Income Tax (Trading and Other Income) Act 2005

Tax credits and payment and deduction of tax U.K.

397 Tax credits for qualifying distributions [F1 of UK resident companies] : UK residents and eligible non-UK residents U.K.

(1) A UK resident or eligible non-UK resident receiving a qualifying distribution made by a UK resident company is entitled to a tax credit equal to one-ninth of the amount or value of the distribution (but see subsections (3) and (6)).

(2) Such a person may claim to deduct the tax credit from—

(a) the income tax charged on the person's total income for the tax year in which the distribution is made, F2 . . .

(b) F2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(3) Subsection (1) only applies so far as the distribution is brought into charge to tax, and accordingly if the person's total income is reduced by any deductions which fall to be made from the distribution, the tax credit for the distribution is reduced in the same proportion as the distribution.

(4) For the purposes of this section “eligible non-UK resident”, in relation to a qualifying distribution, means an individual who at any time in the tax year in which it is received is a non-UK resident within section 278(2) of ICTA [F3 or section 56(3) of ITA 2007](Commonwealth citizens, EEA nationals etc.).

(5) If a distribution is, or is treated under any provision of the Tax Acts as, the income of a person (“P”) other than the recipient (“R”), P (not R) is treated as receiving it for the purposes of this section (and so P (not R) is entitled to a tax credit if P falls within subsection (1)).

(6) This section is subject to the following provisions—

• [F4 section 504(4) of ITA 2007 (disapplication of certain provisions for income of unauthorised unit trusts),

• section 592 of ITA 2007 (no tax credits for borrower under stock lending arrangement),

• section 593 of ITA 2007 (no tax credits for interim holder under repo),

• section 594 of ITA 2007 (no tax credits for original owner under repo), ] and

• section 171(2B) of FA 1993 (no tax credit for distributions in respect of assets in Lloyd's member's premium trust fund).

Textual Amendments

F1 Words in s. 397 heading inserted (with effect in accordance with s. 34(2) of the amending Act) by Finance Act 2008 (c. 9), Sch. 12 para. 3

F2 S. 397(2)(b) and preceding word repealed (6.4.2007 with effect as stated in s. 1034(1) of the amending Act) by Income Tax Act 2007 (c. 3), ss. 1027, 1031, 1034, Sch. 1 para. 515(2), Sch. 3 Pt. 1 (with transitional provisions and savings in Sch. 2)

F3 Words in s. 397(4) inserted (6.4.2007 with effect as stated in s. 1034(1) of the amending Act) by Income Tax Act 2007 (c. 3), ss. 1027, 1034, Sch. 1 para. 515(3) (with transitional provisions and savings in Sch. 2)

F4 Words in s. 397(6) substituted (6.4.2007 with effect as stated in s. 1034(1) of the amending Act) by Income Tax Act 2007 (c. 3), ss. 1027, 1034, Sch. 1 para. 515(4) (with transitional provisions and savings in Sch. 2)

Modifications etc. (not altering text)

C1 S. 397 excluded (19.7.2006) by Finance Act 2006 (c. 25), s. 121(5) (with Sch. 17 para. 18(2))

S. 397(1) excluded (6.4.2007 with effect as stated in s. 1034(1) of the amending Act) by Income Tax Act 2007 (c. 3), s. 504(4)(b) (with transitional provisions and savings in Sch. 2)

C2 S. 397 excluded by S.I. 2006/694, regs. 69Z18(5), 69Z19(2) (as inserted (6.4.2008) by The Authorised Investment Funds (Tax) (Amendment) Regulations 2008 (S.I. 2008/705), regs. 1, 5)

[F5 397A Tax credits for distributions of non-UK resident companies: UK residents and eligible non-UK residents U.K.

[F6 (1) A UK resident or eligible non-UK resident receiving a relevant distribution made by a non-UK resident company is entitled to a tax credit equal to one-ninth of the amount or value of the grossed up distribution (but see subsections (3) and (6) and section 397AA).]

