CTM15120 - Distributions: general: introduction
ICTA88/S209
The distributions legislation basically aims to ensure that if a company gives anything to one of its members without the member giving full payment in return, then a tax liability arises.
The legislation applies where the company passes money or assets to members or shareholders in their capacity as members. It does not apply where the company pays members or shareholders for services to the company. Such payments are covered by the Schedule E etc rules prior to 6 April 2003.
Note that Schedule E was replaced with effect from 6 April 2003 by the provisions of the ITEPA03. The following guidance should be construed accordingly in relation to events on or after that date.
A UK resident company that made a distribution before 6 April 1999 usually had to account for ACT. The recipient (unless a UK resident company) is chargeable to IT under Schedule F.
ICTA88/S209 gives a broad definition of ‘distribution’. It identifies particular items that are distributions.
- Dividends CTM15200.
- Bonus securities or redeemable shares (see CTM15450).
- Transfers of assets and of liabilities between a company and its members CTM15250.
- Payments of interest or other distributions to the extent that they exceed a commercial rate (see CTM15500).
- Payments of interest or other distributions on certain securities (see CTM15500).
- A bonus issue on or following a repayment of share capital (see CTM15420).
- Any other distributions out of assets of the company in respect of shares in the company (see CTM15350).
Tax consequences, ICTA88/S14
Where a UK resident company made a qualifying distribution before 6 April 1999 (see CTM20070), it had to account for ACT (see CTM20050 onwards) unless there was a ICTA88/S247 election (see CTM80070).
The liability to account for ACT was restricted to UK resident companies. Despite this, the distributions legislation applies in principle to both UK resident and non-UK resident companies.
Special provisions
There are some special provisions that modify the general approach of the distributions legislation. These deal with:
- Companies in liquidation (see CTM36130).
- Industrial and provident societies (see CTM40560).
- Building societies (see CTM49100).
- Mutual traders (see BIM24000 onwards).
- Companies which do not and have not carried on a trade or a business of holding investments (see CTM15550).
- Groups of companies (see CTM80070).
- Stock dividends (see CTM17000 onwards).
- Demergers (see CTM17200 onwards).
- Purchase of own shares by unquoted trading companies (see CTM17500 onwards).
- FID (see CTM21000 onwards).
Anti-avoidance provisions, ICTA88/S212, ICTA88/S254 (8)
A distribution paid by one UK resident company to another is not chargeable to CT in the hands of the recipient. This opens the possibility of avoidance. To prevent such avoidance ICTA88/S212 disapplies the distributions legislation in certain circumstances (see CTM15530).
The legislation also seeks to counter reciprocal arrangements that aim to side step the distributions legislation (see CTM15560).
Close companies
ICTA88/S418 extends the meaning of distributions for close companies (see CTM60500 onwards).
Winding-up, ICTA88/S209 (1)
There are special rules relating to distributions in respect of share capital where a company is being wound-up (see CTM36130).
References in the Corporation Tax Acts to distributions do not apply to distributions made in respect of share capital in a winding-up.
Unincorporated associations
The term company in ICTA88/S209 includes an unincorporated association. Such associations can make distributions (see CTM15540).
Non-residents, ICTA88/S14 (1), ICTA88/S337 (2)
Either a UK resident or non-resident company can make a distribution. For distributions made before 6 April 1999, ACT was due only in respect of a qualifying distribution made by a UK resident company.
Neither UK resident nor non-resident companies are allowed any deduction for a distribution in computing profits for CT purposes.
90% groups
A 90% group is defined in ICTA88/S254.
Where a company is a member of such a group, it may make a distribution out of its own assets in respect of shares or securities of another group company. If this happens, ICTA88/S254 (3) treats the distribution as a distribution for tax purposes. However, ICTA88/S254 (4) provides that this does not apply if the distribution is to another UK resident member of the same group.
Reciprocal arrangements, ICTA88/S254 (8)
Some companies may enter into arrangements to make distributions to each other's members. There are rules to deal with such situations (see CTM15560).
Reports to Head Office
You should make a report to CTIAA (Technical) of any case where there is a transaction to the disadvantage of the company, if it involves:
- someone (whether or not a member), receiving a benefit or value as a result of the transaction,
and
- the distributions legislation does not apply to the transaction.
However, see CTM15310 where the transaction is between companies within the charge to CT.
