What exactly is a distribution?

The issue

Company distributions are subject to income tax. They have special rates and from 6 April 2022 these rates will be 8.75%, 33.75% and 39.35% for basic rate, higher rate and additional rate taxpayers respectively. Dividends are the most common category of distribution but the definition of a distribution is much wider than formally declared dividends.

Distribution legislation

This is set out with a fairly wide definition in the tax legislation (section 1000 of Corporation Tax Act 2010) and the key points are that the following things should be treated as distributions:

1. Dividends
2. Any other distribution out of assets of the company in respect of shares in the company.
3. Various issues of securities.

Point 2 is generally considered to be quite wide and in practice HMRC will treat most value which is extracted from a company as a distribution.

Loan write-offs between associated companies

Example

Fred owns two companies, Tradeco 1 and Tradeco 2, directly. Tradeco 1 writes off £100,000 that it is owed by Tradeco 2. As connected parties (both controlled by Fred) the treatment of this write-off will be tax-neutral in the companies. There are, however, some commentators who would argue that Fred should be taxed on a £100,000 distribution from Tradeco 1. This is on the basis that Tradeco 1 has decreased its value by £100,000 in order to increase Tradeco 2’s (owned by Fred) value by £100,000.

Commentary is divided on this, although some of the answer is likely to hinge around whether such a loan write-off is actually ‘in respect of shares’. We would argue that it is not.

Recent case of Jasper Conran v HMRC

In this very recent case Jasper Conran was a 99% member of an LLP which sold a business held to be worth £1 to a company (which was the subsidiary of a company that he held shares in) for £8.25m. Unsurprisingly,  HMRC argued that Jasper should be taxed on this as a distribution. HMRC lost on the basis that the Tribunal did not accept that the distribution out of assets had been made ‘in respect of shares’ because it argued that no distribution had been made to Jasper in his capacity as a shareholder.

This case would seem to support the position that a sister company debt write-off does not give rise to a distribution in the shareholder’s hands (above).

Forbes Dawson view

We would not be surprised to see the above case being appealed, but in any event it does raise the question about whether value which is received from a shareholder’s company is automatically received because they are a shareholder. At first glance it also seems like Mr Conran has achieved ‘tax alchemy’ by extracting value from his company without suffering a tax charge. This case is ‘hot off the press’ and it is likely that there will be quite a bit of further interesting commentary over the coming weeks.

 

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