First Nationwide
| Jurisdiction | UK Non-devolved |
| Judgment Date | 12 January 2010 |
| Neutral Citation | [2010] UKFTT 24 (TC) |
| Date | 12 January 2010 |
| Court | First Tier Tribunal (Tax Chamber) |
[2010] UKFTT 24 (TC)
Judge Roger Berner (Chairman)
John Gardiner QC and Philip Walford, instructed by Slaughter and May, for the Appellant
Malcolm Gammie QC, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents
Stocklending agreement - deduction for management expenses in respect of manufactured dividends - ICTA Sch. 23A, Income and Corporation Taxes Act 1988 schedule 23A subsec-or-para 1para. 1(1) - Income Tax (Manufactured Overseas Dividends) Regulations 1993 - whether dividends paid by a Cayman Islands company out of share premium account are "dividends" and "overseas dividends" - ICTA Income and Corporation Taxes Act 1988 section 737A section 730Asss. 737A and 730A - whether a sale of preference shares and a subscription for preference shares is a sale and repurchase of securities
The tribunal decided that certain dividends paid by a Cayman company to the UK were income in nature, notwithstanding that the dividends were paid out of the company's share premium account. The fact that share premium was freely distributable under local Cayman law had to be respected and accordingly the dividends had to be regarded as income in nature.
The taxpayer was a UK resident unlimited company that was a wholly-owned investment company subsidiary of a building society. The two companies formed part of the same group for the purposes of TCGA 1992, Taxation of Chargeable Gains Act 1992 section 170s. 170. The taxpayer was an investment company within the meaning of ICTA 1988, Income and Corporation Taxes Act 1988 section 130s. 130 and was not an approved UK intermediary ("AUKI") within the meaning of reg. 2(1) of the Income Tax (Manufactured Overseas Dividends) Regulations 1993 (SI 1993/2004).
The taxpayer acquired certain preference shares in a Cayman company by way of a stock loan from a bank. The shares carried a right to two substantial quarterly dividends, after which the dividend rights reduced significantly. Before those dividends became payable, the taxpayer sold the shares outright to a non-UK third party, and the dividends were paid to that third party out of the Cayman company's share premium account, as was permitted under Cayman law. Although the taxpayer had not received the dividends itself, it was still obliged under the terms of the stock loan to pay a manufactured dividend to the bank. The taxpayer then subscribed for further preference shares in the Cayman company in order to close out the stock loan with the bank.
The taxpayer subsequently claimed a deduction for the cost of the manufactured dividend in the sum of £51m as a management expense and regarded the sale of the preference shares to the third party as a capital gain, which was elected into the parent company. The taxpayer appealed against an amendment made by HMRC to its corporation tax self-assessment for the relevant accounting period excluding the deduction of £51m for expenses of management.
Whether the dividends paid out of the share premium account constituted income or capital; whether the dividends were "dividends" and "overseas dividends" within the meaning of ICTA 1988, Income and Corporation Taxes Act 1988 schedule 23A subsec-or-para 1Sch. 23A, para. 1(1); and whether a subscription for preference shares was a purchase of shares which constituted "buying similar securities" within ICTA 1988, Income and Corporation Taxes Act 1988 section 730A section 737Ass. 730A and 737A.
The First-tier Tribunal (Roger Berner) (allowing the appeal) said that the dispute concerned whether or not the preference dividends were overseas dividends. If they were, then reg. 4(1)(c) of the 1993 Regulations would apply so as to treat the manufactured dividends as expenses of management of the taxpayer and consequently they would be deductible under ICTA 1988, Income and Corporation Taxes Act 1988 section 75s. 75.
The legislation had to be construed purposively, but there was no basis for ascribing any meaning to "dividend" in that context that was different from the ordinary understanding of that term as a matter of legal machinery. Here it was accepted that the preference dividends were lawful dividends as a matter of Cayman Islands law, and that the concepts of that law were analogous to the same concepts under English law. In that respect, therefore, it seemed that the enquiry need not go any further. That was not mere labelling; the payments were in substance dividends under Cayman Islands law, the machinery of which was recognisable in the context of English law. Moreover, the dividend did not have to be a payment of part of the profits of the company in the economic or commercial sense so long as it was profit in the legal sense of profits which the law allowed a company to distribute to shareholders as dividends.
