Alexander Beard v The Commissioners for HMRC

A payment by a non-UK company is a dividend for section 402 of the Income Tax (Trading and Other Income) Act 2005 if, under the company’s local law, it is made by the mechanism used to pay dividends. The source account’s label is not determinative.

Whether such a dividend is of a capital nature depends on the mechanism of distribution and whether the company’s capital corpus remains intact under local law. A distribution of share premium under Jersey’s ordinary distribution machinery, rather than its capital-reduction machinery, is income in nature. Section 402(4) nevertheless retains a role for dividends which, on a true analysis, cannot sensibly be regarded as income.

The appellant, a United Kingdom-resident shareholder in a Jersey-incorporated company, received cash distributions from its share premium account between 2011 and 2016. He also received shares in another company by an in specie distribution in 2015. The company made each distribution under Part 17 of the Companies (Jersey) Law 1991.

HMRC assessed the distributions to income tax. The First-tier Tribunal held that they were dividends and not dividends of a capital nature. The appellant appealed on those questions and, with permission, on the separate treatment of the in specie distribution. The central issue was whether the distributions fell outside section 402 of the Income Tax (Trading and Other Income) Act 2005 as capital distributions.

1. Appeal dismissed. The cash distributions were dividends within section 402 of the Income Tax (Trading and Other Income) Act 2005. They were paid under Article 115 and Part 17 of the Companies (Jersey) Law 1991, which was the machinery used to pay dividends from trading profits. The ordinary English-law meaning of dividend did not exclude a distribution from share premium merely because the account was called a capital account.

2. The tribunal applied the approach in First Nationwide v HMRC [2011] STC 1540 (UT). The dividend issue required the ordinary meaning of dividend to be identified and the foreign law then considered to establish what the company was permitted to do. The further characterisation of the receipt as capital or income belonged to the separate section 402(4) issue.

3. The dividends were not of a capital nature. United Kingdom law recognises income and capital payments in respect of shares, and the decisive consideration is the mechanism of distribution. Under Jersey law, Part 17 permitted freely distributable share premium, subject to a solvency requirement. It was not the Part 12 capital-reduction procedure. Accordingly, the company’s capital corpus was not reduced for this purpose, and the distributions were income.

4. Section 402(4) does not create a general third category between income and capital. It can apply to an exceptional dividend which, on a true analysis, cannot sensibly be treated as income, as illustrated by a corporate reconstruction of the kind considered in Sinclair v Lee [1993] Ch 497. The present distributions were not such a case.

5. The appellant could advance the in specie ground, but it failed. A dividend may be paid in cash or in specie. The Lonmin share distribution arose from the same restructuring, was made from the same reserves, and did not have a different capital character.

• Upper Tribunal (Tax and Chancery Chamber): Dismissed the taxpayer’s appeal from the First-tier Tribunal.
• First-tier Tribunal: Held that the distributions were dividends of a non-UK resident company and were not dividends of a capital nature. Its decision is not separately cited in the judgment.