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A company may make an ICTA88/S242 claim for an accounting period beginning before 2 July 1997 which straddled a change in the rate of tax credit.

The statute does not say which franked investment income (FII) should cover franked payments (FP).聽 A company will want to set off FII in the most beneficial way, that is, to maximise the ICTA88/S242 payment.

If the company made no FP, HMRC viewed the ICTA88/S242 claim as being primarily in respect of FII carrying the higher rate of tax credit.

If the company has made FP, the individual return periods had to be reviewed to see which FII could be identified as the subject of the claim.

Example

For the year ended 31 December 1993 a company's forms CT61Z showed the following.

Return period	FII	FP
ended 31 March 1993	拢100,000	Nil
ended 30 June 1993	拢20,000 (all after 5 April 1993)	拢30,000 (all after 5 April 1993)
ended 30 September 1993	Nil	拢10,000
ended 31 December 1993	拢20,000	Nil

The total surplus FII for the accounting period was 拢100,000. The company made an ICTA88/S242 claim in respect of this.聽 The rate of tax credit changed on 6 April 1993.

For the return period ended 30 June 1993, the company could view the FP of 拢30,000 as covered first by the 拢20,000 FII of the same return period.聽 The remaining 拢10,000 of the FP is then viewed as covered by surplus FII brought forward from the previous return period.

For the return period ended 30 September 1993, all the FP of 拢10,000 had to be viewed as covered by FII brought forward from an earlier return period.

As a result the surplus FII of 拢100,000 for the accounting period comprised:

• 拢80,000 arising before 6 April 1993,and

and

• 拢20,000 arising after 5 April 1993.

The view taken by the company of which FII is used to cover franked payments affects both the amount of the payment of tax credit to the company, and the amount of loss and so forth used, where FII of 1993-94 is involved, see CTM20535.

In the example above, HMRC viewed the surplus FII of 拢100,000 as comprising 拢80,000 arising before 6 April 1993 and 拢20,000 from that date.聽 The tax credit in the 拢80,000 FII was 拢20,000.

The surplus FII of 拢20,000 represents a distribution received of 拢15,500.聽 If FA93/S78 (3) had applied, the tax credit would be 拢3,875.聽 So the loss and so forth used under S242 against this surplus FII is 拢19,375, and the total relief used in the S242 claim was 拢99,375 (FA93/S77 (8)).聽 The tax credit paid was 拢23,875.

Because FA93/S78 (8) applies, FA93/S78 (9) requires a reduction to FII carried forward of 拢625 (being the tax credit of 拢4,500 less the tax credit of 拢3,875).

Alternatively, the company might view the franked payments in the June and September return periods as covered by FII of the March return period.聽 The surplus FII of 拢100,000 then comprised 拢60,000 arising before 6 April 1993 and 拢40,000 from that date. The tax credit in the 拢60,000 was 拢15,000.

The surplus FII of 拢40,000 represents a distribution received of 拢31,000.聽 If FA93/S78 (3) had applied, the tax credit would be 拢7,750.聽 So the relief used under section 242 against this surplus FII was 拢38,750, and the total loss used in the S242 claim was 拢98,750 (FA93/S77 (8)).聽 The tax credit paid is 拢22,750.

Because S78 (8) applied, S78 (9) required a reduction to FII carried forward of 拢1,250 (being the tax credit of 拢9,000 less the tax credit of 拢7,750).

Because of the operation of FA93/S78 (8), in neither case is a loss of 拢100,000 used to cover the surplus.