HM Revenue and Customs (HMRC) have been unsuccessful in their appeal against a decision that a dividend received by a man in the 2016/17 tax year was paid for Income Tax (IT) purposes in that year, even though another shareholder had received the dividend in the 2015/16 tax year.
The man and his brother were directors and shareholders of a family company. On 31 March 2016, the board resolved to pay an interim dividend of £40 million. The brother received the dividend on 5 April but it was not paid to the man until 16 December. Having relocated to Jamaica, he was non-resident in the UK for tax purposes in 2016/17 and would therefore not pay IT on the dividend if it were paid in that year. There was doubt about his residency status in 2015/16.
After enquiring into the man's tax returns, HMRC issued closure notices amending the returns to show the dividend as taxable in 2015/16. The man appealed to the First-tier Tribunal (FTT). At issue was when the dividend became 'due and payable' under Section 1168(1) of the Corporation Tax Act 2010.
The FTT upheld the appeal on the grounds that a shareholder who was not paid an interim dividend at the same time as other shareholders did not have a debt claim against the company. Although that was sufficient to decide the appeal, the FTT also considered alternative arguments in the event that a debt had been created. It found that all the shareholders had agreed to vary the articles of association so that the directors could pay dividends at different times without creating a debt. The man had also waived his right to enforce payment of the dividend: that waiver was for consideration and therefore binding. HMRC appealed those decisions to the Upper Tribunal (UT).
It was common ground that a dividend is 'due and payable' for the purposes of Section 1168(1) when a shareholder has the right to enforce payment. The UT took account of case law establishing that, unlike the declaration of a final dividend, a resolution to pay an interim dividend does not create a debt. However, a debt was created when the dividend was paid to some of the shareholders but not others. The FTT had been wrong to find otherwise, although the UT noted that this would only be a material error of law if HMRC's other grounds of appeal succeeded.
The UT concluded that the FTT had been entitled to find that the shareholders had intended to informally amend the company's articles of association, even though they had not had the articles in mind when agreeing how the dividend would be paid. The man had accepted that he would not be able to enforce payment of the dividend in the 2015/16 tax year, and was content to take any risk of it not being paid. He had waived his right to enforce payment before the board resolved to pay the dividend, on the basis that the company agreed to pay it. There was therefore consideration. HMRC's appeal was dismissed.