Distribution of share premium subject to income tax

In Alexander Beard v HMRC [2022] TC08460, the First Tier Tribunal (FTT) found that distributions of share premium by a listed PLC incorporated in Jersey were subject to UK income tax as dividends and not capital gains tax.

• Mr Beard was a shareholder in and employee of Glencore.
• As a result of a restructuring of Glencore, profit entitlements which had been granted to employees, including Mr Beard, were exchanged for shares.
• As a result of the restructuring, Mr Beard’s shareholding was in a Jersey incorporated Swiss domiciled company.
• The restructuring created some $9bn of ‘qualifying reserves’ for Glencore under Swiss law meaning they could be repaid to shareholders without Swiss withholding tax.
• Glencore paid distributions in various tax years out of these qualifying reserves, deducting the distributions from the share premium account rather than retained earnings.
• Mr Beard included the distributions received in his Tax Returns subjecting them to UK capital gains tax rather than income tax as he contended they represented capital distributions.
• HMRC raised enquiries contending the distributions should be subject to income tax rather than capital gains tax.
• Mr Beard appealed to the FTT.

The FTT found that the payments were dividends for UK tax purposes and should be subject to income tax accordingly finding:

• The correct approach to determine the treatment derived from case law and was to:
  • Consider the meaning of ‘dividends’ as a matter of English Law and then look at the relevant foreign law (in this case Jersey), and
  • Decide whether the payment under foreign law fulfils that English law definition.
• The distributions were dividends for the purpose of English law, there was nothing in Jersey law to indicate the distributions cannot be dividends for English law purposes:
  • Jersey law used the term distribution rather than dividend.
  • Dividend was undefined in Jersey legislation but was used interchangeably with distribution in general use.
  • At the time of the dividend payments Jersey law stated that share premium could be used to make distributions.
  • The mechanism for paying the distribution was the same whether paying out share premium or trading profits, nothing in the payment mechanism used assimilated the dividend to capital.  Jersey law went further than English law in allowing share capital to be distributed.
• The dividends were not of a capital nature as:
  • There was no Jersey law mechanism to protect shareholders from directors distributing share premium.
  • Jersey law definition of distributable profit makes everything distributable unless otherwise stated, this included share premium.
  • The form of the distribution did not support that the distribution was capital in nature. Glencore had two ways under Jersey law to distribute, one way would have resulted in a capital repayment, however, the way in which it distributed represented a dividend which had not, under Jersey law, been assimilated into capital.

UPDATE: This case has been appealed to the Upper Tribunal.

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)
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 [2022] TC08460