application of S447 ITEPA 2003

Harry has prompted me ...
... that s21 ICTA has been repealed and now that I recall, this is part of the problem. S366(3) ITOIA 2005 says that if certain income is taxable under any of the Chapters of Part 4 ITOIA and is also taxable under certain Chapters of ITEPA then ITEPA takes priority. However dividends are taxable under Chapter 3 ITOIA and this chapter is excluded from the application of 366(3). Even if it wasn't the provisions of ITEPA mentioned are Parts 2,9 and 10, whereas post acquisition benefits are taxable under Chapter 4 of Part 7. So all that can be said about section 366 is that it says which provisions should have priority over charges under Part 4 but it doesn't include Part 7 of ITEPA - therefore it doesn't. However, its easy to see why some people are saying that the Revenue can choose under which provisions to assess. I agree that it is also debateable whether dividends are something done which affects securities in terms of the revised s447 ITEPA. I still think that the realpolitic is that s447 would not apply to dividends without some policy statement first because the effects would be so far-reaching. I still think any such move would be part of the review of taxation of small business.

I have been known to question ...
... exactly for whose benefit the re-write project is for. Most advisers managed to find their way around the old legislation and the rewrite seems mostly to chop familiar legislation into lots of little bits that are actually harder to navigate (I think it's called 'unpacking' the legislation in the jargonese that the Revenue seem to be using more and more). It's certainly not for the punter's benefit as they will find the rewritten legislation every bit as gibberish as the previous version. Funny though, like you I thought the TLRP was not supposed to involve substantive changes to the legislation and here we are - I'd say the repeal of s21 is a fairly substantive change and may even have been deliberately not re-enacted in the same terms for reasons to do with s447. Hang on. Hey lads (and ladettes). We've been had. It's for the Revenue's benefit! How stupid of me. I should have known.

There is a risk - but it applies to everybody
I know of one well-known tax consultancy that is warning people off this strategy for the very reason that dividends combined with low salary is obviously for tax-avoidance and could be taxed as employment income.

You may be aware that s447 was amended in FA No2 2005 so that the exclusion of 'benefits' otherwise chargeable to tax does not apply if tax avoidance is involved, which, it is suggested, opens the way to dividends being taxed as employment income and possibly even being taxed twice. I'm not convinced about this. S21 ICTA says specifically that no distribution chargeable under Sch F shall be chargeable under any other provision of the income tax acts. So while there is now nothing to preclude a charge under s447 I don't see how this overides s21(3) without saying so explicitly. Since there is a general presumption against income being taxed twice I don't see it myself. But I'm no expert on statutory interpretation so will have to leave that for the lawyers.

The Paymaster General’s remarks on the amendments to s447, which refer to “contrived schemes to disguise remuneration to avoid tax and national insurance”, could be interpreted as paving the way to taxing dividends as employment income. However, simply drawing a small salary and taking the rest of the profits as dividends is not a ‘contrived scheme’ (though it wouldn't be the first time this expression has been used inappropriately). Park J in the recent Arctic systems case remarked that if Mr Jones wished to pay himself a small salary and draw dividends it was entirely proper for him to do so – it was the dividends to Mrs Jones that were the problem. Moreover, probably the majority of private companies employ this strategy to some degree and therefore where does one draw the line between acceptable dividend/salary levels and tax avoidance? In a sense the owner(s) of the company are not avoiding tax/NICs by this strategy but are simply not paying as much as they could do if they arranged matters differently! Technical issues aside therefore it seems to me to be unlikely that the Revenue can use the revised s447 in this way without a policy statement from the Government. Unless, I suppose, you had really over-egged it like that Forthright (Wales) Sp C case where it was admitted that different classes of shares had been used to diguise remuneration as dividends to avoid NICs. That was just a sham really but as it was to do with EIS relief this point was not pursued i.e. were they really dividends? It seems more likely that such changes would emerge from the ongoing review of the taxation of small businesses.

Agree
It is, in my view, academic whether paying a dividend is doing something which affects the shares (although I am inclined to think that it cannot be said to affect them as part of such an arrangement as is mentioned in the section): there can be no employment income charge because of ITTOIA, sec 366(3).

Harry

Harry J Ross is a tax specialist in practice in North London. He can be contacted by email at [email protected] or by telephone 020-8446 4193.
Harry hopes that the above posting is helpful. It is, however, unresearched. Accordingly, it cannot be guaranteed to be accurate or complete. It is given wholly without responsibility or recourse.