BIM24615 - Mutual trading: distributions: ICTA88/S491: what is taxed?
If a company receives assets (not capital) from a body corporate which has at any time carried on a mutual trade or consideration for the transfer of assets from such a body corporate following an amalgamation or reconstruction (including the winding up) or the consideration for a transfer of a right to receive under either of the above which is not otherwise chargeable to tax on the recipient the provisions of this section shall apply to the receipt if the company is being wound up or dissolved.
If a company makes a transfer or surrender of a right, not at arms length, it is deemed to have received consideration equal to the value of the right.
If the recipient of such money or money’s wroth has previously made any payment to the body corporate for which the recipient was allowed a corporation tax deduction then:
- Any money or money’s worth received is treated as a receipt of the recipients trade (if he is carrying on a trade) This applies notwithstanding that as a result of a change in persons carrying on the trade, the profits under ICTA88/S113 or ICTA88/S337(1) are determined as if the trade had been permanently discontinued and a new trade set up and commenced (ICTA88/S491(4)). Or
- Any money or money’s worth received is treated as a receipt of miscellaneous income (if the recipient no longer carries on the trade). If the trade has been permanently discontinued prior to the time of the receipt of money or money’s worth, a deduction should be allowed against the receipt for:
- any loss, expense or debit which would have been allowed had the trade continued or
- any capital allowance to which the recipient trade was entitled and to which effect has not been given.
However, relief shall not be given for any amounts for which relief has previously been given under this section or ICTA88/S103
and if the recipient has been allowed a deduction for any payment made to the mutual trader then (ICTA88/S491 (3)):
- the amount received is treated as a receipt of the recipient’s trade, or
- if the recipient no longer carries on the trade, the receipt is taxable under Case VI of Schedule D.
The legislation applies if the recipient is the person, or one of the persons, carrying on the trade that made a payment to the mutual trader. The provision applies notwithstanding that, as a result of a change in the persons carrying on the trade, the profits under ICTA88/S113 or ICTA88/S337 (1) are determined as if the trade had been permanently discontinued and a new trade set up and commenced - ICTA88/S491 (4).
Where the transfer or surrender at (c) above is not at arm's length, you should substitute the value of the right to receive the distribution for the consideration actually paid - ICTA88/S491 (2).
