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HMRC internal manual

Savings and Investment Manual

Dividends and other company distributions: qualifying and non-qualifying distributions

The corporation tax rules

The corporation tax rules distinguish between qualifying and non-qualifying distributions. From the point of view of the recipient of the distribution (other than a company) the difference is that a qualifying distribution carries a tax credit.

Any difficulties relating to particular distributions or share issues should be referred to the HMRC office dealing with the Corporation Tax affairs of the company.

Qualifying distributions

A qualifying distribution is any distribution within:

  • CTA10/S1000(1) (dividends and other distributions within the extended meaning of that word - see SAIM5030) with the exception of a distribution under CTA10/S1000(1)C or D;
  • CTA10/S1000(2) (expenses of accommodation, entertainment and other services, benefits and facilities provided to a participator in a close company - see SAIM5200).

Non-qualifying distributions

Most distributions by UK resident companies are qualifying distributions. A ‘bonus’ or ‘scrip’ issue of shares is different. For example, a ‘1 for 4 bonus issue’ means that the shareholder receives one free share for every four existing shares. (This is different to a rights issue in which existing shareholders have first refusal on new shares that the company issuing and for which they would have to pay cash.)

Such a distribution is within CTA10/S1000(1)C or D which refers to an issue of redeemable share capital or securities in respect of shares or securities of a company otherwise than wholly for new consideration. CTA10/S1136(1) excludes it from being a qualifying distribution. It is therefore a non-qualifying distribution.

A bonus issue of non-redeemable shares is not income at all for tax purposes (see, for example, CIR v Blott (1921) 8TC101, CIR v Fisher’s Executors (1926) 10TC302 HL, and CIR v Wright (1926) 11TC181), and is not taxable as a distribution.

However, where a company makes a bonus issue of any share capital (redeemable or non-redeemable) shares at the time of, or following, a repayment of any share capital (CTM15420), then CTA10/S1022 this as a qualifying distribution (CTM20050). (SAIM20000)

A bonus issue is not necessarily the same as a stock dividend (see below).

Repayments of share capital

A repayment of share capital is not a distribution (CTA10/S1000(1)B. However, CTA10/S1026 provides that where bonus share capital was issued and was a non-qualifying distribution, then a later distribution in respect of that share capital is not treated as repayments of share capital, but is a qualifying distribution (CTM15400 onwards).

Stock dividends

The above rules are further modified by CTA10/S1049, which provides that a stock dividend

  • is not a distribution within CTA10/S1000(1)C;
  • is not treated as a distribution for the purposes of CTA10/S1022 (repayment of share capital followed by bonus issue);
  • does not count as a bonus issue for the purposes of CTA10/S1026 (bonus issue followed by repayment).

Thus a stock dividend received by an individual or trustee will not be a distribution, either qualifying or non-qualifying, whether it follows or precedes a repayment of share capital. SAIM5150 has more on stock dividends.