CTM01160 - Corporation Tax: introduction: distributions

This guidance summarises the provisions relating to distributions in the Corporation Tax Acts, defined at CTA10/PART23. There is more extensive guidance on:

  • Distributions at CTM15000 onwards.
  • Advance Corporation Tax (ACT) at CTM20000 onwards.
  • Non Corporate Distribution Rate (NCDR) at CTM14000 onwards.
  • Foreign Income Dividends (FIDs) at CTM21000 onwards.

The ACT, NCDR and FID regimes have all been abolished.

Distributions received by a company

The old rule was that distributions of a UK resident company received by a company chargeable to CT were not charged (CTA09/S1285, formerly ICTA88/S208). FA09/SCH14 introduced a new regime covering all company distributions, UK and foreign. It was aimed mainly at replacing the credit system for tax on foreign dividends, but also replaced the ICTA88/S208 exemption of UK company dividends and other distributions recieved.

Before 6 April 1999 any tax credit attaching to distributions received by a company as part of its ‘franked investment income’ (FII) could be taken into account in arriving at the ACT payable by it in respect of distributions, other than FIDs, it made (that is, on its ‘franked payments’, FPs, see below): ICTA88/S241. In most cases any tax credit attaching to distributions received was not payable to a company, but there was an exception: ICTA88/S242 to 244.

The latter provisions, which were repealed for accounting periods beginning on or after 2 July 1997, allowed a company to claim that FII received should be treated as profits chargeable to CT for the purpose of setting off:

  • trading losses,
  • charges on income,
  • management expenses,
  • certain capital allowances,
  • losses on unquoted shares,
  • non trading deficits or loan relationships or deficits of insurance companies.

Where a company made such a claim the tax credit included in the FII was paid to the company. Compensating adjustments were made if there was a later excess of FPs over FII.

Distributions made by a company

Before 6 April 1999, when a company made a qualifying distribution (now called a non-CD distribution, reflecting the paragraphs at CTA10/S1000(1)) it had to account for ACT at the rate in force at the time the qualifying distribution was made. Qualifying distributions were broadly all company distributions except bonus issues of redeemable shares (S1000 (1) paragraph C) or of securities (paragraph D), which otherwise would have generated payable tax credits without any actual distribution out of company assets (CTM20070).

The ACT was calculated separately in respect of FIDs paid and other qualifying distributions.

A franked payment was:

  • the amount or value of a qualifying distribution (excluding a FID) made, together with
  • the related ACT.

Franked investment income is:

  • the amount or value of a qualifying distribution (excluding an FID) received, together with
  • the tax credit attaching to the distribution.

The ACT was calculated by reference to the excess of FPs made over FII received, except where a distribution was a FID. In that case the ACT was calculated by reference to the excess of FIDs paid over FIDs received.

The machinery for the collection of ACT was in ICTA88/SCH13. A company which made a non-qualifying (CD) distribution was not liable to account for ACT in respect of it, but the company had to return details of the non-qualifying distribution under ICTA88/S234 (CTM15900 onwards).

ICTA88/S247 (1) allowed companies in particular circumstances to make a ‘group income election’ that dividends (but not other forms of qualifying distributions and not FIDs) could be paid without the paying company having to account for ACT on those dividends. Broadly an election could be made in respect of dividends paid by:

  • a subsidiary to its parent, or
  • a subsidiary to a co-subsidiary, or
  • a trading company owned by a consortium of companies.

No ACT is payable in respect of any distribution made on or after 6 April 1999.

Set-off of ACT

The ACT paid by a company in respect of qualifying distributions made by it in any accounting period was set off against the CT chargeable on its profits for that accounting period, subject to certain limitations. It was quite possible, notably where double tax relief was available against CT, that all or part of the ACT a company paid in respect of distributions made by it in an accounting period could not be set-off against CT chargeable for that period. The amount it could not set off was known as surplus ACT and, subject to certain limitations, the company could claim to have the surplus ACT set off against CT on its profits for accounting periods beginning in the six previous years. Any surplus ACT not used in this way was carried forward and set off against CT on profits for later accounting periods.

Relief for ACT that was available for set-off but had not been set off against the liability of an accounting period beginning before 6 April 1999 (‘unrelieved surplus ACT’) is dealt with under the ‘Shadow’ ACT Regulations (see CTM18000 onwards). These control the rate at which surplus ACT may be relieved.

Surrender of ACT

A parent company that paid ACT in respect of dividends paid in an accounting period could surrender the whole or part of that ACT to its subsidiaries. Then a subsidiary got relief for ‘surrendered’ ACT as if it were ACT paid in respect of its own qualifying distributions, although the subsidiary could not claim to set-off any surrendered ACT against CT on its profits for earlier accounting periods.

Repayment of ACT

FA94 introduced the FIDs scheme which in certain circumstances allowed companies to claim set-off or repayment of surplus ACT, but conferred no payable tax credit on recipients.

Non-corporate distribution rate

Where a company made distributions to a person other than a company during the period 1 April 2004 to 31 March 2006 it could be affected by the NCDR legislation in ICTA88/S13AB and ICTA88/SCHA2. This effectively imposed a minimum rate of CT on profits paid out as distributions to non-corporate members. There is detailed guidance on the NCDR at CTM14000 onwards.