Beard v R & C Commissioners

JurisdictionUK Non-devolved
Judgment Date25 March 2024
Neutral Citation[2024] UKUT 73 (TCC)
CourtUpper Tribunal (Tax and Chancery Chamber)
Beard
and
R & C Commrs

[2024] UKUT 73 (TCC)

Mr Justice Roth, Judge Jennifer Dean

Upper Tribunal (Tax and Chancery Chamber)

Distributions from share premium – Jersey law – Whether the distributions were ‘dividends’ – Yes – And whether the distributions were ‘dividends of a capital nature – No – ITTOIA 2005, s. 402 – First Nationwide considered — Appeal dismissed.

Abstract

In Beard v R & C Commrs [2024] BTC 509, the Upper Tribunal (UT), dismissing an appeal against the First-tier Tribunal (FTT) decision in Beard, found that payments (distributions) debited from a share premium account were dividends and were of an income not capital nature, hence taxable under ITTOIA 2005, s. 402.

Summary

Mr Beard (the appellant) was a shareholder in Glencore International plc (Glencore), a company incorporated in Jersey and domiciled in Switzerland. Between 2011–12 and 2015–16, he received distributions derived from the company’s share premium account (that had arisen from a corporate restructuring). In 2008, Jersey law relating to distributions had been amended to make share premium freely distributable and to remove the doctrine of maintenance of capital (Part 17 of the Companies (Jersey) Law 1991, (Part 17)). The distributions were made under these provisions. This was an appeal against the decision of the FTT that the payments were (i) dividends; and (ii) not dividends of a capital nature.

Were the distributions dividends?

As there is no definition of “dividend” in ITTOIA 2005, the Tribunal considered that it should be given its ordinary meaning, which had been examined by both the FTT and UT in First Nationwide v R & C Commrs ( and ). The UT in First Nationwide held that the meaning of dividend in the tax legislation was a matter of English law. They therefore turned to the Companies Acts for their definition, referring to the Companies Act 1948, which prevented the payment of dividends out of share premium account (that had previously been possible). Crucially, however, they found that this had not changed the ordinary meaning of “dividend” but had simply changed the meaning of “distributable profits” out of which a dividend could be paid, such that a distribution out of share premium account was still a “dividend”. They then considered what the company was permitted to do under its governing law (in First Nationwide, this was the cayman islands), which did allow share premium account to be applied in paying dividends. They then examined the approach taken by the FTT in the current case, which was: first, to consider the meaning of dividend under English law and then consider the foreign law governing the relevant payment; and second, to decide whether the payment made under foreign law fulfils the definition of dividend under English law. Here the UT diverged from the FTT, as they believed that the test established in First Nationwide corresponded only to the first part of the FTT’s approach. Nevertheless, applying only the first part of their approach they agreed with the FTT that the distributions fell within the ordinary meaning of a dividend for English law purposes and that there was nothing in Jersey law to indicate that the distributions could not be treated as fulfilling the English law definition; accordingly, the distributions constituted “dividends” within ITTOIA 2005, s. 402.

Were the dividends of a capital nature ((ITTOIA 2005, s. 402(4))?

The expression “dividend of a capital nature” in ITTOIA 2005, s. 402(4) is not defined in statute and was introduced from 6 April 2005 as a product of the Tax Law Rewrite project; consequently the appellant sought to argue that earlier authorities decided by reference to a previous statutory regime (including First Nationwide) should not be followed and that the FTT had erred in law. However, the Tribunal considered that this did not prevent reference to earlier authorities in examining basic concepts such as “income” and “capital”. Having considered the explanatory notes to ITTOIA 2005, which explain that it is necessary to determine whether a payment is of an income or capital nature, by reference to local law, they also disagreed with the argument that the effect of ITTOIA 2005, s. 402(4) was to create a third category of receipt, being a dividend from what is treated under the law of the company as the capital of the company and is a receipt of a capital nature.

