Clause 393: Later charge where cash dividends retained in SIPs are paid over

142.     This clause is based on section 251B of ICTA.

143.     The trustees of the scheme may only hold on to a cash dividend and carry it forward for three years from the date the dividend is paid by the company. Additionally, any amount not reinvested must be paid to the participant if the participant ceases to be in "relevant employment" or if a termination notice is issued in respect of the plan (see paragraph 68(4) of Schedule 2 to ITEPA).

144.     Subsection (2) ensures that in any of these circumstances, the participant is charged to income tax for the tax year in which the dividend is paid over.

145.     Tax is charged on the amount of the cash dividend paid over and not on the amount of the cash dividend originally paid by the company (subsection (3)).

146.     Whether the participant is entitled to a tax credit and, if so, the amount of it, is determined by reference to the tax year in which the cash dividend is paid over by the trustees and not by reference to the tax year the company actually paid the dividend (see subsection (5)).

147.     Section 251B of ICTA is rewritten so that the original tax charge is postponed (contrast clause 394 which deems a further distribution to be made). This approach has rendered the phrase "except to the extent that it represents a foreign cash dividend" redundant. In effect, the cash dividend paid over by the trustees does not lose its original character as either a cash dividend paid by a UK resident company (in which case it is dealt with under this Chapter) or a cash dividend paid by a non-UK resident company (in which case it is dealt with under Chapter 4 of Part 4 of this Bill).

148.     But the definition of "foreign cash dividend" in section 251D of ICTA does suggest that it is the date that the company originally paid the dividend that determined, under the source legislation, whether the tax charge fell under Schedule F (if UK resident company) or Schedule D Case V (if non-UK resident company). This is rewritten in subsection (6).

Clause 394: Distribution when dividend shares cease to be subject to SIP

149.     This clause is based on section 251C of ICTA and applies if the dividend shares acquired with the cash dividend cease to be subject to the approved SIP within three years of acquisition.

150.     Subsection (2) deems a distribution to have been made to the participant in the tax year in which the dividend shares cease to be subject to the plan.

151.     Subsection (3) confirms that tax is charged on the amount of the cash dividend applied to acquire the shares (which have ceased to be subject to the plan) rather than, for example, the amount or value of the dividend shares.

Clause 395: Reduction in tax due in cases within section 394

152.     This clause is based on section 251C of ICTA and applies if tax has been paid in respect of any capital receipts received in connection with the holding of the dividend shares which cease to be subject to the approved SIP.

153.     Subsection (2) operates to reduce the amount of tax due under clause 394.

Clause 396: Interpretation of sections 392 to 395

154.     This clause is based on section 251D of ICTA.

Clause 397: Tax credits for qualifying distributions: UK residents and eligible non-UK residents

155.     This clause and the following four clauses deal with:

• a person's entitlement to a tax credit attaching to qualifying distributions;

• the tax treatment of qualifying distributions where the person is not entitled to a tax credit; and

• the tax treatment of non-qualifying distributions.

156.     The clauses are based on sections 231, 232 and 233 of ICTA.

157.     By virtue of sections 231(1) and 232 of ICTA tax credits are available to certain recipients in respect of qualifying distributions from companies resident in the United Kingdom.

158.     Tax credits attach to qualifying distributions which are made either to residents of the United Kingdom or to certain non-UK resident persons. The source legislation has been rearranged so that there is a single provision dealing with both categories of recipients (UK resident and non-UK resident) who are entitled to tax credits.

159.     Most distributions of companies resident in the United Kingdom are "qualifying distributions" (see section 14(2) of ICTA). Only the issue of redeemable share capital (unless that share capital is taxed under the stock dividends legislation) or the issue of securities in respect of shares or securities of a company otherwise than wholly for new consideration are non-qualifying distributions.

160.     In line with the decision not to define the expression "distribution" in the Bill, the expression "qualifying distribution" is likewise not defined (other than by reference to section 832(1) of ICTA).

161.     Subsection (1) sets out who is entitled to the tax credit, in what circumstances and what the value of that tax credit is. Those entitled to the tax credit include "eligible non-UK residents".

