GIM5070 - Taxation of the investment return: interest and foreign dividends: income received under deduction of tax

There have been differing views as to whether the Crown option (see BIM14035) exists in relation to income that has suffered income tax by deduction.

One view, for which authority is claimed in the case of FS Securities Limited v CIR41TC666, is that the deduction of tax is equivalent to a decision to tax the income in a particular way so that it must be excluded from a computation of trade profits.

The alternative view is that since income tax and corporation tax are different taxes the FS Securities case has no relevance to a computation made for the purposes of corporation tax.

In practice, Inspectors will come across both approaches and there will usually be no reason to disturb the settled treatment, especially as much of the income concerned will in any case be within the rules on government and corporate debt from 1996 onwards.

Interest

So far as interest is concerned, this issue ceased to be relevant on the enactment of the loan relationships legislation. Inspectors should not normally seek to disturb the pre-1996 treatment unless it is clear that there is a significant tax deferral on the arising basis.

Foreign dividends

The treatment of foreign dividends depends on the relationship between the recipient and paying companies.

Shares in overseas subsidiary companies will normally be held as part of the capital structure of the group rather than as investments that are integral to the trading operation - see GIM5230.

Dividends from such subsidiary companies will not be trading receipts and should therefore be assessed under Case V of Schedule D.

Overseas dividends on other shares, held as portfolio investments, should be included in the computation of trade profits.

Generally, though, such dividends will be accounted for when they fall due for payment and since it is acceptable to follow this treatment for tax purposes the question as to the correct charge – trade profits or foreign income – may well be academic. From 1 April 2001, the paying and collecting agents rules cease to apply so that overseas dividends will be received without any deduction of UK tax, so there can be no dispute that they can be included in a computation of trade profits.