s.399 ITTOIA 2005 - tax treated as paid on distributions received by non-resident persons

I understand that advice is circulating among some non-UK resident trustees to the effect that they may be able to use this section to avoid returning UK dividend income to HMRC and thereby do not have to pay the 7.5% dividend tax, following the removal of the notional 10% tax credit, where the income has not been mandated to the UK-resident life-interest beneficiaries.

Are others aware of this advice?
What is the general consensus about its efficacy, especially given that some of these UK-resident beneficiaries may wish to claim repayment of the dividend tax, provided their individual circumstances allow.

Maxine Higgins
Citroen Wells

I have not seen the advice which this question refers to, but I suggest there are two distinct questions here.

  1. Do non-resident trustees qualify for a tax credit on UK dividends? Section 399 ITTOIA provides:

(1) This section applies if—
(a) a person’s income for a tax year includes a distribution of a company, and
(b) the person is non-UK resident.
(2) The person is treated as having paid income tax at the dividend ordinary rate on the amount or value of the distribution.

So it seems the answer should be yes. And why not!

  1. Does a UK resident life tenant obtain the benefit of the tax credit (including reclaiming the tax if appropriate)?

There is no provision to that effect. It is often the case that a life tenant should obtain credit for tax paid by the trustees, but that is not a statutory rule. In the present case it would not make sense for the beneficiary to have the tax credit so the answer should be no.

That would lead to a sensible result. But the point is not altogether easy. In Shirley v HMRC [2014] UKFTT 1023 (TC) at [108].the Tribunal said:

	it is not possible to ascertain a consistent and logical basis in the legislation for the taxation of dividends. ... There are no logically consistent principles (as it were) underpinning the taxation of dividends, against which the result of a literal interpretation can be compared—in order to reach a judgment that a literal interpretation results in an anomaly or absurdity.

There has subsequently been another round of reform, introduced in breach of the Tax Consultation Framework, but I think this gloomy assessment is still valid.

James Kessler QC

15 Old Square
Lincoln’s Inn

Has anyone any experience of dealing with this in practice?

Our tax software for 2017/18 gives offshore trustees the benefit of a credit for the 7.5% dividend tax due. This is then being passed on to the UK resident life tenant on the R185, though obviously nothing has been paid.

The 2016/17 calculation gave the trustees no such credit, which the software providers maintain is because HMRC has subsequently changed its own calculations.

I have yet to find any HMRC guidance on this so would be interested to hear from others with this issue.

Ruth Sadlier
Broomfield Alexander

My understanding is that HMRC have failed to carry the calculations back to 2016/17 due to their own inability, but that they will accept it. Of course, it means the calculation falls on the taxpayer or his own software. Perhaps a protective claim should be submitted.

Julian Cohen

Simons Rodkin

No, I don’t think there has been any official HMRC guidance although there was an article in Accounting Web by Richard Hattersley on 11 September about this (I am unable to upload a PDF version on this forum):

Our software still doesn’t reflect the correct position for 2016/17 although it does for 2017/18 (but only since mid-July) so, where applicable, we may have to submit paper amended 2016/17 trust tax returns to obtain repayment. Our software does however allow us to override the R185 figures so that we can remove any ‘notional’ dividend tax credit that the trustees may have been allowed since for individuals any such tax credit is potentially repayable, although the non-resident trustees may not have paid this.

With regard to my original query, it seems that the ‘advice’ was misconstrued - rather than not ‘returning the income’, the UK dividend income should be ‘returned’ to HMRC, although the non-UK resident trustees do not have to pay the 7.5% tax on it.

Maxine Higgins
Citroen Wells

Our software provider contacted HMRC when we identified the issue re s. 399 and the anomaly between the 2016/17 tax return and the 2017/18 tax return. HMRC issued the following response in July this year:

The developer is correct and this was an issue for Individuals and Trusts in 2016-17. We initially realised this affected individuals and created Exclusion 57. Like non-resident individuals, non-resident trustees are entitled to 7.5% dividend tax credits under Section 399 ITTOIA on any dividends that are included in their taxable income. In the case of non-resident interest in possession trusts, this broadly means that there should be net income tax liability of zero on UK dividends. Non-resident discretionary trusts should still have a liability, as higher income tax rates apply, but it should be reduced by the 7.5% tax treated as paid.

It was deemed to be too late to provide a Trust Exclusion because it would have been issued after the filing date 31 January. The developer can advise their clients that if they contact HMRC, whilst there is no Trust Exclusion number to quote for 2016-17, they can quote Exc 57 or s399 and staff are aware of the issue.

I have been advised 2017/18 is right.

Mandy Connolly
LTS Tax Limited