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Part 23: Company distributions
Overview
2954. This Part sets out what is and what is not a company distribution for the purposes of the Corporation Tax Acts. It rewrites Part 6 and section 418 of ICTA and elements of sections 477A, 486 and 490 of ICTA.
2955. The definition of “the Corporation Tax Acts” in the Interpretation Act 1978 refers to enactments relating to the taxation of company distributions and associated income tax provisions. Some income tax rules are included in this Bill. But the income tax effect of some provisions (notably sections 249 and 252 of ICTA) are relocated in ITTOIA.
2956. Provisions of an administrative nature relating to specific aspects of distributions have been located alongside the provisions to which they relate. More general provisions about returns and information are in Chapter 6.
2957. The structure of the Part is as follows.
- Chapter 2 sets out what is treated as a distribution.
- Chapter 3 sets out what is not a distribution.
- Chapter 4 deals with certain special cases.
- Chapter 5 deals with demergers.
- Chapter 6 contains provisions about returns and information.
- Chapter 7 deals with tax credits in connection with distributions.
- Chapter 8 provides interpretation.
Chapter 1: Introduction
Clause 997: Overview of Part
2958. This clause sets out the scope of the Part. It is new.
2959. The clause provides signposts to rules that define what is and is not a distribution, to rules that extend the meaning of distribution, and to the power in section 152 of FA 1995 to make modifications in relation to open-ended investment companies. Section 152 of FA 1995 is not being rewritten.
Chapter 2: Matters which are distributions
Clause 998: Overview of Chapter
2960. This clause sets out the scope of Chapter 2 and provides signposts to other provisions in the Chapter, including those setting out exceptions. It is new.
Clause 999: Priority of negative rules
2961. This clause directs that the Chapter is subject to any express exceptions, and lists some of those that most commonly affect what is to be treated as a distribution. It is based on section 209(1) of ICTA.
2962. The clause specifically refers to paragraph 6 of Schedule 12 to FA 1988, which sets out a number of tax matters connected with the transfer of the whole of the business of a building society to a successor company. It was decided to keep this material together rather than take out one small part. The Schedule has, therefore, not been rewritten.
Clause 1000: Meaning of “distribution”
2963. This clause sets out the main circumstances that give rise to a distribution. It is based on sections 209(2) and (4) and 418 of ICTA.
2964. The clause sets out the circumstances that give rise to a distribution in paragraphs A to H. A number of later clauses refer to one or more of these paragraphs.
2965. The references to the source legislation are as follows:
Paragraph Origin (in ICTA).
2966. The clause also provides signposts to extensions to the meaning of distribution in clause 1064 and clause 1072.
Clause 1001: Provisions related to paragraphs A to H in section 1000(1)
2967. This clause provides information and signposts to bring together in one place a table of the main provisions that explain, supplement or limit each of the categories of distribution. It is new.
2968. It is not exhaustive, but provides a set of signposts to aid navigation through the legislation.
Clause 1002: Exceptions for certain transfers of assets or liabilities between a company and its members
2969. This clause excludes two circumstances from the scope of paragraph B in clause 1000. It is based on section 209(5) and (6) of ICTA.
2970. Section 209(5) and (6) of ICTA are written in slightly different terms. Subsection (5) first qualifies section 209(4) of ICTA. This qualification is rewritten in clause 1021(1). Subsection (5) then goes on to disapply section 209(2)(b) of ICTA. Clause 1002(1) picks up this link, which brings with it the interpretation material of section 209(7) of ICTA, rewritten in clause 1021(2) and (3).
2971. Section 209(6) of ICTA is rewritten in clause 1002(2) and clause 1021(4). This ensures that the qualifications are located close to the rewritten provisions that they modify.
Clause 1003: Redeemable share capital
2972. This clause explains how the amount of a distribution is identified when a distribution falls within paragraph C in clause 1000 because redeemable share capital is issued partly for new consideration. It is based on section 209(2) and (8) of ICTA.
2973. If a premium is payable to the holder of this type of share capital, either on redemption or otherwise, the amount of the premium is added to the value of the share capital for the purposes of calculating the amount of the distribution.
2974. For example, the nominal value of the share capital is £1000 and the premium payable on redemption is £100. The total value calculated by clause 1003 is therefore £1100. If the recipient gives, say, £900 for those shares the amount of the distribution is £200.