162.     Subsection (2) deals with how the tax credit may be used and rewrites section 231(3) of ICTA. Section 231(3) in the source legislation is subject to section 231(3AA) of ICTA. This is rewritten in a slightly different way. Subsection (3) treats the tax credits attaching to qualifying distributions as reduced if those distributions are not brought into charge to tax. So, for example, if an individual's total income is reduced by deductions (for example, personal allowances) such that the qualifying distributions are not, or are not wholly, brought into charge to tax, the value of the tax credits attaching to those distributions are correspondingly reduced.

163.     Although companies resident in the United Kingdom are expressly excluded in section 231(3) of ICTA, (because section 231(3) of ICTA only applies to a person "not being a company resident in the United Kingdom") this exclusion has not been adopted. See Change 84 in Annex 1.

164.     Subsection (4) defines eligible non-UK resident. Section 232 of ICTA extends the entitlement to tax credits to certain non-UK resident individuals. These are referred to as individuals who:

having made a claim in that behalf, [are] entitled to relief under Chapter I of Part VII by virtue of section 278(2) ..

165.     The words about making the claim in section 232 of ICTA are unnecessary because the individual will have to make a claim for personal allowances under section 278(8) of ICTA before the tax credit can be taken into account.

166.     Also, section 278 of ICTA does not specify whether the individual concerned has to come within one of the given categories (eg Commonwealth citizen or EEA national) throughout the tax year in question or merely at any time during the tax year in question. However, given personal allowances are available to these individuals simply for falling within a particular category, subsection (4) has followed this approach and has used the words "at any time".

167.     Subsection (5) rewrites section 231(4) of ICTA. The words "(and accordingly the question whether he is entitled to a tax credit in respect of it shall be determined by reference to where he, and not the actual recipient, is resident)" have been omitted. The revised wording of the clause makes the words unnecessary.

Clause 398: Increase in amount or value of dividends where tax credit available

168.     This clause is based on section 20(1) of ICTA (including the proviso "other than section 95(1)"). It applies for all income tax purposes including the case where the recipient of the distribution is a member of Lloyd's. But the clause does not apply if the recipient of the distribution is a dealer (in which case only the net amount of the distribution is taken into account in calculating the profits of the dealer).

Clause 399: Qualifying distributions received by persons not entitled to tax credits

169.     This clause deals with the tax treatment of qualifying distributions received by persons not entitled to a tax credit (for example, because they are non-resident and do not fall within the definition of "eligible non-UK resident"). It is based on section 233(1) and (1A) of ICTA.

170.     Subsection (2) provides that the non-UK resident is treated as having paid income tax at the dividend ordinary rate (Schedule F ordinary rate in the source legislation) on the amount or value of the distribution.

171.     The amount or value of the distribution will either be the actual amount of the distribution (if the person is a non-UK resident company receiving the qualifying distribution in a beneficial capacity) or that amount is "grossed up" by reference to the dividend ordinary rate. Subsections (3) and (4) explain when the grossed up amount (as defined in subsection (5)) is substituted for the actual amount.

172.     The words "not being a company resident in the United Kingdom" in section 233(1) of ICTA and "any person who is not a company" in section 233(1A) of ICTA create the same difficulties as those in section 231(3) of ICTA. So this clause follows a similar approach to that taken in clause 397(2) by rewriting sections 233(1) and 233(1A) of ICTA without any exclusion for companies. See Change 84 in Annex 1.

173.     Section 233(1)(c) of ICTA treats the amount or value of the distribution as not brought into charge to tax for the purposes of sections 348 and 349 of ICTA. Section 233(1)(c) of ICTA is not rewritten in this Bill. But rather than leaving the provision "stranded" in section 233 of ICTA, it has been incorporated in section 348 of ICTA as paragraph (a) of a new subsection (4) (see Schedule 1).

Clause 400: Non-qualifying distributions

174.     This clause is based on section 233(1) of ICTA and applies when a person receives a non-qualifying distribution.

175.     A non-qualifying distribution is defined as any distribution which is not a qualifying distribution (see subsection (6)). A qualifying distribution is defined in section 14(2) of ICTA. Broadly, a non-qualifying distribution is an issue of redeemable share capital (unless the share capital is taxed as a stock dividend) or of securities in respect of shares or securities of the issuing company otherwise than wholly for new consideration. A non-qualifying distribution does not carry a tax credit.

