The Investment Trusts (Dividends) (Optional Treatment as Interest Distributions) Regulations 2009

EXPLANATORY NOTE

(This note is not part of the Regulations)

Section 45 of the Finance Act 2009 confers powers to make provision about the tax treatment of the dividends of investment trusts (or prospective investment trusts). Investment trusts are collective investment vehicles constituted as companies and which pool investments with a view to spreading investment risk for their investors. Companies are investment trusts for tax purposes if approved as such by the Commissioners for Her Majesty’s Revenue and Customs (“the Commissioners”) in accordance with section 842 of the Income and Corporation Taxes Act 1988 (“ICTA”). The investment return to investors in such companies takes the form of dividends. These Regulations enable an investment trust or prospective investment trust (i.e. a company that expects to be approved as an investment trust) to treat its dividends as payments of interest rather than as dividends on shares for tax purposes.

Part 1 of these Regulations contains preliminary provisions and provides for interpretation. Regulation 1 provides for the citation, commencement and effect of these Regulations; and regulation 2 sets outs the structure of these Regulations. Regulation 3 contains interpretive provisions.

Part 2 of these Regulations provides an option to an investment trust company to treat its dividends as payments of interest (referred to as “interest distributions”) and deals with the tax treatment of dividends treated as interest distributions. Regulation 4 provides that in order to treat a dividend as an interest distribution the company paying the dividend must be an investment trust or prospective investment trust for the accounting period to which the dividend relates. Regulation 5 provides that where the company is an investment trust or prospective investment trust for an accounting period it may opt to treat all or part of its dividend or dividends for that period as interest distributions and provides a mechanism for dealing with cases where the dividend may relate to more than one accounting period. Regulation 6 provides that where a company treats dividends as interest distributions for an accounting period it must notify the Commissioners of that fact when applying for approval as an investment trust under section 842 of ICTA. Regulation 7 provides that amounts distributed as interest distributions are not to be treated as distributions for the purposes of the Tax Acts. Regulation 8 provides that the amount that may be treated as interest distributions by an investment trust for an accounting period is the amount of its “qualifying interest income”. This is the amount of the excess of the investment trust’s total credits over the total debits arising from its loan relationships and derivative contracts. Regulation 9 contains supplementary provisions dealing with the determination of the amount of qualifying interest income. Regulation 10 deals with the tax treatment of interest distributions from the perspective of the investment trust or prospective investment trust. Regulation 11 deals with the tax treatment of interest distributions from the perspective of recipients. Regulation 12 prevents dividends being treated as interest distributions by a company where it has been informed by the Commissioners that it is not approved for the purposes of section 842 of ICTA.

Part 3 deals with the investment trust’s duty to deduct tax from interest distributions. Regulation 13 provides for the investment trust’s general obligation to deduct a sum representing tax when any yearly interest is paid (“the deduction obligation”) to be relaxed in a number of cases. The cases in question include those where the reputable intermediary condition is met and those where the residence condition is met. Regulations 14 to 16 deal with the reputable intermediary condition; regulations 17 to 20 deal with the residence condition.

Part 4 deals with information and record keeping in relation to distributions. Regulation 21 provides for section 234A of ICTA (information relating to distributions) to apply in a modified form. Regulation 22 provides that a company making interest distributions without deduction of tax must report this information to the Commissioners and imposes a penalty for failure to comply with this requirement. Regulation 23 imposes record and document keeping requirements on a company in relation to the interest distributions it makes.

A full Impact Assessment of the effect that this instrument will have on the costs of business and the voluntary sector is available from the HMRC website at http://www.hmrc.gov.uk/ ria/index.htm#full and is annexed to the Explanatory Memorandum which is available alongside this instrument on the OPSI website at www.opsi.gov.uk.