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

PART 2 OPTIONAL TREATMENT OF DIVIDENDS AS INTEREST DISTRIBUTIONS

Circumstances in which dividends may be treated as interest distributions

4.—(1) Subject to paragraph (2), regulation 5 applies if—

(a) a company is an investment trust or a prospective investment trust as respects an accounting period;

(b) an amount is distributed by the company as a dividend in respect of a period of account which includes that accounting period; and

(c) the amount distributed in relation to the period of account is distributed on or before the first anniversary of the day on which that period of account ends.

(2) In a case where an amount is distributed by the company as a dividend in respect of a period of account which includes two or more accounting periods of the company, the company must be an investment trust or prospective investment trust as respects all of those accounting periods.

Treatment of dividends as interest distributions

5.—(1) If this regulation applies, the company may designate as an interest distribution all or part of the amount distributed as a dividend or dividends in respect of the period of account which includes the accounting period.

(2) A dividend, or part of a dividend, in respect of which a designation under this regulation has been made is referred to in these Regulations as an “interest distribution”.

(3) A designation under paragraph (1) becomes irrevocable at the time the interest distribution is made.

(4) The aggregate of the amounts distributed as interest distributions in relation to an accounting period may not exceed the amount of the company’s qualifying interest income for the accounting period.

Regulation 8 explains how a company’s qualifying interest income for an accounting period is calculated.

(5) For the purposes of paragraph (4), where an interest distribution is made in respect of a period of account which includes more than one accounting period the amount distributed as the interest distributions in relation to each accounting period is—

where—

“A” is the amount of qualifying interest income for the accounting period;

“I” is the total of the amounts distributed as interest distributions in respect of the period of account; and

“T” is the total amount of the qualifying interest income in respect of all the accounting periods in the period of account.

Notification of designation of dividends as interest distributions

6.  If a company makes a designation under regulation 5, the application by the company for approval as an investment trust under section 842 of ICTA (investment trusts)(1) as respects the accounting period to which the designation relates must include details of the total amount distributed, or to be distributed, as interest distributions in respect of the accounting period.

Interest distributions not to be treated as distributions for purposes of the Tax Acts

7.  An amount distributed as an interest distribution by an investment trust or prospective investment trust shall be treated for the purposes of the Tax Acts as if the amount distributed is not a distribution.

Qualifying interest income

8.—(1) The company’s amount of qualifying interest income for an accounting period is the amount by which the aggregate of the company’s relevant credits exceeds the aggregate of the company’s relevant debits given for that period.

(2) Subject to paragraph (3) and regulation 9, the company’s relevant credits and relevant debits are—

(a) credits and debits given for the accounting period for the purposes of Part 5 of the Corporation Tax Act 2009 (loan relationships)(2); and

(b) credits and debits given for the accounting period for the purposes of Part 7 of that Act (derivative contracts) in relation to—

(i) derivative contracts the underlying subject matter of which consists wholly of assets representing loan relationships or currency or both, and

(ii) contracts for differences the underlying subject matter of which consists wholly of any one or more of interest rates, creditworthiness and currency.

(3) The company’s relevant debits for an accounting period do not include debits arising under regulation 10 in respect of interest distributions made in respect of the accounting period.

(4) If, in relation to an accounting period, the aggregate of the company’s relevant debits exceeds the aggregate of the company’s relevant credits the amount of the qualifying interest income for that period shall be treated as nil.

(5) In this regulation expressions used in Parts 5 and 7 of the Corporation Tax Act 2009 have the same meaning as they have in those Parts.

Qualifying interest income: further provisions

9.—(1) In the circumstances specified in paragraph (2), the underlying subject matter of a derivative contract is treated for the purposes of regulation 8 as consisting wholly of assets representing loan relationships or currency or both (as the case may be).

(2) The circumstances specified are where the underlying subject matter consists only of—

(a) assets representing loan relationships or currency or both, and

(b) other underlying subject matter which is—

(i) subordinate in relation to those assets, or

(ii) of small value in comparison with the value of the underlying subject matter.

(3) In the circumstances specified in paragraph (4), the underlying subject matter of a contract for differences is treated for the purposes of regulation 8 as consisting wholly of one or more of interest rates, creditworthiness and currency (the “principal subject matter”).

(4) The circumstances specified are where the underlying subject matter consists only of—

(a) the principal subject matter, and

(b) other underlying subject matter which is—

(i) subordinate in relation to the principal subject matter, or

(ii) of small value in comparison with the value of the underlying subject matter.

(5) For the purposes of paragraphs (2) and (4), whether part of the underlying subject matter of a contract of a company is subordinate or of small value is to be determined by reference to the time when the company enters into or acquires the contract.

Interest distributions: effect for investment trust or prospective investment trust

10.—(1) This regulation applies in respect of an accounting period if a company—

(a) is an investment trust or prospective investment trust in respect of the accounting period, and

(b) makes an interest distribution in relation to the accounting period.

(2) Subject to paragraph (3), the Corporation Tax Acts have effect in relation to the company as if the interest distribution made by the company in relation to the accounting period were interest under a debtor relationship of the company (and, accordingly is an amount recognised in determining the company’s profit or loss for the period).

(3) Paragraph (2) does not apply to the extent that the aggregate of the amount distributed as interest distributions in relation to the accounting period exceeds the amount of the company’s qualifying interest income for that period.

(4) In paragraph (2) “debtor relationship” has the same meaning as in section 302(6) of the Corporation Tax Act 2009 (loan relationships).

Interest distributions: effect for recipients

11.—(1) In relation to a recipient of an interest distribution within the charge to corporation tax, the Corporation Tax Acts have effect as if the interest distribution were interest under a creditor relationship of that person.

(2) In paragraph (1) “creditor relationship” has the same meaning as in section 302(5) of the Corporation Tax Act 2009 (loan relationships).

(3) In relation to a recipient of an interest distribution within the charge to income tax, the Income Tax Acts have effect as if the interest distribution were a payment of yearly interest on the date the interest distribution is made.

(4) If a recipient of an amount distributed by a company—

(a) is informed (whether directly by the company or by a person who receives the amount on behalf of the recipient) that the amount is distributed to the recipient as an interest distribution, and

(b) is so informed at, or as soon as reasonably possible after, the time the amount is distributed,

the recipient shall treat that amount as an interest distribution (whether or not the amount distributed is an interest distribution for the purposes of the Corporation Tax Acts in relation to the company).

Failure to obtain approval as an investment trust

12.  No amount may be distributed as an interest distribution by a company in relation to an accounting period after the time the company is informed by the Commissioners that approval for the purposes of section 842 of ICTA is not given by them as respects that accounting period.

(1)

Section 842 was amended by section 117(1) of the Finance Act 1988 (c. 39), section 55 of the Finance Act 1990 (c. 29), paragraph 14(55) of Schedule 10 to the Taxation of Chargeable Gains Act 1992 (c. 12), paragraph 8 of Schedule 17 to the Finance Act 1994 (c. 9), paragraph 4(7) of Schedule 9, paragraph 56 of Schedule 25 and Part 3(2) of Schedule 40 to the Finance Act 2002 (c. 23), section 45(4) of the Finance Act 2004 (c. 12), paragraph 228 of Schedule 1 to the Income Tax Act 2007 (c. 3), and section 57(3) of, and paragraph 7(9) of Schedule 26 to, the Finance Act 2007 (c. 11).

(2)

2009 c. 4.