(3) Subsection [F7 (1)] only applies so far as the distribution is brought into charge to tax, and accordingly if the person's total income is reduced by any deductions which fall to be made from the distribution, the tax credit for the distribution is reduced in the same proportion as the distribution.

(4) The person may claim to deduct the tax credit from the income tax charged on the person's total income for the tax year in which the distribution (or the part of the distribution to which the tax credit relates) is brought into charge to tax.

(5) If a distribution is, or is treated under any provision of the Tax Acts as, the income of a person (“P”) other than the recipient (“R”), P (not R) is treated as receiving it for the purposes of this section (and so P (not R) is entitled to a tax credit if P falls within subsection (1)).

(6) This section is subject to the following provisions—

• section 171(2B) of FA 1993 (no tax credit for distributions in respect of assets in Lloyd's member's premium trust fund),

• section 504(4) of ITA 2007 (disapplication of certain provisions for income of unauthorised unit trusts),

• section 592 of ITA 2007 (no tax credits for borrower under stock lending arrangement),

• section 593 of ITA 2007 (no tax credits for interim holder under repo), and

• section 594 of ITA 2007 (no tax credits for original owner under repo).

(7) In this section—

• “eligible non-UK resident”, in relation to a distribution, means an individual who, at any time in the tax year in which the distribution (or the part of the distribution to which the tax credit relates) is brought into charge to tax, is a non-UK resident who meets the condition in section 56(3) of ITA 2007 (residence etc of claimants),

• “grossed up distribution” means the distribution increased by the amount of any tax chargeable in respect of the distribution directly or by deduction under the laws of the territory in which the company is resident, including special withholding tax,

• F8 ...

• “relevant distribution”, in relation to a person, means—

  (a)

  a qualifying distribution arising in a relevant tax year,

  (b)

  a cash dividend paid over to the person under paragraph 68(4) of Schedule 2 of ITEPA 2003 (cash dividend paid over if not reinvested etc) in a relevant tax year, and

  (c)

  a dividend treated under section 407 as paid to the person in a relevant tax year,

• “relevant tax year” means the tax year 2008-09 or a subsequent tax year, and

• “special withholding tax” has the meaning given in section 107(3) of FA 2004.

(8) Section 397B makes provision about the application of this section in the case of overseas dividends arising from manufactured overseas dividends (within the meaning of Chapter 2 of Part 11 of ITA 2007).

Textual Amendments

F5 Ss. 397A-397C inserted (with effect in accordance with s. 34(2) of the amending Act) by Finance Act 2008 (c. 9), Sch. 12 para. 4

F6 S. 397A(1) substituted for s. 397A(1)(2) (with effect in accordance with Sch. 19 para. 14 of the amending Act) by Finance Act 2009 (c. 10), Sch. 19 para. 2(2)

F7 Word in s. 397A(3) substituted (with effect in accordance with Sch. 19 para. 14 of the amending Act) by Finance Act 2009 (c. 10), Sch. 19 para. 2(3)

F8 Words in s. 397A(7) omitted (with effect in accordance with Sch. 19 para. 14 of the amending Act) by virtue of Finance Act 2009 (c. 10), Sch. 19 para. 2(4)

[F9 397AA Tax credit under section 397A: conditions U.K.

(1) Section 397A(1) only applies if condition A, B or C is met.

(2) Condition A is that—

(a) the relevant distribution is made by a company with issued share capital, and

(b) at the time the person receives the relevant distribution, the person is a minority shareholder in the company.

(3) Condition B is that the company that makes the relevant distribution is an offshore fund.

(4) Condition C is that—

(a) the company that makes the relevant distribution is a resident of (and only of) a qualifying territory at the time that the relevant distribution is received, and

(b) if the relevant distribution is one of a series of distributions made as part of a scheme—

(i) each company that makes a distribution in the series (a “scheme distribution”) is a resident of (and only of) a qualifying territory at the time that the scheme distribution is received, or

(ii) the scheme is not a tax advantage scheme.

