Franked Investment Income

Definition: Franked Investment Income§

Franked Investment Income (FII) pertains to dividends and other distributions made by UK companies that have already been subjected to corporation tax at the distributing company’s level. Under the imputation system of taxation, once these dividends were taxed, they could be passed through multiple companies without incurring additional tax liabilities. This system ensured that profits were not taxed multiple times as they moved through different entities, providing tax efficiency and reducing the basic tax burden on corporate earnings.

Examples§

1. Company A to Company B: Company A declares dividends and pays the appropriate corporation tax. Company B, which owns shares in Company A, receives these dividends. Under the imputation system, Company B does not pay additional tax on these dividends.

2. Corporate Group Structure: In a corporate group structure where a parent company and multiple subsidiaries existed, profits taxed at the subsidiaries’ level and distributed as dividends to the parent company would not be taxed again at the parent level due to the franking credit attached to the dividends.

3. Historical Corporate Example: Let’s assume Company X, a part of a large conglomerate, earns £1 million, and after paying corporation tax, distributes £500,000 as dividends to Company Y, another entity within the conglomerate. Company Y receives the £500,000 without further tax deductions.

Frequently Asked Questions§

Q1: What is the primary benefit of Franked Investment Income? A1: The main benefit is the elimination of double taxation on corporate dividends, allowing companies to optimize their tax liabilities and overall efficiency.

Q2: Is Franked Investment Income still applicable in today’s UK tax system? A2: No, the imputation system and the concept of Franked Investment Income were abolished with the introduction of the advance corporation tax (ACT) reforms in the early 2000s.

Q3: How does the removal of the imputation system impact companies? A3: The removal has led to different tax treatments which may involve more complex tax planning strategies to avoid multiple layers of taxation on profits and inter-company dividends.

Related Terms§

• Imputation System: A corporate tax system where tax paid by a company on its profits is imputed to shareholders in dividends, which are then not taxed again.
• Corporate Taxation: Taxes levied on companies’ profits, which were the initial layer of taxation under the imputation system.
• Advance Corporation Tax (ACT): The prepayment of corporation tax under the old UK system, abolished in 1999, which affected how dividends were taxed.

Online References§

1. HM Revenue & Customs (HMRC) - Corporation Tax
2. AccountingTools - Dividend Imputation
3. Wikipedia - Imputation System

Suggested Books for Further Studies§

1. Corporate Taxation: Problems, Solutions & Explanations by Cheryl D. Block
2. UK Business Taxation by Malcolm James
3. Taxation: Policy and Practice by Andy Lymer and Lynne Oats

Accounting Basics: “Franked Investment Income” Fundamentals Quiz§

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