UK Extends Dividend Tax Credit For Shareholders

by Robin Pilgrim, LawAndTax-News.com, London

30 January 2009

The UK tax authority, HM Revenue and Customs, has announced that the Finance Bill 2009 will include measures that will further extend eligibility for the non-payable tax credit for shareholders, in line with an announcement made by the government last year.

The 2008 budget included an announcement to extend eligibility for the non-payable dividend tax credit to individuals in receipt of dividends from non-UK resident companies where the individual owns a 10% or greater shareholding in the distributing company. However, the tax credit will not be available if the source country does not levy a tax on corporate profits similar to corporation tax. There will also be anti-avoidance measures to ensure that these new rules are not subject to abuse.

Currently, dividends received by individual shareholders are taxed at rates of 10% and 32.5% for basic rate and higher rate taxpayers respectively.

When dividends from UK resident companies are charged to tax, shareholders are entitled to a non-payable tax credit of one ninth of the distribution under the provisions of section 397 (1) of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA). Because tax is charged on the gross dividend received, including the tax credit, this lowers the effective rates of tax on these dividends at the personal level to 0% and 25%.

With effect from 6 April 2008, Section 397A of ITTOIA, introduced by the Finance Act 2008, extended the non-payable tax credit to individuals in receipt of dividends from non-UK resident companies if they own less than a 10% shareholding in the distributing company and that company is not an offshore fund.

The Finance Bill 2009 will include measures that will further extend eligibility for the non-payable tax credit in line with the budget 2008 announcement.

For shareholders with holdings of 10% or more in a non-resident company, the tax credit will normally be available if the distributing company is resident in a territory with which the UK has a double taxation agreement with a non-discrimination article ('qualifying territory'). This approach is already used in the transfer pricing provisions (Schedule 28 AA of the Income and Corporation Taxes Act 1988). The legislation will also include powers to vary what is a 'qualifying' and 'non-qualifying' territory.

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