Clause 1004: Securities issued otherwise than for new consideration
2975. This clause performs a role similar to that of clause 1003, but in this case in relation to paragraph D in clause 1000 - securities issued partly for new consideration. It is based on section 209(2) and (8) of ICTA.
Clause 1005: Meaning of “non-commercial securities”
2976. This clause sets out the definition of a non-commercial security for the purposes of paragraph E in clause 1000. It is based on section 209(2)(d) of ICTA.
2977. Clauses 1006 to 1014 also affect the scope and amount of a distribution within paragraph E in clause 1000.
Clause 1006: Distributions exceeding consideration received for issue of security
2978. This clause qualifies the meaning of “the principal secured” for the purposes of clause 1005 and of paragraph E in clause 1000. It is based on section 209(3) of ICTA.
2979. The basic meaning of “principal secured” is not defined in tax statute and takes its general meaning, subject to any relevant specific tax rules.
2980. In measuring the extent to which there is more than a reasonable commercial return for the use of the principal, the “principal secured” cannot be greater than the amount given for the issue of the security.
2981. Clause 1117(6) provides a further qualification if securities are issued at a price less than the amount repayable on them, and are not listed on a recognised stock exchange.
Clause 1007: Securities issued at premium representing new consideration
2982. This clause sets out the effect on the measurement of the “principal secured” if a security is issued at a premium representing new consideration. It is based on section 209(3A) of ICTA.
2983. The amount of the premium is taken into account in determining both the amount of the principal secured and the extent to which the return on the securities is more than a reasonable commercial return.
2984. Clause 1008 qualifies this clause, and there is a table at the end of the note on clause 1013 summarising the interaction of clauses 1006 to 1013.
Clause 1008: Consideration for issue of security exceeding amount of principal
2985. This clause explains what happens when the amount of the consideration paid for securities exceeds the principal secured. It is based on section 209(3AA) of ICTA.
2986. In such a case the principal secured is deemed to be increased to the amount of the consideration, for the purposes of determining whether or to what extent paragraph E in clause 1000 applies. The rules in clause 1007 concerning issue at a premium do not apply.
2987. An example is where the security is linked to movement in the value of a basket of shares. The amount received back by the investor could be lower than the amount paid for the security, so the value of the principal secured could be very small in such an example. This could on one view appear to be above a commercial return for that principal, but not so when viewed in relation to the amount actually paid by the investor for the security.
Clause 1009: Securities reflecting dividends on certain shares etc: exclusion of section 1008
2988. This clause is the first of two that qualify clause 1008. It is based on section 209A(1), (2) and (4) of ICTA.
2989. The clause applies where a security is linked to shares of the issuing company or any of its associated companies. The effect is that if the consideration given for the security exceeds the principal secured, the increase provided for by clause 1008 is not made, but the rules in clause 1007 concerning issue at a premium do apply.
2990. Clause 1009 does not apply if the link to shares of a company or its associated companies arises solely because a bank or securities house has issued, as part of its normal business, securities based on a “qualifying index”. This could happen if the basket of shares forming the subject matter of the index includes shares in the issuing bank itself or in one of its associated companies.
2991. The second qualification is in clause 1012.
Clause 1010: Meaning of “qualifying index” in section 1009
2992. This clause defines “qualifying index”. It is based on section 209A(3) of ICTA.
2993. The index must include shares of at least one company that is not either the issuing company or one of its associated companies, and those shares must be a “significant proportion” of the market value of the shares that make up the index.
Clause 1011: Meaning of “associated company” in section 1009
2994. This clause defines the term “associated company” as it applies in clause 1009. It is based on section 209A(5) to (7) of ICTA.
2995. The clause sets out how a person can control a company for this purpose. Any shares held on trading account (but not as part of an insurance company’s long-term insurance fund) are disregarded for this purpose.
Clause 1012: Hedging arrangements
2996. This clause provides the second exception to clause 1008. It disapplies clause 1008 if there are “hedging arrangements” in place. It is based on section 209B(1) and (3) of ICTA.
2997. Clause 1012 takes effect either from the time when the hedging arrangements come into effect, or from a later time in relation to earlier hedging arrangements (but only if those arrangements were in place on or after 17 April 2002). An example of the latter is where a distribution in respect of a security did not initially fall within paragraph E in clause 1000, but did so subsequently and there were hedging arrangements in place before the distribution fell within paragraph E.
