Jays and Another
| Jurisdiction | UK Non-devolved |
| Judgment Date | 22 September 2022 |
| Neutral Citation | [2022] UKFTT 420 (TC) |
| Court | First Tier Tribunal (Tax Chamber) |
[2022] UKFTT 420 (TC)
Judge Amanda Brown KC, Ms Gill Hunter
First-Tier Tribunal (Tax Chamber)
Income tax – Whether declared but withheld and unpaid dividends represent taxable income – ITTOIA 2005, s. 384(1) – No – Validity of requirements for discovery assessment – Would have been valid – Appeal ALLOWED.
In Jays & Anor [2022] TC 08639, the First-tier Tribunal concluded that there was no charge to income tax on dividends declared but retained as unpaid.
Mr Marcus Jays (MJ) and Mrs Karen Jays (KJ) (the Appellants) appealed against discovery and penalty assessments in respect of income tax under-assessed on dividends declared by Questor Properties Ltd (QPL), a property management company in which MJ and KJ jointly held the single issued share and were, respectively, sole director and company secretary. QPL was trading successfully but encumbered by punitive interest costs that related to previous hedging contracts. MJ wished to attract external equity investors and believed that strong dividend declarations would make the business more attractive but the company’s bankers wanted to limit dividends paid to prevent substantial profit extraction from the business. MJ and KJ therefore provided an undertaking to the bank limiting the payment of dividends and providing that any dividends in excess of those limits shown in the company’s accounts would be credited to blocked shareholder accounts and written back in subsequent accounts. Subsequently dividends were declared (found by the FTT to be final dividends) and shown in the company’s accounts that were in excess of the agreed limits, with the excess being credited to ‘directors blocked accounts’ and shown in the financial accounts as ‘other creditors’. The excess dividends were later written back in subsequent accounts.
The Appellants argued that the dividends did not come within the income tax charge in ITTOIA 2005, s. 384(1) because they had not been paid, and that because of the undertaking given to the bank there was no enforceable debt.
HMRC submitted that as the dividends were final dividends, they were enforceable and that crediting them to the appellants’ ‘directors blocked account’ represented payment, and further that the subsequent write back was a capital contribution by the Appellants.
The Tribunal determined that the shareholders had no immediate right to enforce payment of the dividend when declared. Although the terms of the bank covenant did not legally prevent payment, a breach of the undertaking would have enabled the bank to suspend all borrowings and call in all the company’s loans, so that MJ’s recommendation that the dividends should be declared subject to the stringent rules in the undertaking, being made in accordance with his fiduciary duties as director, had the legal effect of deferring the date on which the dividends were payable. In accordance with the judgment in Potel, it was clear that the dividends were not paid for the purposes of s. 384(1). They also dismissed HMRC’s unpleaded submission that, as there was a single share, it was impermissible for QPL to stipulate an unequal deferral, on the basis that if the dividend had not been declared in accordance with company law (which was not in fact their opinion), the dividend would have been invalid and therefore there would have been no income within the charge to tax.
Having reached the conclusion that the blocked dividends were not chargeable, it was strictly unnecessary to consider the validity of the discovery assessments. However, in the event that their conclusion with regard to chargeability was incorrect, the Tribunal found that the absence of any white space disclosure of the unpaid dividends meant that HMRC could not have been reasonably expected to be aware of the situation and were not precluded from raising a discovery assessment on MJ. In the case of KJ (who had not made self-assessment returns for the years in question), there would have been no liability to notify in respect of the dividends actually paid (below the higher rate income tax threshold) but inclusion of the dividends withheld would have meant the there was a liability and an assessment could be made under TMA 1970, s. 36(1A) unless there was a reasonable excuse. As no evidence had been provided in KJ’s witness statement in relation to reasonable excuse the Tribunal would have no alternative but to uphold the assessment.
In general, if a final dividend is declared by a company, the declaration of the dividend creates an immediate debt (see In-Depth. However, in this case, the Tribunal took account of ‘the most unusual factual circumstances’ in the appeals.
Comment by Stephanie Webber, Senior Tax Writer, Croner-i Ltd.
