First Nationwide v HM Revenue and Customs
| Jurisdiction | UK Non-devolved |
| Judgment Date | 18 April 2011 |
| Neutral Citation | [2011] UKUT 174 (TCC) |
| Date | 18 April 2011 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2011] UKUT 174 (TCC).
Upper Tribunal (Tax and Chancery Chamber).
Warren J, Judge Edward Sadler.
Malcolm Gammie QC (instructed by the Solicitor to HM Revenue and Customs) for the appellants.
John Gardiner QC and Philip Walford (instructed by Slaughter and May) for the respondent.
The following cases were referred to in the judgment:
Abbey National Building Society v Building Societies Commission UNK(1989) 5 BCC 259
Barclays Mercantile Business Finance Ltd v Mawson (HMIT) TAXELRTAX[2004] BTC 414; [2005] 1 AC 684; 76 TC 446
Bates, Re ELR[1928] Ch 682
Courtaulds Investments Ltd v Fleming TAX(1969) 46 TC 111
Dalmia Dairy Industries Ltd v National Bank of Pakistan UNK[1978] 2 Ll Rep 233
DCC Holdings (UK) Ltd v R & C Commrs TAXWLR[2011] BTC 13; [2011] 1 WLR 44
Drown v Gaumont-British Picture Corp Ltd ELRUNK[1937] Ch 402; [1937] 2 All ER 609
Duff's Settlement Trusts, Re ELRELR[1951] Ch 923 (CA); [1951] Ch 721
Esso Petroleum Co Ltd v Ministry of Defence ELR[1990] Ch 163
George Wimpey & Co Ltd v IR Commrs TAXWLR[2009] BTC 7,003; [1975] 1 WLR 995
Hill v Permanent Trustee Co of New South Wales Ltd ELR[1930] AC 720
Hoare & Co Ltd, Re ELR[1904] 2 Ch 208
Inchyra (Baron) v Jennings ELR[1966] Ch 37
IR Commrs v Reid's Trustees ELRTAX[1949] AC 361; 30 TC 431
Jenks v Dickinson TAX[1997] BTC 286
McMillan Properties Pty Ltd v Penfold UNK[2001] NSWSC 1173
Marshall (HMIT) v Kerr TAXTAX[1994] BTC 258; 67 TC 56
MCC Proceeds Inc v Bishopsgate Invetsment Trust plc (No. 4) [1999] CLC 417
Memec plc v IR Commrs TAXTAX[1998] BTC 251; 71 TC 77
Mersey Docks & Harbour Board v IR Commrs ELR[1897] 2 QB 316
Omni Securities Ltd (No. 5), Re (2000) CILR 187
Parksho v Singh ELR[1968] P 233
Prospect Properties Ltd (in liquidation) v McNeill and JM Bodden II (1990-91) CILR 171
Quayle Munro Ltd, Re SC1992 SC 24
Rae v Lazard Investment Co Ltd WLRTAX[1963] 1 WLR 555; 41 TC 1
Singh v Board of Inland Revenue TAXWLR[2000] BTC 116; [2000] 1 WLR 1421
Spanish Prospecting Co, Re ELR[1911] 1 Ch 92
Turcan, Re ELR(1889) LR 40 Ch D 5
Verner v General and Commercial Investment Trust ELR[1894] 2 Ch 239
VGM Holdings Ltd, Re ELR[1942] Ch 235
Corporation tax - Expenses of management - Dividends - Stock lending agreement - Sale and repurchase of securities - Deduction for management expenses in respect of manufactured dividends - Whether dividends paid by Cayman Islands company out of share premium account "dividends" and "overseas dividends" - Whether transaction involving subscription for shares could be sale and repurchase of securities - HMRC's appeal dismissed - Income and Corporation Taxes Act 1988, Income and Corporation Taxes Act 1988 section 730A section 737Ass. 730A, 737A, Sch. 23A, Income and Corporation Taxes Act 1988 schedule 23A subsec-or-para 1para. 1(1) - Income Tax (Manufactured Overseas Dividends) Regulations 1993 (SI 1993/2004).
This was an appeal by HM Revenue and Customs against a decision of the First-tier Tribunal ([2010] UKFTT 24 (TC); [2010] TC 00339) that certain dividends paid by a Cayman Islands company out of its share premium account were "dividends" and "overseas dividends" within the Income and Corporation Taxes Act 1988, Sch. 23A, para. 1(1).
The taxpayer was a UK resident unlimited company that was a wholly-owned investment company subsidiary of a building society. It had acquired preference shares in a Cayman Islands 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 Islands company's share premium account, as was permitted under Cayman Islands 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 Islands 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. 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.
