Author: Mike Dingley (Mazars)
Dividends Tax has been payable since 1 April 2012. Prior to this, resident companies that declared dividends were subject to Secondary Tax on Companies (‘STC’). Under the Dividends Tax regime when a company pays a dividend, it is, subject to certain requirements, allowed to deduct unused STC credits from the dividend amount in calculating the amount subject to Dividends Tax. Some changes are in the pipeline though, but for those who need a better understanding, here are some points to note.
What is an STC credit?
If a company had an open ‘dividend cycle’ at the inception of Dividends Tax the cycle was deemed to have ended on the day before such inception and that cycle is known as the ‘final dividend cycle’. This meant that at the end of the ‘final dividend cycle’ a company could have had a deemed dividend accruing from the penultimate ‘dividend cycle’ together with other dividends which accrued to it in the ‘final dividend cycle’ which had not been set off against dividends declared. This un-utilised balance is referred to as an ‘STC credit’.
How is STC calculated?
The period between two successive dividends declared by a company is referred to as a ‘dividend cycle’. STC is paid on the company’s ‘net amount’ of dividends in a ‘dividend cycle’ where the ‘net amount’ was the amount of the dividend declared by the company, less the amount of dividends that accrued to the company in that ‘dividend cycle’.
Group company dividends on which no STC was paid could not be deducted in establishing a ‘net amount’. Where the amount of dividends accrued exceeded the dividend declared in a ‘dividend cycle’ the excess could be carried forward to the company’s next ‘dividend cycle’ and was deemed to be a dividend that accrued to the company in that next cycle.
What about Dividends Tax exemptions?
Where a company’s shareholder is an individual this is fair and equitable but where the shareholder is a resident company it is exempt from Dividends Tax in any event. This means that where a dividend paying company utilises an STC credit and the dividend is paid wholly or partly to a resident company, the STC credit, or portion of it, would have effectively been lost. For this reason the recipient resident company is allowed, subject to certain conditions, to add the STC credit that was applicable to its dividend portion to its own STC credit balance.
On 1 April 2015 a company’s STC credit will be deemed to be nil. Companies are therefore reminded to calculate their STC credit balance and use it before this date. Companies should also consider whether companies in which they own shares should pay dividends and pass STC credits up the line.