News - Revenue

NCDR

HMRC are concerned that confusion exists about the treatment of excess non-corporate distributions for a singleton company and have issued a note clarifying the position as they see it. Extracts from the note follow.
Where a singleton company has excess non-corporate distributions for an accounting period, i.e there are non-corporate distributions which cannot be matched with profits of that period, then the excess is carried forward and treated as non-corporate distributions of the next period. Where they can be fully matched with profits of the next accounting period, they are not carried forward further. However, if in that accounting period there are still some unmatched distributions then the unmatched balance should be carried forward again.
HMRC give two examples as follow.

Example 1

Year	Profits	Dividends
1	£10,000	£25,000
2	£55,000	£15,000
3	0	£5,000

In year 1, £10,000 non-corporate distributions are matched with the profits. The profits are charged at 19%. There are excess distributions of £15,000 which are carried forward to be treated as non-corporate distributions of the next year.
In year 2, non-corporate distributions of the year are added to those brought forward, giving a total of £30,000. All of these are matched with profits charged to tax; therefore there are no excess distributions to carry forward from this period.
In year 3 there are no profits, so no tax is chargeable. There are non-corporate distributions of £5,000, all of which are excess distributions and are therefore carried forward to the next period.

Example 2

Year	Profits	Dividends
1	£10,000	£25,000
2	£2,000	£15,000
3	0	£5,000

In year 1 excess non-corporate distributions of £15,000 are carried forward to year 2.
In year 2, there are total non-corporate distributions of £30,000. £2,000 of these can be matched with the profits of the period. However, the balance of £28,000 cannot be matched and will be carried forward to the next period even though the profits of year 2 are charged at 19%. The matching and carry forward provisions apply even though the company does not claim the starting rate and therefore has an underlying rate of tax which is not less than the non-corporate distribution rate.
In year 3, there are no profits chargeable but the non-corporate distributions of the year and those brought forward are treated as excess distributions, giving a total of £33,000, and carried forward to year 4.

Group examples
HMRC plan to publish examples of how the allocation of excess non-corporate distributions will work in the group situation as soon as possible.
This clarification seems to respond to Keith Gordon's article 'Bolting Gift Horses' in Taxation, 27 October 2005, page 94. In that article, Keith pointed out that the rushed drafting of the legislation introduced a possible anomaly which could lead to further taxation on companies paying non-corporate distributions. Keith says, 'it is reassuring to learn that HMRC will not, at least for the time being, press for a literal interpretation of the legislation'.
However, reading the updated note, one could gain the impression that the confusion which surrounds the non-corporate distribution rate is the fault of taxpayers and their advisers. As Keith wrote in an earlier article, the confusion stems from the fact that the original published guidance on the rules was wrong. Keith adds, 'it is a shame that so much effort has to be expended by civil servants, taxpayers, tax advisers and the designers of tax software simply because the Government got its sums wrong in 2003 and was not prepared to return to a more sensible corporation tax starting rate'.
www.hmrc.gov.uk