(5) In this section—

• “minority shareholder”, in relation to a company, has the meaning given in section 397C;

• “offshore fund” has the same meaning as in Chapter 5 of Part 17 of ICTA (see sections 756A to 756C of that Act);

• “qualifying territory” has the meaning given by or under section 397BA;

• “relevant distribution” has the same meaning as in section 397A;

• “scheme” includes any scheme, arrangements or understanding of any kind, whether or not legally enforceable and whether involving a single transaction or two or more transactions;

• “tax advantage scheme” means a scheme that, ignoring any incidental purposes, has as its only purpose or purposes either or both of the following—

  (a)

  to enable a person to obtain a tax credit under section 397A, and

  (b)

  to enable a person to obtain (in any territory) any other relief from tax on a distribution.]

Textual Amendments

F9 S. 397AA inserted (with effect in accordance with Sch. 19 para. 14 of the amending Act) by Finance Act 2009 (c. 10), Sch. 19 para. 3

Modifications etc. (not altering text)

C3 S. 397AA modified (with effect in accordance with reg. 1 of the amending S.I.) by The Tax Credits (Excluded Companies) Regulations 2009 (S.I. 2009/3333), reg. 2

397B Tax credits under section 397A: manufactured overseas dividends U.K.

(1) This section applies where, under section 581 of ITA 2007, a person is treated as receiving an overseas dividend by virtue of having received a manufactured overseas dividend which is representative of an overseas dividend.

(2) For the purposes of section 397A, the person is treated as receiving a relevant distribution made by a non-UK resident company F10 ... if, and only if, the manufactured overseas dividend is representative of such a distribution.

(3) References in section 397A to the grossed up distribution have effect as if they were references to the gross amount of the overseas dividend of which the manufactured overseas dividend is representative [F11 (“the original dividend”)], disregarding the amount of any overseas tax credit.

[F12 (3A) Section 397AA has effect as if—

(a) the references in subsections (2)(a), (3) and (4)(a) to the relevant distribution were to the original dividend, and

(b) the reference in subsection (2)(b) to the company that makes the relevant distribution were to the company that makes the original dividend.]

(4) In this section—

• “gross amount”, in relation to [F13 an] overseas dividend, has the same meaning as in Chapter 2 of Part 11 of ITA 2007 (manufactured payments) (see section 589 of that Act),

• “manufactured overseas dividend” and “overseas tax credit” have the same meaning as in Chapter 2 of that Part (see sections 581 and 591 of that Act), and

• “overseas dividend” has the same meaning as in that Part (see section 567 of that Act).

Textual Amendments

F5 Ss. 397A-397C inserted (with effect in accordance with s. 34(2) of the amending Act) by Finance Act 2008 (c. 9), Sch. 12 para. 4

F10 Words in s. 397B(2) omitted (with effect in accordance with Sch. 19 para. 14 of the amending Act) by virtue of Finance Act 2009 (c. 10), Sch. 19 para. 4(2)

F11 Words in s. 397B(3) inserted (with effect in accordance with Sch. 19 para. 14 of the amending Act) by Finance Act 2009 (c. 10), Sch. 19 para. 4(3)

F12 S. 397B(3A) inserted (with effect in accordance with Sch. 19 para. 14 of the amending Act) by Finance Act 2009 (c. 10), Sch. 19 para. 4(4)

F13 Word in s. 397B(4) substituted (with effect in accordance with Sch. 19 para. 14 of the amending Act) by Finance Act 2009 (c. 10), Sch. 19 para. 4(5)

[F14 397BA Meaning of “qualifying territory” U.K.

(1) For the purposes of section 397AA “qualifying territory” means—

(a) the United Kingdom, or

(b) a territory within subsection (2).

(2) A territory is within this subsection if—

(a) arrangements to which section 788 of ICTA applies (“double taxation relief arrangements”) have effect in relation to the territory, and

(b) the arrangements contain a non-discrimination provision.