The First-tier Tribunal allowed the taxpayer's appeal. 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 ([2010] TC 00339).
HMRC appealed contending, among other things, that since the dividends had been paid out of the company's share premium account, the receipt was not a dividend; or, even if it were a dividend, it was capital in nature in the hands of the recipient.
A further issue arose as to whether the subscription for preference shares constituted "buying similar securities" for the purposes of ICTA 1988, s. 730A and 737A.
Held, dismissing the appeal:
1.As a matter of English law s. 56 of the Companies Act 1948 had taken the share premium account out of the category of divisible profit and prevented it being distributable by way of dividend. However, that did not mean that the ordinary meaning of the word "dividend" had changed. It could be assumed that the UK business community would understand that a dividend could not be paid out of the share premium account of an English company; but equally that under some other jurisdictions, including the Cayman Islands, the amount credited to share premium account comprised distributable profits which could be paid to shareholders as dividends. There was nothing to suggest that a dividend payable out of share premium account was not a dividend as ordinarily understood in England by a commercial man or company lawyer. Accordingly, a distribution out of the share premium account of a Cayman company which was made by the procedure or mechanism of payment ofadividend, was a "dividend" within the manufactured payments provisions.
2.The categorisation in Cayman law of the share premium account as capital or profit was not relevant. Nor was it relevant whether Cayman law would treat a dividend paid out of share premium account as income or capital in the hands of the recipient. However, if the tribunal was wrong in its principal reasons for concluding that the preference dividends were dividends within the manufactured payments provisions, as a matter of Cayman law the share premium account was properly categorised not as capital but as profit available for distribution.
3.Dividends paid out of the share premium account of a Cayman company were ordinarily to be seen as payments of income for English law purposes. The dividend rights in this case were part of the "fruit" and not part of the "tree". Dividend rights that were satisfied otherwise than out of share capital, or a reserve that was assimilated to share capital, were part of the fruit even though they might be exhausted by the payment of a dividend. Such a dividend was the fruit even though it might be harvested in a single crop. It followed that the preference dividends constituted income chargeable under Sch. D, Case V and that they were "overseas dividends" for the purposes of the manufactured payments provisions. (Courtaulds Investments Ltd v Fleming (1969) 46 TC 111 considered.)
4.The sale of the first preference shares and the subscription for further preference shares did not constitute a sale and repurchase of securities within ICTA 1988, s. 737A and s. 730A, as extended by s. 737B(5) and s. 730B(2)(a) to include the case where a person sold securities and bought similar securities. Reading s. 737A in isolation, "buy" could only mean buy existing securities. The word was not to be given a different meaning in s. 737B(5). The similar securities therefore had to be in existence at the very latest when the purchase was completed. A subscription was not in that sense a purchase. (Re VGM Holdings Ltd [1942] Ch 235 applied.)
1.The central issues ("the Dividend Issues") in this appeal are whether each of two distributions made by a company registered under the law of the Cayman Islands and resident there, Blueborder Cayman Ltd ("Blueborder"), to Anglo Irish Bank Corporation plc ("Anglo Irish Bank") was (i) a "dividend" and (ii) an "overseas dividend" for the purposes of the manufactured payments legislation found in Income and Corporation Taxes Act 1988 schedule 23ASchedule 23A to the Income and Corporation Taxes Act 1988 ("ICTA") and the Income Tax (Manufactured Overseas Dividends) Regulations 1993. We shall refer to these provisions as "the manufactured payments provisions". If they were, then corresponding payments, the manufactured dividends, made by the Appellant ("First Nationwide") (a wholly owned investment company subsidiary of Nationwide Building Society ("the Society")) to the London branch of ABN AMRO Bank nv ("ABN AMRO") are deductible by First Nationwide as a management expense; if they were not, then the corresponding payments are not.
2.There is a secondary issue ("the Repo Issue") in relation to Income and Corporation Taxes Act 1988 section 737A section 730Asections 737A and 730A ICTA (as extended by Income and Corporation Taxes Act 1988 section 737B subsec-or-para 5 section 730B subsec-or-para 2subsections 737B(5) and 730B(2)(a)). It is whether the statutory language ("buying similar securities") in the context of the repo provisions includes subscribing for new shares as well as buying shares already in issue.
3.In its self-assessment to corporation tax for the accounting period ended on 31 March 2004, First Nationwide had included a deduction of £51m for expenses of management (being the payment of manufactured dividends...
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