176.     Subsection (2) treats the recipient of the non-qualifying distribution as having paid income tax at the dividend ordinary rate (Schedule F ordinary rate in the source legislation) on the actual amount of the non-qualifying distribution (that is, there is no grossing up).

177.     The words "not being a company resident in the United Kingdom" in section 233(1) of ICTA create similar difficulties to those in sections 231(3) and 233(1A) of ICTA. See Change 84 in Annex 1.

178.     Subsections (4) and (5) are based on section 233(1B) of ICTA. In the case of trustees of accumulation or discretionary trusts, the trustees are taxed on the amount or value of the distribution at the dividend trust rate (Schedule F trust rate in the source legislation). However, the trustees' tax liability is reduced by an amount of income tax equivalent to the dividend ordinary rate (Schedule F ordinary rate in the source legislation).

Clause 401: Relief: qualifying distribution after linked non-qualifying distribution

179.     This clause is based on section 233(2) of ICTA.

180.     A non-qualifying distribution is generally the first part of an event that will eventually be a qualifying distribution. So the issue of redeemable share capital (unless a stock dividend) is a non-qualifying distribution (see section 14(2)(a) of ICTA) but the repayment of that share capital is a qualifying distribution. So section 233(2) of ICTA provides relief to avoid double taxation for higher rate taxpayers.

181.     The clause applies where a higher rate taxpayer who has paid income tax at the dividend upper rate (Schedule F upper rate in the source legislation) on the receipt of the non-qualifying distribution is liable to income tax at the dividend upper rate (Schedule F upper rate in the source legislation) on the receipt of the linked qualifying distribution.

182.     Where the clause applies, subsection (1) enables a taxpayer to set his or her extra tax liability (ie, the higher rate element) arising on the non-qualifying distribution against the extra liability arising on the qualifying distribution so that the taxpayer is only liable to pay the balance.

183.     Subsections (5) and (6) explain how the extra liability is calculated in earlier tax years (because the rates at which higher rate taxpayers have paid tax have changed over the years).

Chapter 4: Dividends from non-UK resident companies

Overview

184.     This Chapter introduces a separate charge to income tax on dividends from companies not resident in the United Kingdom.

185.     Under section 18(3) of ICTA, there are no individual charges according to types of income within the Schedule D Case IV or V charge. But the system of identifying and classifying income by Schedule and Case has been replaced in this Bill by individual charges on types of income.

186.     Income which, under the source legislation, is charged to tax under Schedule D Cases IV or V, has, where appropriate, been fully integrated with the equivalent income arising from a UK source. In the case of dividends from non-UK resident companies there is no exact equivalent in terms of UK source income. The closest equivalent is the charge to tax on dividends and other distributions from UK resident companies (section 20 of ICTA, Schedule F in the source legislation). But there is no precise overlap. The UK charge, by the adoption of the definition of "distribution" from Part 6 of ICTA (see the commentary on Chapter 3 of Part 4 of this Bill) can include dividends or distributions of a capital nature and can also operate to convert payments that would otherwise be treated as interest into distributions. Any charge on distributions from non-UK resident companies must be confined to income only. For this reason, it is not possible to integrate the charges and a separate charge is needed to cover dividends from non-UK resident companies.

Clause 402: Charge to tax on dividends from non-UK resident companies

187.     This clause charges to tax dividends of companies not resident in the United Kingdom. It is based on section 18(1) and (3) of ICTA.

188.     For the reasons explained in the overview, the expression "distribution" has not been adopted. It is possible that a non-UK resident company may make a distribution of income which would not fall within Chapter 4 of Part 4 of this Bill because it is not a "dividend". But if the distribution comprises income it will fall to be dealt with either under alternative specific charges (eg interest) or within "income not otherwise charged", the charge on which appears in Chapter 8 of Part 5 of this Bill.

189.     Although, the term "dividend" is used it is not defined. "Dividend" is a widely used and understood term and is defined only in very specific circumstances not applicable in this context (see, for example, section 49 of ICTA - dividends held in the name of Treasury). It is not thought appropriate to attempt to define "dividend" here. It will usually be a matter of referring to the relevant company law to determine whether or not a payment made by a company is a dividend.

190.     Subsection (2) highlights an exemption from income tax for dividends paid under approved share incentive plans ("SIPs") (see further the commentary on the SIPs legislation in Chapter 3 of Part 4 of this Bill and also the commentary on clause 405).