(3) The Treasury may by regulations—

(a) provide that a territory specified in or of a description specified in the regulations that does not satisfy subsection (2)(a) or (b) is a qualifying territory for the purpose of section 397AA, and

(b) provide that a territory so specified or described that satisfies subsection (2)(a) or (b) is not a qualifying territory for that purpose.

(4) For the purposes of section 397AA a company is a resident of a territory if, under the laws of the territory, the company is liable to tax there—

(a) by reason of its domicile, residence or place of management, but

(b) not in respect only of income from sources in that territory or capital situated there.

(5) In subsection (2) “non-discrimination provision”, in relation to double taxation relief arrangements, means a provision to the effect that nationals of a state which is a party to those arrangements (a “contracting state”) are not to be subject in any other contracting state to—

(a) any taxation, or

(b) any requirement connected with taxation,

which is other or more burdensome than the taxation and connected requirements to which nationals of that other state in the same circumstances (in particular with respect to residence) are or may be subjected.

(6) In subsection (5) “national”, in relation to a contracting state, includes—

(a) an individual possessing the nationality or citizenship of the contracting state, and

(b) a legal person, partnership or association deriving its status as such from the laws in force in that contracting state.

(7) Regulations under this section may—

(a) describe a territory by reference to the double taxation relief arrangements for the time being in force in relation to the territory,

(b) make different provision in relation to different descriptions of company, and

(c) make provision having effect in relation to the tax year current on the day on which the regulations are made.

(8) No regulations may be made under this section unless a draft of the instrument containing them has been laid before, and approved by a resolution of, the House of Commons.]

Textual Amendments

F14 S. 397BA inserted (with effect in accordance with Sch. 19 para. 14 of the amending Act) by Finance Act 2009 (c. 10), Sch. 19 para. 5

397C Meaning of “minority shareholder” U.K.

(1) In section [F15 397AA] “minority shareholder”, in relation to a F16 ... company, means a person whose shareholding in the company is less than 10% of the company's issued share capital.

[F17 (1A) Where the company has more than one class of share, the reference in subsection (1) to the company's issued share capital is to issued share capital of the same class as the share in respect of which the distribution is made.]

(2) Subsections (3) to (6) make provision about the circumstances in which shares form part of a person's shareholding in a company for the purposes of this section.

(3) Shares form part of a person's shareholding in a company to the extent that the person is beneficially entitled to the shares or to a distribution arising in respect of the shares (or both).

(4) Shares form part of a person's shareholding in the company where—

(a) a person is a settlor in relation to a settlement, and

(b) income arising from shares comprised in the settlement is treated for income tax purposes as the income of that person and of that person alone.

(5) Shares form part of the shareholding in a company of a person (“P”) if—

(a) they form part of the shareholding in the company of a person connected with P,

(b) P transferred the shares to the connected person or arranged for the connected person to acquire the shares, and

(c) the purpose of the transfer or arrangement was wholly or mainly to enable P to avoid tax.

(6) Shares form part of a person's shareholding in a company if that person has transferred the shares to another person under a repo or stock lending arrangement.

(7) In this section—

• “repo” has the same meaning as in Part 11 of ITA 2007 (see section 569 of that Act),

• “settlement” and “settlor” have the same meaning as in Chapter 5 of Part 5 of this Act, and

• “stock lending arrangement” has the same meaning as in Part 11 of ITA 2007 (see section 568 of that Act).

[F18 (8) For the purposes of this section, shares are not of the same class if the amounts paid up on them (otherwise than by way of premium) are different.]]

