I shall speak to amendment 43 first. This touches on a point I raised in the clause stand part debate about the treatment of UK to UK dividends. Under existing rules all distributions from UK companies are non-taxable, but new section 930A presumes that they are taxable unless they are exempt. The Minister acknowledged that it was the threat of challenge under EU rules that gave rise to that equality of treatment between UK and non-UK distributions. That is a topic that I will come back to under the next clause as well.
Having established that all distributions are taxable, there is then a series of exemptions from that tax. If an exemption is met, no tax is payable on those dividends. That is very straightforward. Where the problem arises is that in some cases there is a difference in treatment between distributions and dividends. The titles of the five exempt classes demonstrate that. There are three related distributions, which relate to controlled companies, non-redeemable ordinary shares and portfolio holdings, but also limited dividends from transactions not designed to reduce tax and dividends in respect of shares accounted for as liabilities.
The issue stems from the exclusion, in new section 930A(2), of a distribution of a capital nature. The feedback I have received is that the principles for that exclusion are relatively untested. To determine whether a distribution is of a capital nature, they would have to be tested against some very unclear case law. There are certainly some cases where distributions that were previously exempt will no longer be so under the new provisions and that will increase uncertainty in some fairly common transactions. Amendment 43 says that all distributions currently falling under section 209 of the Income and Corporation Taxes Act 1988 should continue to be exempt, so that there is a continuity of treatment between the old regime and the current regime.
Amendment 48, which I have also tabled in this group, deals with a small companies exemption. Schedule 14 provides for two regimes: one for small companies and one for medium and large companies. Schedule 14 provides a definition of a small company in new section 930R. However, it creates a degree of uncertainty as to whether a small company is a small company in the year of the dividend accounting period. My amendment seeks to create some certainty by referring back to the accounts of the previous accounting period to determine whether a small company is a small company. Rather than the uncertainty of new section 930R inserted by the schedule, which looks at the current accounting period, amendment 48 refers to the previous accounting period to give the taxpayer greater certainty.