2998. At any time when clause 1012 takes effect, paragraph E in clause 1000 operates from that time as if the adjustment under clause 1008, increasing the principal secured to the consideration given on issue, had not been made.
2999. For example, a security with principal secured of £100 is issued for £120. Clause 1008 would normally deem the principal secured to be increased to £120, and the return would be evaluated against that amount for the purposes of paragraph E in clause 1000. If hedging arrangements are subsequently put in place, the principal secured from that point onwards is £100.
3000. The definition of “hedging arrangements” is in clause 1014.
Clause 1013: Exception to section 1012
3001. This clause sets out a series of circumstances in which clause 1012 does not apply, and hence clause 1008 does apply. It is based on section 209B(2), (4), (5), (6), (7) and (9) of ICTA.
3002. All the four conditions A to D must be met and have been met at all times in which any hedging arrangements have been in place in relation to that security (but only on or after 17 April 2002).
3003. Once any one of the conditions A to D in this clause is not met, clause 1012 will apply from that point onwards, and will continue to apply even if all the conditions are subsequently satisfied.
3004. The following table summarises the interaction of clauses 1006 to 1013.
| Clause 1008 applies? | Clause 1007 applies? |
| Security issued at a premium representing new consideration and the consideration is not greater than the principal secured - clause 1007(1) | NO | YES |
| New consideration received exceeds the principal secured | YES | NO |
| Clause 1009(1) applies - securities linked to shares | NO | YES |
| Clause 1009(2) applies, overrides clause 1009(1) | YES | NO |
| Clause 1012 applies - hedging arrangements | NO | YES |
| Clause 1013 applies, overrides clause 1012 | YES | NO |
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Clause 1014: Meaning of “hedging arrangements”
3005. This clause defines “hedging arrangements” for the purposes of clauses 1012 and 1013. It is based on section 209B(8) of ICTA.
3006. The “hedging arrangements” are looked at from the point of view of the issuing company. The essence of the definition is that there is an amount of income or gain that offsets amounts that the company has to meet in relation to the security.
Clause 1015: Meaning of “special securities”
3007. This clause defines “special securities” for the purpose of paragraph F in clause 1000. It is based on, and covers, the various circumstances that are set out in section 209(2)(e) of ICTA.
3008. There are five sets of circumstances listed, corresponding as follows to the provisions in section 209(2)(e) of ICTA:
Condition A section 209(2)(e)(i).
Condition B section 209(2)(e)(ii).
Condition C section 209(2)(e)(iii).
Condition D section 209(2)(e)(vi).
Condition E section 209(2)(e)(vii).
Clause 1016: Meaning of “equity note” in section 1015
3009. This clause provides the definition of “equity note”. It is based on section 209(9) of ICTA.
Clause 1017: Section 1015: other interpretation
3010. This clause provides additional definitions for the purpose of clause 1015. It is based on section 209(2), (3B), (10) and (11) of ICTA.
3011. Subsection (1) qualifies condition C in clause 1015 if the return on a security is dependent on the results of the company’s business. This is based on section 209(3B) of ICTA.
3012. Subsection (2) expands the meaning of “securities connected with shares in the company” for the purpose of condition D in clause 1015. It is based on section 209(2)(e)(vi) of ICTA.
Clause 1018: The principal secured: special securities
3013. This clause qualifies the meaning of “principal secured” for the purposes of clause 1015 if securities are issued at a premium. It is based on section 209(3) and (3A) of ICTA.
3014. The clause performs the same function in relation to securities as clause 1007(2) does in relation to shares. Note however that there is no equivalent of clause 1007(3).
Clause 1019: Relevant alternative finance return
3015. This clause ensures that returns from certain alternative finance arrangements are not treated as distributions for the purposes of the Corporation Tax Acts. It is based on section 209(6A) of ICTA.
Clause 1020: Transfers of assets or liabilities treated as distributions
3016. This clause treats a company as making a distribution, and describes how to calculate the amount of the distribution, if assets or liabilities are transferred by a company to its members or vice versa (paragraph G in clause 1000). It is based on section 209(4) of ICTA.
3017. The value of the benefit to the member is determined, and is then compared with the amount of any new consideration. If the amount given by the member is less than the value provided to the member, a distribution arises equal to the difference.
