). CTA10/S1000 (2) extends the meaning of ‘distribution’ to include amounts paid to, or expenses of, participators in close companies.

Distributions are made to members of the company, although due to trust or other arrangements the recipient may not be the legal shareholder. CTA10/S1117 (1) defines share as including any interest of a member in a company. S1113 (3) and S1117 (7) treat something done ‘in respect of a share’ as being done to the shareholder, or to someone who has at a particular time been the shareholder, including to their personal representatives if they are now deceased. This may be important in applying the final bullet below. There are similar provisions for securities.

The term ‘company’ includes an unincorporated association. Such associations can make distributions (CTM15540).

See CTM15560 for rules where companies make arrangements to make distributions to each other’s members.

Distribution has a broad meaning

The term distribution is defined in CTA10/S1000 (1) to include the following.

  • Dividends
  • Bonus issues of securities or redeemable shares (until 6 April 2016 these were ‘non-qualifying distributions’ dealt with at ITTOIA05/S400, now repealed)
  • Transfers of assets and liabilities between a company and its members
  • Payments of interest or other distributions to the extent that they exceed a commercial rate
  • Payments of interest or other distributions on certain securities
  • Bonus issues on or following a repayment of share capital
  • Any other distribution out of the assets of a company in respect of shares in it.

The distributions legislation aims to ensure that if a company transfers value to benefit a shareholder or member then a tax liability arises. However, the general rule is that a repayment of share capital is not a distribution unless it is at a premium (CTA10/S1000(1)B, subject to the rules in CTA10/S1024 to S1027 (CTM15400 onwards)).

The legislation does not apply to the case where a company receives a benefit in consideration of what it transfers out of assets. It applies where the company passes money or assets to benefit a shareholder or member in their capacity as such, reflecting their part ownership of and interest in the company and not some contractual obligation or commercial arrangement. For example, payments for services provided to the company might be taxable as employment income or as trading income of the member, they will not be distributions. See CTM15290 and EIM21640 onwards for more on the case where a company transfers an asset at less than market value to an employee or director.

However, there are a number of special provisions that modify the general approach of the distributions legislation. See CTM15120 for more details.

See CTM15130 for further details on the terms used in the distributions legislation.

An issue of shares at par, when they are worth more than par, does not give rise to a distribution. No value leaves the company, although there may in effect be a transfer of value between shareholders.