What does Corporation Tax Act 2010 section 1004 deal with?

Section 1004 addresses how securities issued only partly for new consideration are treated for distribution purposes under United Kingdom corporation tax law. The portion referable to genuine new consideration is carved out and not treated as a distribution under paragraph D of section 1000(1). Only the unsupported portion may be a distribution.

How is the value of a security determined under section 1004 for distribution purposes?

The value of the security is taken as the full amount of principal it secures, including any premium payable at maturity, on a winding up, or in any other circumstances. It is not based on market value. The distribution amount is then calculated by subtracting the portion covered by new consideration from this total value.

How is the distribution amount calculated when a security is partly issued for new consideration?

The total value of the security, including any redemption premium, is determined first. The portion properly referable to new consideration is then subtracted. For example, a security valued at £220,000 with £150,000 of new consideration produces a potential distribution of £70,000 under paragraph D of section 1000(1).

Why is section 1004 important in United Kingdom corporation tax law?

Section 1004 is important because distributions carry different tax consequences from ordinary commercial transactions. By carving out the portion of a security backed by genuine new consideration, the legislation ensures only the element representing a return of value without equivalent consideration received by the company is caught by distribution rules.

Corporation Tax Act 2010 section 1004

Securities issued otherwise than for new consideration

Section 1004 deals with the tax treatment of securities issued by a company where only part of the issue is in return for new consideration, and explains how to determine whether and to what extent the issue counts as a distribution.

Where a company issues a security partly (but not wholly) for new consideration, the portion properly referable to that new consideration is not treated as a distribution under paragraph D of section 1000(1).
Only the portion of the security that is not backed by new consideration can be treated as a distribution.
For the purpose of measuring the distribution amount, the value of the security is taken to be the full principal secured, including any premium payable at maturity, in a winding up, or in any other circumstances.
This rule works alongside section 1003 and ensures that genuine commercial funding backed by real new consideration is carved out from the distribution rules.

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