Distributions in specie made from a share premium account were confirmed by the Upper Tribunal to be income distributions and not capital. The UT considered if the payments by a non-resident company satisfied the definition of a dividend for the purpose of English law.
In Alexander Beard v HMRC [2024] UT/2022/000084, the UT heard:
- Mr Beard is a UK resident and shareholder in Glencore PLC (Glencore), a publicly listed company incorporated in Jersey and domiciled in Switzerland.
- Following a corporate restructuring of the company. the taxpayer acquired shares in 2011 as part of a profit participation exercise for employees.
- He received cash distributions in each of 2011-12 to 2015-16 paid from the share premium account of the company.
- In 2015, Glencore also made an in specie distribution of shares in a subsidiary company, Lonmin plc and Mr Beard was a recipient.
- In October 2019, HMRC issued a closure notice assessing Mr Beard to Income Tax on the distributions.
Mr Beard appealed to the First Tier Tribunal (FTT) on the basis the in specie distribution was capital in nature and therefore subject to Capital Gains Tax.
- The FTT held that all the distributions from a non-UK resident company were income distributions.
- Permission to appeal was granted by the Upper Tribunal (the UT).
The UT confirmed that in accordance with UK case law, in determining the correct tax treatment of a payment by a non-UK company such as Glencore, the correct approach is to establish the character of the payment under the corporate law of the jurisdiction in which the paying company is incorporated and apply UK tax legislation to that payment. The appeal necessarily concerned both UK tax legislation and Jersey company law.
- In UK tax law, the term dividend does not include dividends of a capital nature.
- In UK company law, share premium is treated as equivalent to a company's share capital rather than being categorised as distributable reserves in accordance with the 'maintenance of capital' principle.
- The doctrine of the maintenance of capital was removed from Jersey company law as a result of changes made in 2008 and all parties agreed before the FTT that this is where Jersey and English law diverged.
- In Jersey the test for a company to be able to make a distribution relates to its solvency. It does not have to be made from the profits of the company. Whilst the term distribution is defined, the law refers to dividends but does not define them.
- Representatives for Mr Beard argued a distribution debited to a share premium account reduces the amount on a capital account. They asserted that in making the changes in 2008, if Jersey legislature had intended all distributions from a share premium account to be characterised as income or profit it would have expressly said so.
Both the FTT and the UT considered the case of First Nationwide v HMRC [2010] SFTD 408 and [2009] UKFTT 24 (TC). The UT found that the FTT had correctly concluded that the distributions made by Glencore constituted dividends for s.402 ITTOIA 2005 and they were not capital in nature.
The appeal was dismissed.
Useful guides on this topic
Dividend Tax (freeview)
How do you tax dividend income? An at a glance guide to the dividend allowance and dividend tax rates.
Dividend tax (subscriber guide)Dividend tax (subscriber guide)
This practical tax guide explains how dividends are taxed on or after 6 April 2016. It includes HMRC's own examples, more detailed examples, including an Owner Managed Business (OMB) section together with tax planning tips.
How to appeal an HMRC decision
Disagree with an HMRC decision? How to appeal, what type of decision can you appeal and what are your different options when you disagree with HMRC? What are the key steps in making an appeal?
External links
Alexander Beard v HMRC [2024] UT/2022/000084