191.     Subsection (3) provides that where shares cease to be subject to an approved SIP but the reason for the cessation falls within one of the "good leaver" provisions, the charge to tax under subsection (1) will not apply.

192.     Subsection (4) ensures that dividends of a capital nature do not fall within the charge to tax under this Chapter. In determining whether a payment is income in nature, it is necessary (as it is under the source legislation) to analyse the payment under local law (see CIR v Trustees of Joseph Reid (dec'd) (1949), 30 TC 431 HL and Rae v Lazard Investment Co Ltd (1963), 41 TC 1 HL). Whiteman on Income Tax, Third Edition, on page 1107, comments in this context "the proper test in such circumstances is, applying the local law, whether or not the corpus of the asset is left intact after the distribution. If it is not, the receipt will be a capital receipt; if it is, the payment will be chargeable".

Clause 403: Income charged

193.     This clause sets out the amount charged to tax and is based on section 65(1) of ICTA.

194.     Subsection (1) charges tax on the full amount of the dividends arising in the tax year. The term "arising" has been retained (see the commentary on income charged in Chapter 2 of Part 4 of this Bill). The arising basis is different from the paid basis which applies to the charge to tax on dividends and other distributions from UK resident companies (for a discussion of the paid basis see the commentary on Chapter 3 of Part 4 of this Bill) and, given they do not mean exactly the same, "paid" has not been used in this context.

195.     Subsection (2) makes the basis of assessment in subsection (1) subject to the SIPs rules and Part 8 of this Bill. Part 8 of this Bill contains the special rules which apply to foreign income (see further the commentary on Part 8 of this Bill).

Clause 404: Person liable

196.     This clause states who is liable for any tax and is based on section 59(1) of ICTA.

Clause 405: SIP shares: introduction

197.     This clause and the following three clauses are based on sections 68A to 68B of ICTA which were inserted into ICTA by ITEPA. They are part of the SIPs code. See the commentary on the SIPs legislation in Chapter 3 of Part 4 of this Bill.

198.     This clause introduces the special rules about charges to tax on SIP dividends.

199.     Subsection (2) provides that clauses 406 to 408 only apply if the participant has benefited from the tax advantages applying to an approved SIP. Those tax advantages will only apply to an individual who is chargeable to tax under Part 2 of ITEPA in respect of eligible employment, or, in the case of shares awarded before ITEPA came into force, under Schedule E.

Clause 406: Later charge where cash dividends retained in SIPs are paid over

200.     This clause is based on section 68B of ICTA.

201.     SIP trustees may only retain a cash dividend and carry it forward for three years from the date the dividend is paid by the company. Any amount not reinvested must be paid to the participant if the participant ceases to be in "relevant employment" or if a termination notice is issued in respect of the plan (see paragraph 68(4) of Schedule 2 to ITEPA).

202.     This clause makes provision about amounts so paid over.

203.     The definition of "foreign cash dividend" in section 68C of ICTA suggests that it is the date that the company originally paid the dividend that determined whether the tax charge fell under Schedule F or Schedule D Case V in the source legislation. This is rewritten in subsection (5).

Clause 407: Dividend payment when dividend shares cease to be subject to SIP

204.     This clause is based on section 68B(2) of ICTA and applies if the dividend shares acquired with the cash dividend cease to be subject to the approved SIP within three years of acquisition.

Clause 408: Reduction in tax due in cases within 407

205.     This clause is based on section 68B(3) of ICTA. Subsection (1) provides that the clause applies if the participant has paid tax in respect of any capital receipts received in connection with the holding of the dividend shares which cease to be subject to the approved SIP.

206.     Subsection (2) operates to reduce the amount of tax otherwise due under Chapter 4 of Part 4 of this Bill by an amount equal to the tax paid on the capital receipts.

Chapter 5: Stock dividends from UK resident companies

Overview

207.     This Chapter deals with the charge to income tax on stock dividend income.

208.     "Stock dividend" is a term often given to particular form of dividend made by a UK resident company which is subject to a particular charge to income tax.

209.     A bonus issue of non-redeemable shares by a company is not a distribution (see, for example, CIR v Blott (1921), 8 TC 101 HL, CIR v Fisher's Executors (1926), 10 TC 302 HL, and CIR v Wright (1926), 11 TC 181 CA). Without any special provision it would not have any income tax consequences for the shareholder.