3018. This clause is subject to the exceptions in clause 1021.
Clause 1021: Section 1020 exceptions
3019. This clause sets out two circumstances where clause 1020 does not apply. It is based on section 209(5) to (7) of ICTA.
3020. Subsection (1) sets out the two exceptions. Subsections (2) to (5) contain further interpretation.
3021. Note that if subsection (1) disapplies clause 1020 and thereby takes something out of being a distribution, it is not to be treated as a distribution under paragraph B in clause 1000. Clause 1002(2) makes the necessary link.
Clause 1022: Bonus issue following repayment of share capital treated as distribution
3022. This clause sets out how a distribution can arise when a company makes a bonus issue of shares following a repayment of share capital. It is based on section 210(1) of ICTA.
3023. This clause is qualified by clause 1023.
3024. The rules for a repayment of share capital following a bonus issue of shares are in clause 1026.
Clause 1023: Exceptions to section 1022
3025. This clause sets out certain exceptions to clause 1022. It is based on section 210(2) to (4) of ICTA.
Clause 1024: Premiums paid on redemption of share capital
3026. This clause works with clause 1025 to determine what is treated as a repayment of share capital. It is based on section 211(7) of ICTA.
3027. The starting point is that a premium paid on redemption of share capital is not treated as a repayment of share capital. This is further qualified by clause 1025.
3028. The source legislation in section 211(7) of ICTA is not expressly limited in its application, but analysis of the legislation has shown that its practical application is limited to matters within the distributions legislation. This has now been made explicit by limiting its effect to this Chapter. See Change 57 in Annex 1.
Clause 1025: Share capital issued at a premium representing new consideration
3029. This clause provides further interpretation of what constitutes a repayment of share capital. It is based on section 211(5) and (6) of ICTA.
3030. If a premium is paid by the purchaser on the issue of share capital, the amount of the premium is considered to be part of the value of that share capital for the purpose of determining what is subsequently to be treated as a repayment of share capital or as a distribution.
3031. For example, taking clauses 1024 and 1025 together, if share capital with a nominal value of £100 is issued at par and is later repaid with a redemption premium of £20 then only £100 is considered to be a repayment of share capital.
3032. If, however, that same share capital was issued at an issue premium of £10, then £110 of the £120 would be regarded as a repayment of that share capital. However, all or part of the £10 issue premium is not regarded as a repayment of share capital to the extent that it has already been applied in paying up any share capital - see subsection (3).
Clause 1026: Distributions following a bonus issue
3033. This clause sets out the circumstances in which certain distributions are not treated as repayments of share capital because they follow an earlier issue of bonus shares. It is based on section 211(1), (2) and (4) of ICTA.
3034. The clause applies only if the issue of bonus shares does not fall to be treated as a qualifying distribution under another provision. A qualifying distribution is any distribution other than one that is a distribution solely because of paragraph C or D in clause 1000 (see clause 1136 for the definition).
3035. Distributions made more than ten years after any bonus issue can be treated as repayments of share capital provided that clause 739 does not apply to the company, and provided that the shares are not redeemable share capital.
3036. Clause 1027 contains a further qualification.
3037. Schedule 2 contains savings for certain bonus issues that took place before 7 April 1973.
Clause 1027: Cap on amount of distributions affected by section 1026
3038. This clause qualifies clause 1026. It is based on section 211(1) and (3) of ICTA.
3039. The clause limits the amount of the distribution to the total value of any previous bonus issues that:
- have not already been treated as distributions, and
- have not been met by new consideration (defined as the “cap”).
Clause 1028: Certain payments connected with exempt distributions
3040. This clause affects clause 1022 by treating chargeable payments made within five years of an exempt distribution as not being repayments of share capital for the purposes of those clauses. It is based on sections 214 and 218(1)of ICTA.
3041. Exempt distributions and chargeable payments are dealt with in Chapter 5 (demergers). Chargeable payments are charged to income tax and corporation tax by clause 1086.
Chapter 3: Matters which are not distributions
Clause 1029: Overview of Chapter
3042. This clause sets out the scope of the Chapter. It is new.
3043. The clause refers to paragraph 6 of Schedule 12 to FA 1988. This Schedule is about change of status of building societies. It was decided to keep this material together rather than take out one small part. The Schedule has, therefore, not been rewritten.
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