Upper Tribunal considers when a dividend becomes 'due and payable' for tax purposes
In HMRC v Gould [2024] UKUT 00285 (TCC), the Upper Tribunal (UT) dismissed HMRC's appeal and confirmed that an enforceable debt arises when a company pays an interim dividend to one shareholder but not another shareholder of the same class.
Background
Peter Gould, and his brother Nicholas Gould, were the principal shareholders in Regis Group (Holdings) Ltd (Regis), each holding 28.3% of the voting A shares and 50% of the non-voting B shares. The remaining 43.4% of the A shares were held by a family trust of which they were the joint life tenants (the Settlement).
In 2015, Regis had surplus cash from property disposals and its Chief Financial Officer recommended that it should distribute the surplus cash by way of dividend. On 31 March 2016, the board of directors of Regis resolved to pay an interim dividend of £40m.
Prior to the payment of the interim dividend, the trustees of the Settlement directed Regis to pay its share directly to Peter and Nicholas. An interim dividend of £20m was paid to Nicholas on 5 April 2016. However, the interim dividend of £20m to Peter, was not paid until 16 December 2016.
The issue
The timing of the two dividend payments meant that, prima facie, each payment arose in a different tax year. The payment to Nicholas took place in tax year 2015/16, whereas the payment to Peter took place in tax year 2016/17.
This was important because Peter was non-resident in the UK for tax year 2016/17 and therefore no income tax was payable by him on the dividend.
HMRC argued that the relevant date, for income tax purposes, was not the date of the dividend payment but the date the dividend became 'due and payable'. HMRC relied on section 1168(1), Corporation Tax Act 2010 (CTA 2010), which provides that "[f]or the purposes of the Corporation Tax Acts dividends are to be treated as paid on the date when they become due and payable".
It was HMRC's position that the dividend became 'due and payable' at the time payment was made to Nicholas on 5 April 2016, because Nicholas and Peter were both shareholders of the same class and must be treated equally. HMRC argued that once payment had been made to Nicholas, Regis became indebted to pay Peter and he could have enforced that debt immediately.
HMRC issued closure notices on the basis that the dividend paid to Peter was taxable in 2015/16. Peter appealed the closure notices to the First-tier Tribunal (FTT).
FTT decision
The appeal was allowed.
FTT agreed that a dividend became due and payable for the purposes of section 1168(1), CTA 2010, when the shareholder entitled to the dividend has a right to enforce payment.
It also accepted the principle that shareholders of the same class must be treated equally.
However, the FTT ultimately allowed the appeal because it did not accept that the payment of a dividend to Nicholas gave rise to an enforceable debt for Peter.
HMRC appealed to the UT.
UT decision
The appeal was dismissed.
The UT disagreed with the FTT on the core issue of whether an enforceable debt arose. When a company declares a final dividend at a general meeting it gives rise to an enforceable debt, and the UT saw no reason why the circumstances of the present case would result in a different outcome.
However, the UT then went on to consider the following two alternative arguments that had been put forward by Peter and considered by the FTT:
1. The principle in re Duomatic Ltd [1969] 2 Ch 365, was engaged. All the shareholders had agreed to vary the articles of association so that the directors were permitted to pay dividends at different times without creating a debt.
2. Prior to the directors resolving to pay the interim dividend, Peter waived his right to enforce payment of the dividend when the dividend was paid to Nicholas. That waiver was supported by consideration and was therefore binding on Peter and Regis.
The UT agreed with the FTT that both of these arguments should succeed and HMRC's appeal was therefore dismissed.
Comment
The key takeaway from this decision is that the first payment of an interim dividend to a shareholder will create an enforceable debt in favour of all other shareholders of the same class.
The date of that first payment will therefore be treated as the date subsequent dividends are paid for tax purposes, unless the articles are varied or there is a binding agreement to the contrary, as was the case here.
This should be factored in when companies are considering dividend payments which they wish to make in a tax-efficient manner.
The decision can be viewed here.
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