This section deals with the case where a tax credit, reduced in accordance with section 64, is in respect of a distribution to which section 178, which deals with dividends on offer at gross rates, applies, In other words, it deals with preference dividends. Section 178 provides that an obligation created before April 6th, 1976, to make a fixed rate distribution—for example, a preference dividend—will as from that date be satisfied by payment of such an amount as will, with the addition of the normal tax credit in force on that date, be equal to the gross distribution which the company were previously obliged to make. The section requires the company to make a supplementary payment equal to the amount by which the tax credit as reduced under section 64 falls short of the normal tax credit.

If I could perhaps use some non-technical language—under the old system, getting rid of dividends was good but under the new system the company would be discharging their obligations to pay if they paid a preference dividend which with the tax credit would equal the gross dividend.

Why is this necessary?

Because we are imputing a tax credit. Before the dividend was gross, in future it will be a net dividend. Therefore, we have to provide that the company will be discharging their obligation when they pay the net dividend plus the tax credit. It will work out precisely the same—just a different formulation which achieves the same result.

Does this occur only where there is a supplementary distribution?

It is a case of dividends being paid in preference shares. We are dealing here with fixed rate distributions, not distributions of profits as ascertained but a distribution of fixed rates.

It says here in subsection (1):

Where a company makes a distribution in respect of any right or obligation. . . relates and the tax credit in respect of that distribution is calculated in accordance with section 64 then, the company shall make a supplementary distribution of an amount equal to the excess of the amount of the tax credit which would have applied to the distribution. . . .

That would then equal the gross amount in favour of the old system.

I do not know why it is necessary at all.

I have given an example.

Even with the example, it is difficult to understand.

Look at the old system. Fixed rate dividends of £100 were subject to income tax at the standard rate. Before payment the shareholders received a net dividend of £65. In regard to such a dividend paid after 5th April, 1976, the company is under an obligation to pay £100 gross dividend, distribution of £65 carries with it a tax credit entitlement of £35. The recipient's position is unchanged. His income for tax purposes is £65 plus £35 which is £100 which equals the £100 gross which he received formerly.

Are not some companies doing that already?

No.

Export relief is referred to, is it not?

The example at the end of the page deals with export sales relief.

That is showing the benefit from the export sales relief?

Yes. The same amount of money is received by the shareholder.