Dividends and other company distributions: tax credits on qualifying distributions
Tax credits: qualifying distributions
Tax credits attach to qualifying distributions from companies resident in the United Kingdom which are made either to residents of the United Kingdom or to certain non-UK resident persons. The ITTOIA05 legislation applies to both UK resident and non-UK resident recipients who are entitled to tax credits.
Most distributions of companies resident in the United Kingdom are ‘qualifying distributions’. Only the issue of redeemable share capital (unless that share capital is taxed under the stock dividends legislation) or the issue of securities in respect of shares or securities of a company otherwise than wholly for new consideration, are non-qualifying distributions (SAIM5050).
Under ITTOIA05/S397, UK residents and eligible non-UK residents are entitled to a tax credit equal to one ninth of the amount or value of the distribution. Eligible non-UK residents are defined in ITA2007/S56 (3) (Commonwealth citizens, EEA nationals, etc.).
The person may claim to deduct the tax credit from the income tax charged on the person’s total income for the tax year for which the distribution is made. The non-UK resident has only to fall into the relevant category ‘at any time’ in the tax year, not necessarily throughout the tax year.
ITTOIA05/S397 (3) treats the tax credits attaching to qualifying distributions as reduced if those distributions are not brought into charge to tax. So, for example, if an individual’s total income is reduced by deductions (for example, personal allowances) such that the qualifying distributions are not, or are not wholly, brought into charge to tax, the value of the tax credits attaching to those distributions are correspondingly reduced. So a person may be entitled to a tax credit whose value is nil.
ITTOIA05/S397 (5) makes it clear that if a person other than the recipient of the distribution is treated as receiving the distribution, that person is entitled to the tax credit.
The rules in ITTOIA05/S397 are subject to a number of rules which deny tax credits in certain cases. These are
- ITA07/S504(4) (certain types of unit trust - CTM48000)
- ITA07/S614ZD(6) (manufactured payments - CFM74440)
- FA93/S171 (2B) (Lloyd’s premium trust fund assets - LLM1190).
Increase in amount or value of dividends where tax credit available
ITTOIA05/S398 treats the amount of the dividend or distribution as increased by the amount of the tax credit. It applies for all income tax purposes including the case where the recipient of the distribution is a member of Lloyd’s. But the section does not apply if the recipient of the distribution is a dealer (in which case only the net amount of the distribution is taken into account in calculating the profits of the dealer).