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Income Tax

Volume 124: debated on Friday 11 December 1987

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To ask the Chancellor of the Exchequer if he will publish a note explaining the circumstances in which distributions by companies other than in the form of cash or shares are subject to income tax; and if he will make a statement.

[holding answer 7 December 1987]: The Taxes Act provides that, in addition to dividends and certain issues of shares and securities, any other distribution out of the assets of the company in respect of shares in the company falls within schedule F of the income tax code. The company has to account for advance corporation tax on the value of the distribution, and the sum of that value plus the advance corporation tax is income of the shareholder.The recipient is entitled to a tax credit equal to the advance corporation tax, and this covers his basic rate income tax liability. A distribution is treated as provided out of the assets of a company if the cost falls on the company. If the cost falls on a direct 90 per cent. subsidiary of the company, a distribution is treated as made by the subsidiary. The legislation provides that "in respect of shares" covers anything done in pursuance of a right granted or offer made in respect of a share.The Taxes Act also contains a supplementary rule that can apply where a company transfers assets to, or takes over, liabilities of a member or members. If the market value of the benefit received by the member exceeds the consideration that he pays, the company is treated as making a distribution equal to the difference. There are also special rules covering the provision of benefits or facilities to members of a close company.