CTM47230 - Investment trusts: conditions for approval: 15 per cent retention
ICTA88/S842(1)(e), (2A), (2B) and (2C)
The company must not retain in respect of any accounting period an amount which is greater than 15 per cent of its income derived from shares and securities. See CTM47210 for what is and is not regarded as income derived from shares and securities for this purpose.
To apply this test you need to compare the figure of 15 per cent of the company’s income derived from shares and securities to the amount of the company’s ‘retained income’.
Meaning of retained income
Where the company’s accounts are prepared in accordance with the Statement of Recommended Practice: Financial Statements of Investment Trust Companies (the ‘SORP’), issued in January 2003 and revised in December 2005, retained income will be the amount shown as retained in the company’s revenue account; that is, after dividends paid or proposed and proper provision for liabilities, but before any transfers from reserves.
Following the adoption of International Financial Reporting Standards and the equivalent modified UK GAAP, final proposed ordinary dividends will no longer be accrued in the company’s accounts and ordinary dividends (whether paid or proposed) will not be shown in the company’s income statement. These presentational changes do not alter the measure of retained income for the purposes of section 842(1)(e), which is still taken after dividends paid or proposed for the period of account in question. The SORP provides for appropriate disclosures to be made in the notes to the accounts, so that the amounts not appearing on the face of the accounts can be identified. Most investment trusts will also provide a reconciliation showing how the retained income figure translates from the accounts.
Where the company’s accounts are not prepared in accordance with the SORP, adjustments may be needed to the accounts figure to arrive at the amount of retained income for the purposes of applying this test. In such cases, the measure of retained income is the amount that would be shown as retained if the accounts had been prepared in accordance with the SORP.
The 15 per cent retention condition is disapplied by section 842(2A) where the company is required by law to retain an amount of income exceeding 15 per cent of its income derived from shares and securities for the accounting period. This removes any possible conflict between company law and tax law. But the section 842(2A) exclusion does not apply where the company retains more income than is necessary to meet the requirement imposed by law and the excess retained plus any distribution of income for that accounting period is at least £10,000. This figure of £10,000 is proportionately reduced where the accounting period is less than 12 months.
The 15 per cent retention condition is also disapplied by section 842(2C) where, in order to meet the section 842(1)(e) requirement, the company would have to distribute an amount less than £10,000 or, if the accounting period is less than 12 months, a proportionately reduced amount. This stops the tax rule requiring companies to pay very small dividends.