In recent weeks it has become clear that HM Revenue and Customs (HMRC) has concerns about the corporation tax treatment of dividends paid out of capital reserves. Such dividends have traditionally been viewed - by both HMRC and advisers - as income. As such they are potentially exempt from corporation tax. However, it appears that HMRC has received advice that such dividends may, in some cases, be subject to corporation tax as a capital receipt (which, depending on the circumstances, might not be exempt from corporation tax).

To address this issue, HM Treasury has issued a Ministerial Statement which confirms that legislation will be introduced to ensure that the law reflects what all parties had previously understood - that such dividends will be treated as income, and not capital. This change will have retrospective effect, preserving the tax treatment of dividends paid in the past.

The legislation will be included in the forthcoming Finance Bill.

(HM Treasury, Written Ministerial Statement on Capital Distributions, 24.02.10)