Corporation tax treatment - unlawful distributions

How to tax unlawful distributions received by a company

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Hello all

My client, a company, was previously a shareholder in a joint venture. The JV had 3 shareholders, but the three are all subsidiaries of listed companies, and as such the jv was not a close company. The jv, immediately prior to strike off, declared a £30,000 dividendout of distributable reserves with £10000 going to each shareholder. This left £3000 of shareholder capital in the company which was not going to be withdrawn.

an administrative error resulted in each shareholder being paid £11000 rather than the £10000 which was declared. As such, the £1000 represents an unlawful distribution.

I appreciate the CA2006 consequences of the unlawful dividend, but am uncertain how it should be assessed to corporation tax in my clients return. I am aware that if it's treated as income it is a tax nothing, and if it is treated as capital, it would be a NGNL full disposal of the shares (cost of the shares was £1000, payment received was £1000).  On the other hand, is this an example of a loan since the £1000 now belongs to the crown which is repayable on demand? Given these possibilities, it's evident that this query relates more to presentation and my own interests as opposed to there being tax to pay, cuirious if anyone has come across something similar?

Replies (8)

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By johngroganjga
11th Dec 2016 05:47

Don't you just need to find out what the extra £1,000 is?

You say it was a mistake but what is now to be done about it? Is the mistake to be rectified by the money being repaid. If so you have your accounting treatment right there.

Or has the JV company after all retuned its share capital prior to being struck off?

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By Scriptic
11th Dec 2016 15:27

Is there some problem with paying back the £1,000 given that it was paid in error and therefore not expected?

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By anewstart
11th Dec 2016 15:38

Thanks for responding both.

The client company has no intention of returning the £1,000 to the JV now that the JV has been struck off, the rationale being simply that for the amounts involved there seems little point. There is little enthusiasm to bring the JV back from the dead.

Given this, the impression I get is that it is a return of capital and should be treated, therefore, as a capital receipt. Reasonable conclusion?

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Replying to anewstart:
By johngroganjga
11th Dec 2016 21:59

You started by telling us that the JV did not intend to distribute its capital, but now you tell us the JV has been struck off. In other words you say that the plan was for the JV to be struck off with £3,000 in its bank account - presumably to make a donation to the Crown.

Yes of course the return of capital should be treated as a return of capital.

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By anewstart
11th Dec 2016 23:07

That is correct, it was very much intended that the company be struck off with the share capital still in the company. The articles of the company didn't permit a capital reduction and the shareholders were uninterested in passing a special resolution to permit it. I suppose all three thought their time was worth more than a thousand pounds.

Despite the haughtiness, I appreciate the help john.

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Replying to anewstart:
By johngroganjga
12th Dec 2016 05:12

Then whoever was advising the JV company has had a lucky escape. If their advice had been followed they would have no defence to a claim that that advice had led to the shareholders losing £3,000.

Any competent adviser will know that the most important thing you must advise any company being struck off to do is to distribute every last penny of its assets before applying to be struck off.

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Replying to anewstart:
By johngroganjga
12th Dec 2016 07:56

anewstart wrote:

That is correct, it was very much intended that the company be struck off with the share capital still in the company. The articles of the company didn't permit a capital reduction and the shareholders were uninterested in passing a special resolution to permit it. I suppose all three thought their time was worth more than a thousand pounds.

Despite the haughtiness, I appreciate the help john.

If you think a company being liquidated or struck off needs to pass a special resolution to reduce its capital, or else go to its grave with its capital still in the bank, you need to swot up on the procedures.

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By TheLambtonWorm
12th Dec 2016 09:58

Removed after reading the thread properly.

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