Annex 1: Minor changes in the law made by the Act: Change 79: Distributions made by UK companies: section 366
This change alters the test for bringing a distribution received from a UK company, or a payment representative of such a distribution, into account in calculating the profits of a trade from one based on the underlying shares to one based on the character of the receipt or payment.
Section 95 of ICTA sets out the circumstances in which a distribution made by a UK company, or a “payment which is representative of” a UK distribution, is brought into account in calculating the profits of a trade.
Section 95 of ICTA operates by determining whether the recipient of a distribution is a dealer in relation to that distribution. This is tested by reference to whether the proceeds of a notional sale by the recipient of the shares in respect of which the distribution is received would be taken into account in calculating the profits of the trade of the recipient.
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 366(1) has the effect that a distribution received from a UK company, or a payment representative of such a distribution, is dealt with under Chapter 2 of Part 2 of this Act if that distribution or payment is a trade receipt.
The Inland Revenue believe it is highly unlikely that a distribution or payment could be a receipt of a trade unless the proceeds of any sale of the shares giving rise to the distribution would also be treated as a receipt of that trade. But if this is not the case, the change is likely to be favourable to taxpayers as the treatment of trading income is generally more favourable than the treatment of investment income.
This change is in taxpayers' favour in principle. But it is expected to have no practical effect as it is in line with current practice.