Annex 1: Minor changes in the law made by the Act: Change 84: Dividends etc from UK resident companies: tax credits etc where dividends etc received by companies who pay income tax: sections 397, 399 and 400
This change involves applying sections 231(1) and (3) and 233(1) and (1A) of ICTA as if references to companies did not include companies receiving distributions in a fiduciary or representative capacity.
Section 6(2) of ICTA recognises that income may arise to a company:
	in a beneficial capacity; or
	in a fiduciary or representative capacity.
Broadly speaking, section 6(2) of ICTA prevents income tax applying to income arising to companies in a beneficial capacity. And section 8(2) of ICTA provides that corporation tax applies to profits arising to a company beneficially but excludes profits arising to a company in a fiduciary or representative capacity from corporation tax. The result is that a corporate trust is subject to income tax. The exception to this is that a non-UK resident company’s profits are charged to income tax rather than corporation tax, even where it is beneficially entitled to them, except where UK permanent establishment business is involved. (See section 6(2)(a) of ICTA.)
Section 231(1) of ICTA provides that where a company resident in the UK makes a qualifying distribution and the person receiving the distribution is another such company (ie a UK resident company) or a person resident in the UK (not being a company), then the recipient of the distribution is entitled to a tax credit.
Section 231(1) of ICTA makes it clear that a UK resident company is entitled to a tax credit.
Section 231(3) and (3AA) of ICTA describe how the tax credit may be used. It may either be set against an income tax liability under section 3 of ICTA or against the person’s income tax liability on total income for the tax year in which the distribution is made.
Section 231(3) of ICTA expressly excludes UK resident companies because it only applies to a person “not being a company resident in the United Kingdom”.
It is unnecessary for section 231(3) and (3AA) of ICTA to extend to corporation tax and apply to UK resident companies liable to that tax because such companies do not pay corporation tax on qualifying distributions (see section 208 of ICTA). But, unless it is a mere nominee, a UK resident company receiving a distribution in a fiduciary or representative capacity is charged to income tax on the aggregate of the distribution and the tax credit (see paragraph 2 of Schedule F in section 20(1) and section 835(6)(a) of ICTA). So section 231(3) of ICTA excludes such a company from setting its tax credit against its income tax liability.
In practice, however, the Inland Revenue look at the capacity in which a company is acting and treat a company receiving a distribution in a representative or fiduciary capacity, and hence liable to income tax on it, as if it were an individual receiving it in that capacity. So, in effect, the words “a company resident in the United Kingdom” in section 231(3) of ICTA are taken to refer only to a UK resident company acting in a beneficial capacity. Therefore companies acting in a fiduciary or representative capacity are taken to fall within that section and so may use their tax credits. Section 397(2) gives effect to this by not excluding UK resident companies from claiming.
Similar difficulties arise over the wording of sections 233(1) and (1A) of ICTA.
Section 233(1) of ICTA provides for recipients of distributions to be treated as having paid income tax at the Schedule F ordinary rate on the amount of the distribution. It is expressed to apply if in a tax year the income of any person “not being a company resident in the United Kingdom” includes a distribution, in respect of which that person is not entitled to a tax credit.
So, on a literal interpretation of the phrase “not being a company resident in the United Kingdom” in section 233(1) of ICTA, all UK resident companies whether they are acting in a beneficial or in a fiduciary or representative capacity are excluded. But again because section 233(1) of ICTA is about income tax it does not need to exclude companies subject to corporation tax and it fails to deal with companies receiving distributions in a fiduciary or representative capacity.
In practice, however, the exclusion is only treated as applying to UK resident companies receiving distributions in a beneficial capacity. So a UK resident company acting in a fiduciary or representative capacity and falling within section 233(1) of ICTA is treated as having paid income tax under section 233(1). Sections 399(1) and (2) and 400(1) and (2) rewrite section 233(1) of ICTA and give effect to the practice by not excluding UK resident companies.
Section 233(1A) of ICTA follows on from section 233(1) of ICTA, but deals only with qualifying distributions. It provides that where the income of any person “who is not a company” and is non-UK resident includes a qualifying distribution in respect of which the person is not entitled to a tax credit, so much of the distribution as is comprised in:
is treated for the purposes of those provisions as if it were grossed up at that rate. And for the purposes of those provisions income tax is treated as having been paid at that rate on it.
Again, strictly a non-UK resident company acting in a fiduciary or representative capacity does not fall within section 233(1A) of ICTA as it is a company. It can only fall within section 233(1) of ICTA (and so would not be subject to grossing-up). But, in practice, the same approach is followed for companies receiving the distribution in a fiduciary or representative capacity as with sections 231(1) of ICTA and 233(1) of ICTA. So section 233(1A) of ICTA is taken to apply to all non-residents, whether individuals or companies receiving the distributions in such a capacity. Section 399(3) and (4) follow this approach in rewriting section 233(1A) of ICTA without any exclusion for such companies.
In principle, this change is in taxpayers’ favour so far as it relates to sections 231(3) and 233(1) of ICTA and is adverse to some taxpayers so far as it relates to section 233(1A) of ICTA. But it is expected to have no practical effect as it is in line with current practice.