Annex 1: Minor Changes in the Law Change 34: Trading income: traders receiving distributions etc: section 130 and Schedule 1
This change alters the test for bringing a distribution received from a UK resident company (“a UK distribution”), or a payment representative of such a distribution, into account in calculating the profits of a trade for corporation tax purposes from one based on the underlying shares to one based on the character of the receipt or payment.
It brings the income tax and corporation tax codes back into line.
Section 95 of ICTA sets out the circumstances in which a UK distribution or a payment “representative of” a UK distribution, is brought into account in calculating the corporation tax profits of the company by which the distribution is received or to which the payment is made.
Section 95 of ICTA operates by determining whether the company by which the distribution is received or to which the payment made is a dealer in relation to that distribution. Section 95(2) of ICTA tests whether the company is a dealer by reference to whether the proceeds of a notional sale by the company of the shares in respect of which the distribution is received or the payment made would be taken into account in calculating the profits of the company’s trade.
This approach is a legacy of the origin of section 95 of ICTA. Section 95 of ICTA is derived from section 54 of FA 1982. Section 54 of FA 1982 was concerned with the tax treatment of a dealer from whom a company purchased its own shares. In that context it was logical to focus on the shares rather than on the distribution. But this has the problem not only that the sale is theoretical but also that the shares may not be held by the dealer when the distribution is received. It is no longer the logical approach now that section 95 of ICTA applies to all distributions received by share dealers.
So section 130 provides that:
	a UK distribution is brought into account in calculating the profits of a trade if it is a trade receipt; and
	a payment representative of such a distribution is brought into account in calculating the profits of a trade if a deduction for the payment would be disallowed only by section 1305.
Section 208 of ICTA provides that “except as otherwise provided by the Corporation Tax Acts” corporation tax is not chargeable on dividends and other distributions. Section 95(1A) of ICTA disapplies section 208 of ICTA in the case of a UK distribution, or a payment representative of such a distribution, received by a dealer.
Paragraph 2(2)(b) of Schedule 23A to ICTA provides that an amount representative of a dividend on UK shares (a “manufactured dividend”) is treated in relation to the company by which it is paid as if it were a dividend on its own shares.
Section 337A(1)(a) of ICTA provides that “subject to any provision of the Corporation Tax Acts expressly authorising a deduction”, a company’s profits are to be computed “without any deduction in respect of dividends or other distributions”. Section 95 of ICTA expressly provides for a payment representative of a UK distribution made by a company which is a dealer to be taken into account in computing the profits of that company.
Section 130 does not refer to a “dealer” (defined in section 95(2) of ICTA). So Schedule 1 to this Act replaces references to that definition. See the entries for section 26(7) of F(No 2)A 2005 and section 121(3) of FA 2006, where the replacement definitions reproduce the exclusion for insurance companies in section 95(2A) of ICTA.
HMRC believe it is highly unlikely that a UK distribution could be a receipt of a trade, or that the payment of an amount representative of a UK distribution could be allowed as a trade deduction, unless the proceeds of any sale of the shares giving rise to the distribution or payment would also be treated as a receipt or allowable expense of that trade. But if this is not the case, the change may in principle be unfavourable to some taxpayers by bringing into account a UK distribution which would otherwise be exempt under section 208 of ICTA and favourable to others by allowing a deduction for a payment representative of a UK distribution which would otherwise be disallowed under section 337A(1) of ICTA.
This change is adverse to some taxpayers and favourable to others in principle. But it is expected to have no practical effect as it is in line with generally accepted practice.