Establishing the timing of a corporate dividend can be an important feature in a number of transactions where value is being extracted from a company.  In the recent case of HMRC v Gould [2024] UKUT 00285 (TCC) (“Gould”), the United Kingdom’s Upper Tribunal (“UT”) has dismissed H.M. Revenue & Custom’s (“HMRC”) appeal against the decision of the First Tier Tribunal (“FTT”) and has found that, in this instance, an interim dividend was not considered to be “paid” for income tax purposes as the receiving shareholder had waived his right to enforce his dividend, and the relevant company’s articles of association were amended prior to the payment of the interim dividend. The case is also valuable for illuminating a point of law, owing to the UT confirming that the FTT was wrong to have decided that dividends were not ‘due and payable’ where a company with Table A articles of association pays an interim dividend to one shareholder but not to another.

Background

The board of directors of a private limited company, Regis Group (Holdings) Limited (the “Company”), resolved to pay an interim dividend of £40 million, of which £20 million was paid to one shareholder, Nicholas Gould (“NG”), on 5 April 2016, and £20 million was paid to the other shareholder, Peter Gould (“PG”), on 16 December 2016.  PG had elected to delay receipt of his dividend payment to the 2016-2017 UK tax year (in which the 16 December 2016 dividend payment fell).  This deferral was caused by PG’s doubts relating to whether he was resident outside the UK in the previous tax year.  By contrast, PG was resident outside the UK in the 2016-2017 UK tax year; if the dividend was treated as paid in that later tax year then tax would not be charged on PG’s dividend receipt. 

According to the relevant UK taxation legislation, “[t]ax is charged...on the amount or value of the dividends paid...in the tax year”,[1] and a dividend is subject to income tax in the hands of a shareholder when it becomes “due and payable”.[2] The issue before the FTT was whether the dividend became ‘due and payable’ to PG on 5 April 2016 when the other shareholder NG received his interim dividend payment.

HMRC argued before the FTT that, for income tax purposes, PG should be treated as having received his interim dividend at the same time as NG on 5 April 2016.  If the HMRC argument was supported by the FTT, PG would be liable to pay income tax on the dividends in the tax year 2015-2016.  However, the FTT rejected HMRC’s submissions.  HMRC subsequently appealed to the UT.

Where a company pays an interim dividend to one shareholder, but not to another of the same class, does the company owe a debt to the second shareholder?

The Company’s articles of association were in the form of Table A, as contained in the Companies (Tables A to F) Regulations, SI 1985/805. Article 104 of Table A provides that “except as otherwise provided by the rights attached to shares, all dividends shall be declared and paid according to the amounts paid up on the shares on which the dividend is paid.”[3]

HMRC’s argument before the FTT relied on the effect of Article 104 and also on the principle that shareholders in a company holding the same class of shares must be treated equally. HMRC had submitted that once the Company had paid a dividend to NG on 5 April 2016, the Company became indebted to also pay the dividend to PG.  On that basis, PG was liable to pay tax on the dividend in the 2015-2016 UK tax year.

At first instance, the FTT had rejected HMRC’s argument.  The FTT had held that Article 104 and the principle of equal treatment of shareholders did not mean that PG’s dividend became payable on 5 April 2016. A shareholder who is not paid an interim dividend at the same time as other shareholders might have other remedies, “but did not have a debt claim against the Company”.[4]

On appeal, the UT considered Article 104 of Table A articles and disagreed with the FTT’s reasoning in relation to the effect of Article 104. The UT found that in the absence of an agreement to the contrary, Article 104 is consistent with the principle that shares confer the same rights on all holders of shares. Therefore, if all shares are fully paid up, Article 104 requires all shareholders to be paid an equal dividend per share, subject to any provision governing the rights attaching to the shares.[5]

The UT also rejected the FTT’s argument that Article 104 of Table A articles applied only to final dividends and not to interim dividends.  Once again following the principle that shares of the same class confer the same rights and impose the same liabilities,[6] the UT found there was no reason to distinguish between final dividends and interim dividends at the stage where the directors have not only resolved to pay a dividend but have also actually made payment to some but not all of the shareholders. Where one shareholder is not paid their share of an interim dividend, the UT held that a debt arises at the time the other shareholders are actually paid.  Accordingly, PG had an enforceable debt (against the Company) once the interim dividend had been paid to NG.

On this basis, the UT found the FTT had made a mistake in law. However, for the reasons set out in the remainder of this article, that error in law was not sufficient to overturn the FTT’s decision and grant HMRC’s appeal.

Why was the FTT’s error in law not enough for the taxpayer’s appeal to be granted?

The UT concluded that while the FTT had made a mistake in law, that was not, by itself, sufficient to overturn the FTT’s earlier judgment. 

The FTT had concluded that an informal agreement had been entered between the company’s shareholders, whereby the shareholders had agreed to vary the Company’s articles of association to allow dividends to be paid at different times without creating a debt.  The UT agreed with the FTT’s conclusion, finding no basis to disagree with the factual determination of the FTT at first instance. 

Furthermore, the UT held that the FTT had also been entitled to conclude that there was a contractually binding agreement by PG to waive his right to be paid his share of the dividend at the same time as NG. On this basis, PG should not have been treated as having received his interim dividend at the same time as NG on 5 April 2016.

As a result, the FTT’s mistake in law was not decisive.  The correctly stated legal position as set out by the UT (that where one shareholder is not paid their share of an interim dividend, a debt arises at the time the other shareholders are actually paid) was not decisive given the UT’s conclusion on the factual position. The Company’s articles had been varied, by an informal agreement, to allow dividends to be paid at different times without creating a debt, and PG had waived his right to receive a dividend at the same time as NG.   

Owing to those decisive facts being established by the FTT and supported by the UT, the FTT’s mistake in law did not result in HMRC’s appeal being granted.

Summary

This decision highlights the need to ensure that the constitutional documentation of the company and any discussions relating to the declaration, and timing, of dividends are clearly recorded. 

When planning the extraction of value from a company, the decision in Gould may well be helpful to advisers in practice, particularly when faced with shareholders wishing to receive dividends at different times on shares of the same class in a variety of corporate acquisitions, reorganisations, and restructurings. 

[1]              Section 384(1) of the Income Tax (Trading and Other Income) Act 2005 (“ITTOIA 2005”). 

[2]               Section 1168(1) Corporation Tax Act 2010 provides that ‘[f]or the purposes of the Corporation Tax Acts dividends are to be treated as paid on the date when they become due and payable’. Section 384(1) ITTOIA 2005 falls within the definition of the Corporation Tax Acts because it is an enactment relating to the taxation of company distributions (see Schedule 1 Interpretation Act 1978).

[3]               Paragraph 12, Gould.

[4]               Paragraph 15, Gould.

[5]               Paragraph 36, Gould.

[6]               Paragraph 39, Gould.