Textual Amendments

F5 Ss. 397A-397C inserted (with effect in accordance with s. 34(2) of the amending Act) by Finance Act 2008 (c. 9), Sch. 12 para. 4

F15 Word in s. 397C(1) substituted (with effect in accordance with Sch. 19 para. 14 of the amending Act) by Finance Act 2009 (c. 10), Sch. 19 para. 6(2)(a)

F16 Words in s. 397C(1) omitted (with effect in accordance with Sch. 19 para. 14 of the amending Act) by virtue of Finance Act 2009 (c. 10), Sch. 19 para. 6(2)(b)

F17 S. 397C(1A) inserted (with effect in accordance with Sch. 19 para. 14 of the amending Act) by Finance Act 2009 (c. 10), Sch. 19 para. 6(3)

F18 S. 397C(8) inserted (with effect in accordance with Sch. 19 para. 14 of the amending Act) by Finance Act 2009 (c. 10), Sch. 19 para. 6(4)

398 Increase in amount or value of dividends where tax credit available U.K.

(1) If a person is entitled to a tax credit [F19 under section 397 or 397A] in respect of a dividend or other distribution, the amount or value of the dividend or other distribution is treated as increased by the amount of the tax credit for all income tax purposes (except [F20 sections 397(1) and [F21 397A(1)]] ).

(2) Subsection (1) does not apply if the distribution is dealt with under Chapter 2 of Part 2 unless the trade consists of the underwriting business of a member of Lloyd's.

Textual Amendments

F19 Words in s. 398(1) inserted (with effect in accordance with s. 34(2) of the amending Act) by Finance Act 2008 (c. 9), Sch. 12 para. 5(a)

F20 Words in s. 398(1) substituted (with effect in accordance with s. 34(2) of the amending Act) by Finance Act 2008 (c. 9), Sch. 12 para. 5(b)

F21 Word in s. 398(1) substituted (with effect in accordance with Sch. 19 para. 14 of the amending Act) by Finance Act 2009 (c. 10), Sch. 19 para. 7

399 Qualifying distributions received by persons not entitled to tax credits U.K.

(1) This section applies if a person is not entitled to a tax credit [F22 under section 397 or 397A] for a qualifying distribution included in the person's income for a tax year.

(2) The person is treated as having paid income tax at the dividend ordinary rate on the amount or value of the distribution (but see subsection (7)).

(3) For the purposes of subsection (2), if the person is non-UK resident the amount or value of the distribution is treated as the grossed up amount, unless the person is a company which is beneficially entitled to the income.

(4) If the person is non-UK resident [F23 , the amount or value of the distribution is treated for the purposes of Chapters 3, 4 and 6 of Part 9 of ITA 2007 (special rates for trustees' income)] as the grossed up amount.

(5) In this section “the grossed up amount” means the actual amount or value of the distribution, grossed up by reference to the dividend ordinary rate for the tax year.

(6) The income tax treated as paid under subsection (2) is not repayable.

(7) Subsection (2) is subject to the following provisions—

• [F24 section 504(4) of ITA 2007 (disapplication of certain provisions for income of unauthorised unit trusts),

• section 592 of ITA 2007 (no tax credits for borrower under stock lending arrangement),

• section 593 of ITA 2007 (no tax credits for interim holder under repo), and

• section 594 of ITA 2007 (no tax credits for original owner under repo).]

Textual Amendments

F22 Words in s. 399(1) inserted (with effect in accordance with s. 34(2) of the amending Act) by Finance Act 2008 (c. 9), Sch. 12 para. 6

F23 Words in s. 399(4) substituted (6.4.2007 with effect as stated in s. 1034(1) of the amending Act) by Income Tax Act 2007 (c. 3), ss. 1027, 1034, Sch. 1 para. 516(2) (with transitional provisions and savings in Sch. 2)

F24 Words in s. 399(7) substituted (6.4.2007 with effect as stated in s. 1034(1) of the amending Act) by Income Tax Act 2007 (c. 3), ss. 1027, 1034, Sch. 1 para. 516(3) (with transitional provisions and savings in Sch. 2)

Modifications etc. (not altering text)

C4 S. 399(2) excluded (6.4.2007 with effect as stated in s. 1034(1) of the amending Act) by Income Tax Act 2007 (c. 3), ss. 594(3), 1034 (with transitional provisions and savings in Sch. 2)

