The Death of Dividend Tax Account and Resurgence of Compensating tax

Review of the Finance Act 2018

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The Dividend tax account, loathed by accountants and detested by revenue officers, has been scrapped. The Finance Act 2018 has repealed and replaced section 7A of the Income Tax Act which required resident companies that pay dividends to maintain a dividend tax account.

Section 7A was unnecessarily prescriptive. It went into overkill, providing details on how the dividend tax account should be maintained.  The aim was to facilitate computation of Compensating tax, which would arise if a resident company distributed dividends from untaxed gains.

The new section introduced by the Finance Act simply requires that a company that distributes gains that have not been taxed should pay a compensating tax. The qualifier that the company has to be a resident company has been removed.

The new section reads;

“Where a dividend is distributed out of gains or profits on which no tax is paid, the company distributing the dividend shall be charged to tax in the year of income in which the dividends are distributed at the resident corporate rate of tax on the gains or profits from which such dividends are distributed.” However this section shall not apply to registered collective investment schemes.

Apart from removing onerous requirement of maintaining a dividend tax account, the new section has clarified the rate of compensating tax payable to be a normal corporate tax rate. Before, compensating tax was a punitive, with various tax consultants providing compensating tax rate to be 42.8%. We are not aware how they arrived at this figure but now it matters no more.

A company may distribute dividends from untaxed profits in instances where it has received generous capital allowances such as investment deduction. This may leave the company with an accounting profit, but when adjusted for tax purposes, would leave the company with no taxable income. The compensating tax is intended to act as a disincentive for distribution in such circumstances and compel such company to reinvest the gains.

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