Following the introduction of the new dividend exemption for UK corporation tax purposes with effect from July 1, 2009, there has been increased focus on the defi nition of the terms « dividend » and « distribution » as these drive whether a payment qualifi es for the exemption.

The UK tax authority (HMRC) has suggested that « distribution » is limited to a payment of profi ts that an « ordinary » person would recognise, despite the courts rejecting this view in a number of recent cases. On this basis it has expressed the view that a dividend receipt in the UK which is ultimately sourced from a reserve created on a capital reduction is a capital receipt in the hands of the UK recipient, although most practitioners disagree. HMRC has not changed its view on this, despite signifi cant disagreement expressed by practitioners and a court judgment against it. However, the legislation has now been amended with the intention of providing that dividends following a capital reduction can qualify for the exemption. The amendments are broadly effective in doing so, although the position regarding dividends in specie is not entirely clear.

In addition, these amendments are only applicable for corporation tax purposes. Therefore, if HMRC’s new stance on the meaning of distribution is correct, it would impact the position of individuals because the rate of tax they pay on such a receipt would differ according to whether it is taxed as a dividend or capital receipt.

HMRC has established a working group to resolve these and other issues surrounding the taxation of dividends and PwC is a member of this. One solution HMRC is considering is extending the amendments referred to above to individuals. This is the subject of further discussion.

In the meantime, we are generally advising clients to seek clearance from HMRC if they need assurance on how a particular payment will be treated.