The question whether a distribution was received as capital or income was determined not by the source from which the relevant assets were distributed, but by the machinery employed in their distribution. Although that question was to be determined according to English law, the factual situation, including that of the applicable foreign law, had to be examined in order to apply the English law. That involved determining the true nature of the foreign possession in respect of which the relevant distribution or payment was made. The key question in determining the nature of the preference dividends for that purpose was the consequence of those dividends on the corpus of the foreign preference shares.
The corpus of the shares remained intact after the payment of the large dividends even though the shares abated in market value after the payment of the dividend and future dividends were to be vastly reduced. In Courtaulds Investments Ltd v Fleming (HMIT)TAX(1969) 46 TC 111, Buckley J held that the effect of the distribution out of the Italian share premium reserve was to lop from the tree part of the engrafted member consisting of the share premium reserve and that the dividends did not leave the shares intact in that case (at pp. 126-127). In the present case, on the proper analysis of Cayman Islands law, the corpus of the assets in question was the nominal share capital only of the preference shares. Unlike the position in Courtaulds Investments, there was no legal reserve in Cayman Islands law with which to equate share premium reserve, nor was the distribution under Cayman Islands law a distribution of capital. Whereas in Courtaulds Investments it was not correct to assimilate the position of the Italian company to that under English law prior to 1948, that was on the basis that it had been found that under Italian law the distribution from share premium reserve was a distribution of capital. There was no such finding here; share premium account under Cayman Islands law was not capital, but was distributable profit. The dividends were part of the fruit, not part of the tree (IR Commrs v Reid's TrusteesELR[1949] AC 361 and Rae (HMIT) v Lazard Investment Co LtdTAX(1963) 41 TC 1 considered).
Furthermore, the subscription by the taxpayer for the second issue of preference shares did not constitute "buying similar securities" within ICTA 1988, Income and Corporation Taxes Act 1988 section 730A section 737Ass. 730A and 737A so as to bring the transaction within the sale and repurchase of securities (repo) rules. The normal meaning of a "purchase" or "buying" in relation to shares or securities of a company (whether a company incorporated under English law or under foreign law) excluded a subscription, unless the context indicated otherwise. There was no such contextual indication in s. 730A or 737A. If Parliament had wished to extend the ambit of those sections to transactions involving a subscription for shares, special provision would have to have been made to that effect. Accordingly, 730A and s. 737A did not apply to the subscription by the taxpayer of the second preference shares, and the taxpayer had no liability to tax under ICTA 1988, Income and Corporation Taxes Act 1988 schedule 23 subsec-or-para 4Sch. 23, para. 4(4) on a deemed manufactured dividend.
1. First Nationwide ("the Appellant"), a UK resident unlimited company that is a wholly-owned investment company subsidiary of Nationwide Building Society ("the Society"), appeals against an amendment dated 23 April 2008 made by HMRC to the Appellant's corporation tax self-assessment for the accounting period ended on 31 March 2004 excluding a deduction of £51,000,000 for expenses of management. The Appellant claims the deduction in respect of certain manufactured dividends paid by the Appellant under a stock loan agreement with ABN AMRO bank.
2. John Gardiner QC and Philip Walford appeared for the Appellant. HMRC were represented by Malcolm Gammie QC.
3. The parties produced an Agreed Statement of Facts and Issues which I set out below (references to volume and tab are to the documents bundles produced):
Introduction
1. This statement of agreed facts and issues relates to the appeal against the Respondent's amendment dated 23 April 2008 [Volume B2, tab 50] in respect of a Corporation Tax Self-Assessment of the Appellant for its accounting period ending 31 March 2004 [Volume B2, tab 49].1
The Appellant and other relevant parties
2. At all material times:
(A) First Nationwide, a private unlimited company, was a UK resident and incorporated wholly-owned investment company subsidiary of Nationwide Building Society;
(B) Nationwide Building Society was UK resident and incorporated under the Building Societies Act 1986 and was the parent of the Nationwide group of companies;
(C) First Nationwide and Nationwide Building Society formed part of the same group for the purposes of Taxation of Chargeable Gains Act 1992 section 170section 170 of the Taxation of Chargeable Gains Act 1992 ("TCGA");
(D) First Nationwide was an investment company within the meaning of Income and Corporation Taxes...
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