Some uncertainty has arisen recently about the corporation tax treatment of distributions. This has arisen from arguments by HMRC in the Tax Tribunal that the meaning of a dividend for tax purposes was different from its company law meaning and that dividends are of an income or capital nature depending upon the reserves out of which they are paid. What HMRC had in mind is that if they could categorise dividends as capital, they could be brought into charge to corporation tax and not be exempt which is the case with dividends generally.

A ministerial statement has been issued to confirm that dividends will not be excluded from the exemption because they are capital distributions and it will have retrospective effect. The Budget notes also made reference to this issue by saying that only distributions which are specifically excluded from clarification as income will be treated as capital and chargeable to tax as a capital gain.