Currently, a distribution of an asset in specie is a distribution for corporation tax purposes, per CTA 2010 Part 23, unless the transferee is also a company and either:
HMRC’s stated concern is that this means that the treatment of a distribution in specie depends on the residence of the transferee company, although there is no policy reason for this difference.
But the problem is wider than that: distributions in specie are common within capital gains groups, often as part of a group reorganisation preparatory to a demerger or other form of reconstruction.
Such a transfer is not a distribution for tax purposes, as the companies in a group will be within the first exception above, and the worry is that it is a capital distribution, treated as a part-disposal of its shareholding by the recipient company, under TCGA 1992 s 122.
To be fair, in most cases this was a theoretical risk, as it is not tax policy that such transactions should be capital distributions and I am not aware that HMRC ever took the point. But the risk was highlighted by recent changes to the distributions legislation and First Nationwide [2012] EWCA Civ 278 recently decided in the taxpayer’s favour in the Court of Appeal.
As a result of these concerns, the Finance Bill will amend the definition of a distribution, so that transfers of assets from a company to a shareholder at undervalue (a distribution in specie), or from a shareholder to a company at overvalue, will be distributions for corporation tax purposes.
As a result, such a distribution cannot be a capital distribution (by TCGA 1992 s 122(6)), as it is prima facie chargeable under CTA 2009 Part 9A.
This will give a consistent treatment of all distributions in specie, regardless of the relationships between the companies concerned, it resolves the concerns about capital distribution treatment for intra-group transfers and the treatment means distributions in specie will no longer be partly dependent on the residence of the companies concerned.
This amendment represents a welcome simplification of the distributions code, which has been somewhat in disarray in recent years, although there is still some way to go to make it a coherent regime.
The fact that the changes have been made is also a triumph of the consultation process. HMRC was made aware of the issues and listened to the concerns of the tax community, convening a group of interested parties to discuss and resolve the problems.
Pete Miller, Partner, The Miller Partnership