C5 S. 399(2) excluded (6.4.2007 with effect as stated in s. 1034(1) of the amending Act) by Income Tax Act 2007 (c. 3), ss. 593(3), 1034 (with transitional provisions and savings in Sch. 2)

C6 S. 399(2) excluded (6.4.2007 with effect as stated in s. 1034(1) of the amending Act) by Income Tax Act 2007 (c. 3), ss. 592(3), 1034 (with transitional provisions and savings in Sch. 2)

C7 S. 399(2)(6) excluded (6.4.2007 with effect as stated in s. 1034(1) of the amending Act) by Income Tax Act 2007 (c. 3), ss. 504(4)(c), 1034 (with transitional provisions and savings in Sch. 2)

400 Non-qualifying distributions U.K.

(1) This section applies if a person's income in a tax year includes a non-qualifying distribution.

(2) The person is treated as having paid income tax at the dividend ordinary rate on the amount or value of the distribution.

(3) The income tax treated as paid under subsection (2) is not repayable.

(4) If the distribution is [F25 assessed (in whole or in part) at the dividend trust rate by virtue of Chapter 3 of Part 9 of ITA 2007 (trustees' accumulated or discretionary income to be charged at special rates), the trustees' liability for income tax at that rate is reduced]

(5) The amount of the reduction is equal to income tax at the dividend ordinary rate on so much of the distribution as is assessed at the dividend trust rate.

(6) In this section and section 401 “non-qualifying distribution” means a distribution which is not a qualifying distribution.

[F26 (7) Subsection (2) is subject to section 504(4) of ITA 2007 (disapplication of certain provisions for income of unauthorised unit trusts).]

Textual Amendments

F25 Words in s. 400(4) substituted (6.4.2007 with effect as stated in s. 1034(1) of the amending Act) by Income Tax Act 2007 (c. 3), ss. 1027, 1034, Sch. 1 para. 517(2) (with transitional provisions and savings in Sch. 2)

F26 S. 400(7) inserted (6.4.2007 with effect as stated in s. 1034(1) of the amending Act) by Income Tax Act 2007 (c. 3), ss. 1027, 1034, Sch. 1 para. 517(3) (with transitional provisions and savings in Sch. 2)

Modifications etc. (not altering text)

C8 S. 400(2)(3) excluded (6.4.2007 with effect as stated in s. 1034(1) of the amending Act) by Income Tax Act 2007 (c. 3), ss. 504(4)(d), 1034 (with transitional provisions and savings in Sch. 2)

401 Relief: qualifying distribution after linked non-qualifying distribution U.K.

(1) Where a person pays an amount in respect of extra liability for a non-qualifying distribution, the person's extra liability for a subsequent qualifying distribution is reduced by that amount if conditions A and B are met.

(2) Condition A is that the non-qualifying distribution consists of the issue of share capital or security.

(3) Condition B is that the qualifying distribution consists of a repayment of the share capital or the principal of the security.

(4) A person's extra liability for a distribution charged to tax for the tax year 1999-2000 or a later tax year is the amount by which the person's liability to income tax on the distribution exceeds the amount it would be if it were charged only at the dividend ordinary rate.

(5) A person's extra liability for a distribution charged to tax for a tax year after the tax year 1992-93 and before the tax year 1999-2000 is the amount by which the person's liability to income tax on the distribution exceeds the amount it would be if it were charged only at the lower rate.

(6) A person's extra liability for a distribution charged to tax for a tax year before the tax year 1993-94 is the amount by which the person's liability to income tax on the distribution exceeds the amount it would be if it were charged only at the basic rate.

[F27 (6A) The reduction under this section is given effect at Step 6 of the calculation in section 23 of ITA 2007.]

(7) In this section “security” has the meaning given in section 254(1) of ICTA.

Textual Amendments

F27 S. 401(6A) inserted (6.4.2007 with effect as stated in s. 1034(1) of the amending Act) by Income Tax Act 2007 (c. 3), ss. 1027, 1034, Sch. 1 para. 518 (with transitional provisions and savings in Sch. 2)