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) existed in relation to income that has suffered income tax by deduction.

Authority is sometimes claimed, relying on the case of FS Securities Limited v CIR 41TC666, for the view that the deduction of tax under the system then prevailing by the company paying the dividend discharges liability so that dividends must be excluded from a computation of trade profits. This case, however, was finally decided in 1964. Viscount Radcliffe quoted with approval the analysis of Lord Phillimore in Bradbury v The English Sewing Cotton Co Ltd 8TC481 to the effect that the Income Tax Act of 1842 (which reintroduced income tax after a 26 year gap) treated a joint stock company as if it were “a large partnership, so that payment of income tax by a company would discharge the quasi partners”. The following year corporation tax was introduced, along with the Schedule F charge on UK dividends in the hands of individual shareholders - the so-called ‘classical system’ for taxing profits and distributions. Lord Radcliffe’s analysis was inconsistent with the new system.

The issue is now somewhat academic, as interest on current assets has since 1996 been treated as a trading credit under the loan relationships legislation of Chapter 2 Part 4 FA 1996 whether or not tax was deducted at source, and deduction of tax at source on foreign dividends (through the operation of the paying and collecting agent rules) ceased to apply in 2001.

The only income that a general insurer may receive under deduction of tax which originates from current assets is:

• The unfranked part of a dividend distribution from a UK authorised investment fund. Such income is treated as an annual payment from which income tax at 20% is deemed deducted. SI2006/964 regulation 49 provides an identification mechanism for determining the unfranked part.
• A distribution from an unauthorised unit trust, treated as an annual payment from which income tax at 20% is deemed deducted.

Such income is treated as a trading receipt, with credit given against corporation tax for the income tax deemed suffered, applying ICTA88/S7 (2).