News
Corporation tax treatment of capital distributions to be clarified
Posted on: 26 February 2010
The Financial Secretary to the Treasury has announced that Finance Bill 2010 will include retrospective legislation to clarify the corporation tax treatment of certain distributions received by UK companies.
The new dividend exemption which applies to distributions paid from 1 July 2009 does not apply to capital distributions. Prior to a 2005 tax law rewrite, the legislation could be interpreted as stating that all UK distributions were of an income nature unless there was a specific rule to the contrary. As this no longer applies, it could be argued that certain distributions which were previously assumed to be income should be treated as capital. For example, HMRC recently unsuccessfully argued that a dividend paid out of a share premium account by an overseas company was capital, and the status of dividend payments following a share capital reduction has also been questioned.
The new legislation will therefore restore the position to that which existed before the tax law rewrite, with the effect that certain distributions that may otherwise be treated as capital for tax purposes will not be prevented from falling within the dividend exemption regime.
Companies will be able to opt out of the revised treatment if retrospective application of the new legislation would increase tax liabilities.
HMRC has stated that it is not in a position to give clearance based on the proposals, so it may be necessary to await the draft legislation before proceeding with any proposed payments.
