Finance Bill Tracking Service 2010 | Budget 2010

BN05 CAPITAL DISTRIBUTIONS

Who is likely to be affected?

1. UK companies in receipt of distributions.

General description of the measure

2. This measure will put beyond doubt the corporation tax (CT) treatment of certain distributions received by UK companies.

3. The new legislation will mean that distributions will not be prevented from falling within the distribution exemption regime at Part 9A of the Corporation Tax Act 2009 because they are capital in nature.

4. The Government intends to legislate this measure in a Finance Bill to be introduced as soon as possible in the next Parliament.

Operative date

5. The legislation will have retrospective effect. UK companies will be able to elect for the legislation not to apply retrospectively.

Current law and proposed revisions

6. Legislation was introduced in the Finance Act (FA) 2009 which has the effect of exempting most distributions received by UK companies from CT. Distributions other than capital distributions paid by UK resident companies (UK distributions) have been exempt distributions for many years. The legislation extended the exemption to foreign distributions but not to distributions of a capital nature.

7. HM Revenue and Customs' (HMRC) long standing practice has been to treat UK distributions as being of an income nature subject only to some specific exceptions. Clarification of the law made in the Income Tax (Trading and Other Income) Act 2005 made this treatment impossible to sustain. This development went unnoticed, and HMRC did not change its practice until after the introduction of the exemption regime in FA 2009.

8. The new legislation will simplify the distribution exemption regime by making it unnecessary to consider difficult boundary issues between income and capital. It will allow HMRC to revert to its previous practice whereby only distributions specifically excluded from income are treated as capital.

Further advice

9. If you have any questions about this change, please contact Andrew Page on 020 7147 2673 (email: andrew.page@hmrc.gsi.gov.uk) or Steve Denyer on 020 7147 0330 (email: stephen.denyer@hmrc.gsi.gov.uk). Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk