UK: Urgent Tax Claims For Offshore Dividends From Family Owned Companies And Investment Funds
A ruling at the First-tier Tribunal has allowed different form of tax credit relief on certain types of offshore dividends taxed in the UK. Overpayment claims for 2010/11 and later years should be considered immediately.
Shirley v HMRC
A UK resident who benefited from an overseas trust has successfully claimed that he is entitled to tax credit relief under s.399 ITTOIA 2005 on overseas dividends paid directly to him and taxed in the UK.
Although part of his claim relates to a period before s.397A was introduced to give the 10% credit on some overseas dividends (from 2008/09 onwards), the Upper Tribunal ruling effectively states that s.399 gives relief on all offshore dividends. If HMRC doesn’t manage to overturn this ruling, there are two key implications.
Relief for offshore dividends is much wider than s.397A
Relief under s.397A is limited to distributions from companies that are:
Offshore funds (but you must own less than 10% of the issued share capital, or any class of share) or
Equity based ‘offshore funds’ or
Not an offshore fund but must be resident for tax purposes in a territory with which the UK has a DTA that includes a ‘non-discrimination’ article.
However, if s.399 does apply generally to give relief on offshore dividends, it means that relief is due on other offshore holdings that fall outside the s.397A rules. For example, an overseas family company paying dividends to owners in the UK who hold over 10% of the equity. Dividends paid by offshore investment companies to UK residents would also qualify for relief.
A better rate of relief under s.399
Where a UK resident individual receives a foreign dividend which does not qualify for a 10% notional tax credit (with grossing up) under s.397A, that individual is treated as having paid tax at 10% on the dividend received (with no grossing up). The different method of calculation creates a 2.5% tax difference for higher rate taxpayers.
