Annex 1: Minor changes in the law Change 58: Company distributions: duty to provide a tax certificate: interest that is not a qualifying distribution: sections 1104 and 1106 and Schedule 1
This change makes clear that section 234A of ICTA applies to a payment of interest only where interest is treated as a distribution, in whole or in part, and not to all payments of interest made by a company.
The origins of section 234A of ICTA lie in section 33 of FA 1924. The provision was introduced specifically to deal with what were known as “tax free dividends”, that is dividends paid by a company to its shareholders where the income tax had already been settled. It was felt that the shareholder should be given more detailed information about the amounts involved and the tax deducted. The provision was largely unchanged through the Income Tax Act 1952 (section 199) and the Income and Corporation Taxes Act 1970 (section 242).
It was amended by paragraph 19 of Schedule 24 to FA 1972 when the imputation system was introduced and the distinction between a qualifying and non-qualifying distribution was introduced. The amendment, which was described as consequential, made separate provision for the two different categories of distribution, and amended the requirements in relation to a qualifying distribution to refer to the tax credit attaching to such a distribution.
This became section 234 of ICTA, with the key provisions being in subsections (3) and (4). Section 32 of F(No 2)A 1992 introduced section 234A of ICTA to deal with payments made directly into a bank account. Section 234(3) and (4) of ICTA were repealed and restated in section 234A of ICTA, along with further provisions to cover direct payment into an account held by the recipient or a nominee.
Section 234A of ICTA applies where “dividend or interest is distributed” by a company – subsection (1) – and this wording has been unchanged from the introduction of the provision in 1924. It may be inferred from this that the section only applies to distributions and not to ordinary payments of interest made by a company. This is reinforced by the penalty provision in section 234A(9) of ICTA (which refers to “distribution”), and by the commencement provision for section 32 of F(No.2)A 1992, which introduced section 234A of ICTA (the new provision was applied to “distributions begun after the day on which this Act is passed”).
But section 234A(6) of ICTA refers to “interest which is not a qualifying distribution or part of a qualifying distribution”. The definition of a qualifying distribution is in section 14 of ICTA, and that definition covers the vast majority of distributions, with the exception of certain types of bonus issue of shares or securities. It is very difficult to see how a payment of interest could therefore fit within the scope of a distribution that is not a qualifying distribution. Section 234A(6) of ICTA could therefore be read as applying to all payments of interest made by a company, including banks, and not just those that are treated as distributions.
If that were true, however, it would overlap with section 975 of ITA, which is the provision under which banks, building societies and other payers of interest deliver tax deduction certificates, and would impose a penalty for failure to comply, whereas none is stipulated in the case of section 975 of ITA.
The origins of section 975 of ITA lie in section 50 of FA 1963. The Royal Commission on the Taxation of Profits and Income (the Radcliffe Committee)reported in 1955 in the following terms:
“though the law requires that a company’s dividend warrants shall be accompanied by statements giving particulars of the tax deductions made,...there is no statutory obligation on a person who deducts tax from any interest ... to furnish a similar certificate” (Cmd 9474).”
The Commission clearly reported on the basis that section 199 of the Income Tax Act 1952, the precursor of section 234A(6)of ICTA, did not apply to all payments of interest and that a new provision would therefore be desirable.
Published guidance and commentaries do not comment explicitly, but the prevailing practice is that certificates for the deduction of income tax from interest payments are delivered under section 975 of ITA.
This change treats section 234A(6) of ICTA as otiose; it appears to have no effect if confined to distributions, and there is evidence from the history of the provision that it was not intended to apply to all payments of interest made by companies.
The change therefore removes any argument that section 234A of ICTA could apply to all payments of interest made by a company, including banks, and could therefore lead to a penalty for failure to comply, as opposed to section 975 of ITA which is enforceable by the recipient of the payment and where no penalty is set down in the tax legislation.
The change also affects the consequential amendment in Schedule 1 of paragraph 80 of Schedule 2 to ITEPA which replaces a reference to section 234A of ICTA with the appropriate rewritten provisions of this Act.
This change has no effect on any liability to tax. Itis in principle favourable to some taxpayers, by removing a requirement on them, and adverse to thosetaxpayers who might have received certificates but do not now do so. But it is expected to have no practical effect as it is in line with generally accepted practice.