210.     A bonus issue of redeemable shares, however, is a distribution (see section 209(2)(c) of ICTA). Without any special provision it would be charged to tax under the source legislation under Schedule F. However, there is a special provision - the charge to tax on stock dividends under section 249 of ICTA. And, under section 230 of ICTA, anything that is a stock dividend:

• is not a distribution for Schedule F purposes;

• is not treated as a distribution for the purposes of section 210 of ICTA (repayment of share capital followed by bonus issue); and

• does not count as a bonus issue for the purposes of section 211 of ICTA (bonus issue followed by repayment).

211.     In this Chapter, the term "stock dividend income" is defined by reference to the issue of the share capital by a UK resident company in two circumstances. These circumstances are set out in section 249(1) and (2) of ICTA. These subsections are not rewritten in this Bill because of their relevance to corporation tax.

212.     The first circumstance is where share capital is issued as a result of the shareholder exercising an option to choose whether to receive an ordinary cash dividend or additional share capital (section 249(1)(a) of ICTA).

213.     The second circumstance is where the company issues "bonus share capital" in respect of shares which, under their terms (whether original or otherwise), carry the right to bonus share capital (section 249(1)(b) and (2) of ICTA). (This is distinct from a bonus issue which arises from a specific resolution and not from the terms of the shares themselves.)

214.     Section 249(7) of ICTA is spent and is therefore repealed. Subsections (8) and (9) of section 249 of ICTA are open-ended and so have been retained in ICTA (but are amended by Schedule 1) to this Bill.

Clause 409: Charge to tax on stock dividend income

215.     This clause charges stock dividend income to tax. It is based on section 249 of ICTA.

Clause 410: When stock dividend income arises

216.     This clause explains when and to whom stock dividend income is treated as arising. It is based on section 249(4) to (6) of ICTA.

217.     If stock dividends are issued to personal representatives during the administration period, stock dividend income is treated as arising (subsection (4)) but that income is not taxed under Chapter 5 of this Bill. Instead, that income forms part of the aggregate income of the estate for the purposes of Chapter 6 of Part 5 of this Bill or section 701(8) of ICTA. "Personal representatives" is defined in clause 878.

Clause 411: Income charged

218.     This clause sets out the amount charged to tax and is based on section 249(4) and (6) of ICTA.

219.     Subsection (2) defines the amount charged to tax. It is the cash equivalent of the stock dividends issued (see clause 412) grossed up at the dividend ordinary rate (the Schedule F ordinary rate in the source legislation). For the meaning of "grossing up" see clause 877 and the commentary on that clause.

Clause 412: Cash equivalent of share capital

220.     This clause explains how to calculate the cash equivalent of the stock dividend (in other words the net amount of the stock dividend income to be grossed up). It is based on section 251 of ICTA. This clause also rewrites part of Statement of Practice A8.

221.     The source legislation is complex, particularly where the stock dividend is bonus share capital. Clause 412 simplifies the rules for both types of stock dividend (ie, stock dividends in lieu of cash dividends and bonus share capital). See Change 85 in Annex 1.

222.     Subsection (1) deals with stock dividends within section 249(1)(a) of ICTA - an issue of share capital in lieu of a cash dividend. The cash equivalent of such share capital is the amount of the cash dividend alternative unless subsection (2) applies.

223.     Subsection (2) applies if the difference between the cash dividend alternative and the share capital's market value equals or exceeds 15% of that market value. In that case, the cash equivalent is not the amount of the cash dividend alternative but rather the market value of the share capital.

224.     Subsection (3) deals with stock dividends within section 249(1)(b) of ICTA - bonus share capital. The cash equivalent of such share capital is its market value.

225.     Section 251(2)(a)(ii) and (4) of ICTA have been omitted, making the rule relating to bonus share capital more straightforward. See Change 85 in Annex 1.

226.     Subsection (4) specifies the date on which the "market value" is to be taken for the purposes of these provisions. It is based on section 251(2) and (3) of ICTA.

227.     Subsection (5) gives definitions for "listed" and "market value". Section 251(3) of ICTA includes more complicated references to the relevant provisions in TCGA. Subsection (5) instead simply imports the definition of "market value" in sections 272 to 273 of TCGA save for subsection (2) of section 272 if TCGA.