The Tribunal were assisted by authorities including the Court of Appeal in R & C Commrs v First Nationwide, which distinguished between income payments and (for companies not in liquidation) payments by way of authorised reduction of capital. They also cited IR Commrs v Reid’s Trustees, in which the House of Lords concluded that the correct test of whether there had been a reduction in capital was to determine whether the capital of the company remained intact post distribution, and Rae v Lazard, which determined that: that question was to be answered according to local law and that the machinery used for the distribution of assets, not the source of those assets was the determining factor (an approach also emphasised in First Nationwide. The FTT in the current case had found that a payment made under Part 17 of the Jersey code was made out of distributable profits and the UT considered that this was a finding of fact that could not be challenged by the appellant. They agreed that a distribution of share premium made under Part 17 was not a payment of capital nature because the company was not using a mechanism that covered a reduction in capital.

Finally, the Tribunal considered whether their approach meant that ITTOIA 2005, s. 402(4) had no effect. In their view (and citing also First Nationwide) there could be cases “where, on a true analysis of the facts, it is possible to identify a declaration of a dividend as being other than a payment of income”. For example, in Sinclair v Lee [1993] 3 WLR 498, shares allotted by way of dividend to shareholders as part of a demerger that compensated them for the fall in value of the company whose subsidiary was demerged could not sensibly be regarded as income.

For reasons similar to those of the FTT, the UT therefore dismissed the appeal.

Comment

The distributions in question in this case amounted to approximately £150m in total, therefore clearly substantial amounts of tax were at stake. Despite the very technical arguments on both sides, ultimately the principles established in R & C Commrs v First Nationwide that “dividend” takes its ordinary meaning in English law and that whether it is of a capital or income nature depends on the mechanism for making the distribution were affirmed.

Comment by Stephanie Webber, Senior Tax Writer, Croner-i Ltd.

Mr Malcolm Gammie KC, Counsel, instructed by Keystone Law, appeared for the appellant

Mr David Milne KC and Ms Calypso Blaj, Counsel, instructed by the General Counsel and Solicitor to His Majesty's Revenue and Customs, appeared for the respondents

DECISION
Introduction

[1] Mr Beard is a UK resident and a shareholder in Glencore PLC (“Glencore”), a publicly listed company incorporated in Jersey and domiciled in Switzerland. He had acquired his shares upon the corporate restructuring of the company in 2011, pursuant to profit participation certificates issued to him as an employee. As a shareholder, Mr Beard received cash distributions paid in each of the tax years 2011–12 to 2015–16. In each case, those distributions were paid from the share premium account of the company; they were not debited to retained earnings. In 2015, Glencore further made an in specie distribution to its shareholders of shares in a subsidiary company, Lonmin plc (“Lonmin”), and as a result Mr Beard received a distribution of Lonmin shares. Like the First-tier Tribunal (“FTT”), we shall refer to all these distributions as “the Distributions”.

[2] On 8 October 2019, HMRC issued a closure notice assessing Mr Beard to income tax on the Distributions. Mr Beard appealed to the FTT on the basis that the Distributions were distributions of a capital nature which were subject to capital gains tax and not income tax in the UK.

[3] By its decision (“the Decision”) the FTT held that the Distributions were dividends of a non-UK resident company and that they were not dividends of a capital nature. The FTT treated the in specie Distribution paid to Mr Beard in the 2015/16 tax year in the same way as the Distributions paid in cash.

[4] Permission to appeal was granted by the FTT on 30 June 2022 in respect of two grounds: (i) whether the payments of share premium made by Glencore were dividends within s. 402 Income Tax (Trading and Other Income) Act 2005 (“ITTOIA 2005”); and (ii) whether the payments were “dividends of a capital nature” within s 402 (4) ITTOIA 2005.

[5] In relation to the in specie Distribution, the FTT recorded in its decision on the application for permission to appeal:

… it was agreed by the Appellant at the Tribunal that the in-specie dividends should be treated in the same way as the cash dividends. No particular finding in respect of the in-specie dividends was made.

[6] Permission to appeal was granted by the Upper Tribunal (the “UT”) on 21 October 2022 in respect of a third ground concerning the treatment of the in specie Distribution and whether that Distribution should be taxed in the same manner as the cash Distributions. However, as HMRC had objected to this ground as inadmissible on the basis that it was not argued below, the permission granted was expressly without prejudice to consideration of its admissibility.

[7] Mr Beard was represented by Mr Gammie KC. HMRC were represented by Mr Milne KC and Ms Blaj. We are grateful to Counsel for their full and helpful written and oral submissions. We have not found it necessary to make specific reference in our decision to all of the submissions or materials to which we were referred but we have taken all of them into account. References below to paragraphs in the form...

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