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TaxationWeb by Burges Salmon LLP

Clarification on the tax treatment of certain payments to shareholders in a registered industrial and provident society, contributed by Burges Salmon LLP, SolicitorsThe tax treatment of certain payments to shareholders in a registered industrial and provident society has recently been clarified. This follows an exchange of correspondence between John Barnett of Burges Salmon LLP Solicitors and HM Revenue & Customs regarding the potential impact of the reworded legislation in the Income Tax (Trading and Other Income) Act 2005, which was introduced from 6 April 2005. This correspondence is reproduced below with the kind permission of Burges Salmon LLP and with the approval of HM Revenue & Customs.

E-mail from John Barnett CTA, Partner in Burges Salmon LLP, to HM Revenue & Customs

I hope that you are the correct person to write to concerning this issue.

If not, I hope that you will be able to pass the question on to someone who is able to deal with it.

I am just getting to grips with the rewritten legislation in ITTOIA 2005 and have noticed a small - but potentially crucial - change to the previous provisions of ICTA 1988.

This "change" (if indeed it is intended) is in section 397(1) ITTOIA – the previous provision being section 486(1) ICTA.

You will see from a comparison of these two sections that ICTA previously referred to share interest...payable by a registered industrial and provident society (IPS).

The new provisions now refer to a payment to a shareholder in such a society...

This may seem a small difference, but potentially it could be crucial.

Take, for instance, a payment made by one member of an IPS to another - perhaps on the purchase of membership rights by a new member from a retiring member.

Such a payment would not be within the ICTA wording because it is not a payment by the IPS. It could potentially be caught by the ITTOIA wording because it is a payment of an "other sum" to a shareholder.

I assume that this is not the intention. This certainly appears to be the case from Explanatory Notes Appendix Change 81 which picks up the old wording. Construing the legislation eiusdem generis would also suggest that "other sum" should be construed in the context of "dividend" and "bonus" both of which by implication suggest some form of payment by the IPS. Given that this change is not mentioned in the explanatory notes and that ITTOIA is merely intended to be consolidating legislation, I would assume that no change in the existing law is intended.

However, clarification on this point would be welcome. I am dealing with an IPS at the moment for whom the point may be relevant. With your permission I would also intend to offer the point to various technical journals so that the point can be made more widely available.

I will look forward to hearing from you.

Reply from HM Revenue & Customs

I am now able to reply to your query.

You believe that section 379 of ITTOIA 2005 may be interpreted so that any payment (other than a bonus or dividend) paid to a shareholder in an IPS and which is payable by reference to the amount of the shareholder's holding in the IPS's share capital is treated as interest for IT purposes. Thus a capital payment for a shareholder's shares by a third party is also so treated.

Unless a point is specifically covered by a Change Note or otherwise dealt with in the Explanatory Notes to ITTOIA 2005 it may be assumed that there is no intended change in meaning between the law as expressed in the old and new section.

We consider that the title of the new section, which refers to payments by IPSs, the context and general sense make it clear that only payments by an IPS (or agricultural co-operative) are included and this is how we will interpret this legislation.

Thank you for raising the matter. We have no objection to you mentioning that you have mentioned this point to us and that we have given this assurance.


June 2005

Reproduced by Burges Salmon LLP with the kind permission of HM Revenue & Customs.

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