Mr Keith Gordon, Counsel instructed by Stuart Ifield, Accountants appeared for the appellant
Dr Jeremy Schryber litigator of HM Revenue and Customs' Solicitor's Office appeared for the respondents
[1] These appeals concern discovery and penalty assessments issued to each of Mr Marcus Jays (MJ) and Mrs Karen Jays (KJ) (together Appellants) in respect of income tax said to have been under assessed on dividends declared by Questor Properties Limited (QPL) as follows:
- For MJA discovery assessment issued by HM Revenue & Customs (HMRC) on 19 November 2019 pursuant to section 29 Taxes Management Act 1970 (TMA) for tax year ended 5 April 2016 in the sum of £14,254.93;A penalty assessment initially issued on 20 November 2019 pursuant to Schedule 24 Finance Act 2007 (Sch 24) in respect of the error assessed by the discovery assessment referred to at [1(1)(a)] above in the sum of £5,737.60. The penalty amount was determined on the basis that the error was made as a consequence of deliberate conduct by MJ. The penalty was subsequently amended on 21 July 2021on the basis that MJ's conduct was careless rather than deliberate. The amended penalty was in the sum of £2,128.23. The amended penalty was suspended.
- For KJA discovery assessment issued on 19 November 2019 pursuant to section 29 TMA for tax year ended 5 April 2015 in the sum of £3,990.15;A discovery assessment on 19 November 2019 pursuant to section 29 TMA for tax year ended 5 April 2016 in the sum of £23,197.77;A discovery assessment on 19 November 2019 pursuant to section 29 TMA for tax year ended 5 April 2017 in the sum of £14,738.50;A penalty assessment initially issued on 20 November 2019 pursuant to Schedule 41 Finance Act 2008 (Sch 41) for the deliberate failure to notify a liability to income tax in respect of each of the tax years ended 5 April 2015, 2016, and 2017 in the sum of £16,875.67. The penalty was subsequently amended on 21 July 2021 on the basis that KJ's conduct was careless rather than deliberate. The amended penalty was in the sum of £8,385.28. The amended penalty was suspended.
[2] The Tribunal had the benefit of a full day of detailed oral argument from the parties and the Appellant's skeleton argument. In reaching the decision in this appeal the Tribunal has taken account of everything referenced by the parties, in both written and oral submissions. It is, however, inevitable given the detail of the argument and the quantity of material that not everything in the appeal has been given specific mention in this judgment.
[3] For the reasons set out in this judgment the Tribunal has concluded:
- In the most unusual factual circumstances in these appeals the dividends declared by QPL but retained as unpaid and inaccessible did not give rise to an enforceable right to receive the dividends as income in the relevant tax years or, in the end, at all.
- As such, and in accordance with the relevant case law, there was no charge to income tax on the declared dividend.
- It therefore becomes unnecessary to consider whether the burden resting on HMRC in connection with the discovery assessments was met but, for completeness, had a charge to tax arisen all discovery assessments would have been valid.
- The penalty assessments fall away.
[4] On 1 September 2022 HMRC sought a postponement on the basis that their witness, Ms S Johnson, was unavailable to attend the hearing. On the basis that the Appellants formally accepted the witness statement and confirmed no need to cross examine Ms Johnson, Judge Fairpo refused the application.
[5] Following the refusal HMRC sought to admit six additional documents (three in respect of each Appellant): an ADR exit agreement, penalty liability notification and amended assessment. The Appellants objected to the admission of the documents on the basis that they considered it impermissible to rely on the terms of the ADR exit agreement to meet the burden of proof on HMRC to satisfy the requirements of section 29 TMA. However, it was ultimately accepted by Mr Gordon that the overriding objective would be served if the Tribunal were to consider the documents concerning MJ but not KJ. The documents concerning MJ were therefore admitted.
[6] As a consequence of the partial settlement agreed between the parties at the ADR meeting the penalties, though under appeal, did not need to be resolved directly by the Tribunal. In the event that the Tribunal determined, as it has, that no additional income tax was due the penalties fell away. In the event that tax had been due the parties had agreed the basis on which penalties were relevant.
[7] A procedural matter also arose in connection with all three of the witness statements before the Tribunal. Each of the witness statements failed to deal, in a material regard, with matters relevant to the hearing. On the basis that the Appellants had objected to a postponement on the basis of Ms Johnson's unavailability, thereby precluding HMRC from supplementing her witness statement with oral testimony, the Tribunal considered it only fair and just (in accordance with the overriding objective) to prevent either of the Appellants from supplementing their witness...
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