Companies facing double taxation on some dividends will be helped, says Treasury
Companies affected by the change are all those who receive dividend income on which they usually claim double taxation relief under the terms of one of the Double Taxation Treaties.
Usually, dividend income is simply divided between the two financial years in proportion to the number of days in the accounting period on either side of the rate change – no matter when the dividend was actually paid. The effect of this is to tax all dividend income at an average of all corporation tax rates which were in force over the company’s accounting period. In the current circumstances, following the rate change from 5 April 2008 from 30% to 28%, the effective taxation level on dividend income will be somewhere between the two depending on when the company’s accounting period ends.
However, some companies claim double taxation relief on this dividend income in their dealings with other tax jurisdictions who also attempt to tax the income. The level of relief they can claim against the foreign tax is obviously determined by the amount they have paid in the UK. However, a provision of the Income and Corporation Taxes Act 1988 caps the amount which can be claimed against foreign tax, with reference to the rate which was in effect on the day the dividend was actually paid. Thus, if the dividend was paid on a date when the corporation tax rate is at the lower level, the company will pay UK tax on the average of between 28% and 30%, but the amount they are able to claim in double taxation relief is capped at 28%. A small proportion of the dividend income will therefore be taxed twice, contrary to the basic terms of the Double Taxation Treaties.
The Treasury has announced that all companies affected by the “unintended oversight” will be compensated by a rectification in next year’s Finance Bill with provisions backdated to 1 April 2008. This will not, however, solve the problem faced by companies who need to make quarterly instalment payments before any change to the law can take effect, and the Treasury has therefore also given assurance that “HMRC will use its statutory discretion to give the necessary double taxation relief.”