Capital distributions

Following the introduction of the dividend exemption regime in last year’s Finance Act, most dividends received by UK companies from 1 July 2009 are exempt from UK corporation tax. However, relief only applies to dividends that are not capital in nature. There is concern that certain distributions could be treated as capital and therefore not exempt. Retrospective legislation will treat most distributions as exempt.

Baker Tilly analysis

In most cases it will be clear whether a distribution received by a company is income or capital in nature. However, there are certain situations whereby a distribution could be regarded as capital and potentially fall outside the dividend exemption regime. This measure will provide a welcome clarification, as it will ensure that most distributions received by UK companies will be treated as income and thus will potentially be exempt from corporation tax. Retrospective legislation is to be enacted, albeit in the next Parliament and we must wait and see just how comprehensive is the forthcoming draft legislation.

In detail

The dividend exemption regime exempts corporation tax from most income distributions received by UK companies. Following introduction of the rules, concern has been expressed regarding certain scenarios such as share redemptions and distributions out of capital, which might be treated as capital distributions and thus fall outside the exemption.

Whilst the budget note, BN05, is light on detail it does say that distributions will not be prevented from falling within the distribution exemption regime because they are capital in nature. Furthermore, it will have a retrospective effect, although the legislation will not be introduced until the next Parliament.