Deduction of tax only applies to overseas equities. The basic
rules requiring deduction are in ITA07/S922. This activates a
withholding requirement on payers of MODs where the manufacturer is
UK resident or if not resident carrying on a trade in the UK. This
basic rule is disapplied in many cases by regulations in
SI1993/2004.
ITA07/S581 provides that where the MOD is received by a UK
person after deduction of the tax, the recipient is treated as
receiving an overseas dividend and the tax withheld is treated as
overseas tax deducted. The amount of the overseas dividend is
deemed to be the gross amount of the real overseas dividend,
regardless of the amount of the MOD. If the MOD (plus UK
withholding tax) is larger than the real dividend for whatever
reason then paragraph 7 Schedule 23A or as the case may be
ITA07/S583 treats the excess as a fee for undertaking the relevant
transaction.
ITA07/S923 says that where a MOD is paid to a UK person (i.e.
UK resident or non-resident receiving for purpose of UK branch
trade) by a non-UK payer (i.e. a non-UK resident) or otherwise than
in the course of a trade carried on the UK through a permanent
establishment, then the UK recipient must deduct and account for a
“reverse charge”. This is the amount of tax that a UK
payer would have deducted and accounted for if it had paid the MOD
to another UK recipient. The person might be the end owner of the
securities, or an intermediary acting as principal or as agent.
ITA07/S581 will then apply to the recipient so that it is treated
as receiving an overseas dividend under deduction of overseas tax.
Again this basic approach is disapplied or modified in some cases
by SI1993/2004.
ITA07/S925 provides the regulation-making powers that enable
the basic approach outlined above to be modified in particular
circumstances.
