Tax Tribunal allows appeal and confirms interim dividend was not "due and payable"

In Peter Gould v HMRC [2022] TC08647, the First-tier Tribunal (FTT) allowed the taxpayer's appeal and found that an interim dividend paid to two shareholders on different dates was taxable on the dates of payment, not the earlier date of declaration, resulting in the dividend being taxed in different tax years for each shareholder.

Background 

This case concerned the payment of an interim dividend by Regis Group (Holdings) Ltd (Regis). Frank Gould established Regis Group (Holdings) Ltd (Regis) as an investment company. His two sons, Peter Gould (the taxpayer) and Nicholas Gould, are full-time employees and key shareholders in Regis.

Regis' board of directors resolved to pay an interim dividend of £40 million in relation to the same class of shares. The resolution was approved by the board on 31 March 2016. Following the resolution, £20 million was paid to Nicholas Gould on 5 April 2016 and £20 million was paid to the taxpayer on 16 December 2016. 

Part of the reasoning for delaying the payment of the dividend to the taxpayer was that he was experiencing difficulties opening a bank account in Jamaica, where he resided (principally because the bank did not accept large transfers).

Another part of the thinking was tax planning for both brothers. If the taxpayer was non-resident for tax purposes in the year in which the dividend was taxed he would not be liable to tax in the UK. Following his move to Jamaica in 2013, the taxpayer had anticipated being   non-resident for tax purposes in tax year 2015/16, but the death of his mother in December 2015 required him to be in the UK for more time than he had intended. Accordingly, there was some doubt as to whether he was non-resident in that tax year. It was therefore decided that, out of an abundance of caution, he should receive his dividend in tax year 2016/17.

In addition, Nicholas Gould was UK resident for tax purposes but due to changes in the taxation of dividends (introduced by Finance Act 2016) he would be taxed at an effective tax rate of 30.56% if he was taxed on the dividend in tax year 2015/16 and at 38.1% if he was taxed on the dividend in tax year 2016/17.
HMRC opened enquiries into the taxpayer's self-assessment tax returns for tax years 2015/16 and 2016/17. HMRC then issued closure notices on 13 March 2020, concluding that the dividend which had been paid to the taxpayer on 16 December 2016 should have been declared on his 2015/16 tax return, rather than his 2016/17 tax return, as the taxpayer was "entitled" to the dividend before 6 April  2016.
Broadly speaking, a shareholder is liable to tax on a dividend when it becomes "due and payable" (that is the effect of sections 383(1) and 384(1), ITTOIA 2005, read together with section 1168(1), CTA 2010, which deems dividends to be treated as paid on the date when they become "due and payable").
HMRC was of the view that the taxpayer could have enforced payment of the dividend from the date of payment to Nicholas Gould. Therefore, for tax purposes, the dividend should be treated as due and payable on 5 April 2016 and the taxpayer was liable to pay tax in the 2015/16 tax year. This was, in part, based on the wording of regulation 104 of Table A 1985, on which Regis' articles of association were based, and the general principle requiring shareholders to be treated equally.

The taxpayer appealed the closure notices to the FTT. 

FTT decision 

The appeal was allowed.

HMRC argued that because Nicholas Gould was paid an interim dividend that related to the same class of shares prior to the payment to the taxpayer, the latter's interim dividend should have been treated as "due and payable" from the date of payment of Nicholas' dividend. HMRC argued that an enforceable debt was created on the day that Regis paid the dividend to Nicholas. 

HMRC relied on Doherty v Jaymarke Developments (Prospecthill) Ltd 2001 SLT (Sh Ct) 75, as authority for the principle that a company must pay other shareholders of the same class when it pays an interim dividend and that shareholders who are not paid the interim divided have an enforceable debt. 

While the FTT agreed that all shareholders should be treated equally, it declined to follow Doherty. It rejected HMRC's submissions that Regis' articles led to the creation of an enforceable debt. The FTT was also hesitant to anticipate the remedy in a hypothetical claim for enforcement by the taxpayer and declined to find that an enforceable debt would necessarily be created as a result of a successful claim (whether such claim existed or not).

The FTT referred to the judgment in Potel v Commissioners of Inland Revenue 46 TC 658, which confirmed that there is a difference between declaring a dividend and paying a dividend. In the view of the FTT,  income tax in respect of the dividend only became "due and payable" on 16 December 2016. As the taxpayer was not tax resident in the UK during tax year 2016/17, he did not have any tax to pay in respect of the dividend.  

Comment 

As was noted in our previous blog on Jays v HMRC [2022] UKFTT 420 (TC), the point at which dividends are taxed will depend in large part on the underlying factual matrix and applicable corporate law. These cases provide a reminder of the extent to which the tax position can very much depend on other areas of the law. 

These decisions also highlight the need to ensure that (1) sufficiently detailed contemporaneous documentation in relation to the declaring of dividends is created and maintained; and (2) the underlying constitutional documentation of the company concerned is clear in order to minimise the risk of challenge on issues pertaining to timing. 

The decision can be viewed here.