There is some uncertainty as to the tax treatment of dividends which are paid out of newly distributable reserves as a result of a capital reduction.
The general view is that these are treated as an income distributions. We agree, and this is reflected in our capital reductions guidance note. However, HMRC has recently expressed concerns that the distribution exemption could be used for company avoidance purposes to mitigate capital gains tax on company share disposals that do not qualify for the Substantial Shareholding Exemption (SSE).
The Financial Secretary to the Treasury has just published a Written Ministerial Statement (WMS) confirming that legislation will be introduced in the Finance Bill to restore previous expectations about the way that distributions are taxed. The WMS also says that the changes will apply retrospectively where appropriate and will be subject to an opt out to ensure that UK retrospective application of the new legislation does not increase tax liabilities.
This move we feel relates only to company to company distributions, and does not (as yet) seem to have any bearing on the taxation of capital reductions in relation to Extra Statutory Concession (ESC) C16 but we are going to be considering this further. If you are considering using a capital reduction in conjunction with ESC C16 it may be a good idea chat this through with Nichola Ross Martin or one of her colleagues to get an update in case there are any new developments in this area. There should be more light cast on this in the Budget.
