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Over £100m in dividends deemed income not capital

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A carefully constructed tax limitation arrangement failed to achieve its goal in this case where dividends received from a Jersey company were judged to be income not capital.

15th Apr 2024
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Alexander Beard is a UK resident employee/shareholder in Glencore plc, a publicly listed company incorporated in Jersey and domiciled in Switzerland. He acquired shares in 2011 from profit participation certificates issued to him as an employee during a corporate restructuring.

As a shareholder of 320,260,410 shares, Beard received cash distributions paid from the company’s share premium account in each of the tax years 2011/12 to 2015/16. They were not debited to retained earnings.

UK tax year Value of distribution received by the appellant
2011/12 £10,372,469.26
2012/13 £31,272,820.54
2013/14 £32,956,347.85
2014/15 £32,964,799.40
2015/16 £42,167,539.61

 

In 2015, Glencore further made an “in specie” distribution to its shareholders of 3,456,037.22 shares in a subsidiary company, Lonmin plc.

The facts were not disputed and these distributions were considered together by both first tier tribunal (FTT) and upper tribunal (UT) on the basis that the tax treatment of each would be the same, although this was challenged.

Tax treatment

On 8 October 2019, HMRC issued a closure notice assessing Beard to income tax on the distributions. Beard appealed to the FTT on the basis that the distributions were subject to capital gains tax rather than income tax.

Permission to appeal was granted on two grounds: 

  1. whether the payments of share premium made by Glencore were dividends within s 402 Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005)
  2. whether the payments were “dividends of a capital nature” within s 402 (4) ITTOIA 2005.

Permission to appeal was subsequently granted on a third ground regarding whether the in specie distribution should be taxed in the same manner as the cash distributions. As HMRC had objected to this ground as inadmissible, the permission granted was expressly without prejudice to consideration of its admissibility.

The Swiss federal tax authority imposed no withholding tax. As a result, Beard suffered no Swiss withholding tax on any of the amounts in question (including the money’s worth of the Lonmin shares).

Across the Channel

The appeal concerns both UK tax legislation and Jersey company law.

In UK legislation, s 402 ITTOIA 2005 regarding 402 charge to tax on dividends from non-UK resident companies, says “income tax is charged on dividends of a non-UK resident company,” and “in this chapter ‘dividends’ does not include dividends of a capital nature.”

It is relevant to note also that by s 56 of the Companies Act 1948, share premium of a company was taken out of the category of distributable reserves and “assimilated” to the company’s share capital.

Under Companies (Jersey) Law 1991 (CJL), there is a series of provisions to be considered, covering share capital in part 8, reduction of capital in part 12 and distributions in part 17. The relevant sections relate to:

  • share premium accounts for par value companies
  • reduction of capital accounts
  • meaning of “distribution”
  • restrictions on distributions.

Capital distribution

It is common ground that Glencore had adopted the procedure under part 17 CJL 1991 in making the distributions and that:

  1. an amount returned under part 12 CJL 1991 is not within the scope of the charge to income tax under s 402 ITTOIA 2005 (being neither a dividend nor of an income nature) and is taxed as a capital distribution
  2. an amount returned using the procedure under part 17 is not within the scope of income tax under s 402 ITTOIA 2005 if it does not amount to a dividend or is a dividend of a capital nature. It is then taxed as a capital distribution.

Dividends or capital?

There is no definition of “dividend” in ITTOIA 2005. However, this question was addressed by the FTT in a case involving Cayman Island dividends, First Nationwide vs HMRC, and was considered on appeal in that case by the UT [2011] STC 1540 (UT).

It was noted that Glencore referred to the earlier distributions as dividends, later changing the description, apparently on the advice of Malcolm Gammie KC, who was representing Beard at the tribunal.

Both tribunals agreed that the distributions were dividends within s 402 ITTOIA 2005.

So are the dividends of a capital nature? This was exclusively a matter of UK law but once again, there is no statutory definition.

Gammie submitted that there now exists a third category of receipt between income and capital as follows: 

  1. “a receipt which is not paid as a dividend and is therefore a capital receipt (such as a payment on a reduction of capital);
  2. a receipt which is an income dividend, in that it is paid from trading profits or capital profits; and 
  3. a receipt which is paid as a dividend from what is treated under the law of the company as the capital of the company: that is a receipt ‘of a capital nature’.”

The tribunal judges disagreed.

Essential character

They further concluded that “the FTT was entirely correct in rejecting the contention that share premium has an ‘essential character as capital’.” 

In particular “when Glencore decided, no doubt for good reason, to make the distributions using the mechanism in part 17 and not the mechanism in part 12, the distributions constituted payments of income and did not have the character of capital.”

Nor could they find that any different analysis applies to the receipt of the Lonmin shares from the cash dividends and concluded somewhat dismissively: “It is trite to observe that a dividend may be made in cash or in specie. The share distribution also resulted from the restructuring and, like the cash distributions, was effected out of Glencore’s capital contribution reserves. As Mr Milne pointed out, if the share distribution were held to be of a capital nature and therefore not taxable as income, a company with cash available for a dividend in those circumstances could instead purchase an asset and then declare a dividend in terms of distribution of that asset. That would be a gateway to income tax avoidance.”

As a result, they supported the FTT’s decision and dismissed Beard’s appeal. As a result, what appears to have been a carefully constructed tax limitation arrangement failed to achieve its goal and the UK Exchequer will be better off by a very material amount.

Replies (4)

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By FactChecker
15th Apr 2024 14:53

Who is Mr Milne (quoted as pointing out the obvious below)?

“Mr Milne pointed out, if the share distribution were held to be of a capital nature and therefore not taxable as income, a company with cash available for a dividend in those circumstances could instead purchase an asset and then declare a dividend in terms of distribution of that asset. That would be a gateway to income tax avoidance.”

He's not mentioned/introduced elsewhere in the article.

Thanks (2)
Replying to FactChecker:
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By Justin Bryant
15th Apr 2024 15:40

Er, check out p1 of the judgement. Have you not heard of word search?

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Replying to Justin Bryant:
the sea otter
By memyself-eye
15th Apr 2024 17:18

I have My wife uses it to relax, about a quid from WHS. Just circle the word in ink once you've found it!
Simples.

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Replying to Justin Bryant:
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By FactChecker
15th Apr 2024 20:11

My point was that he's not mentioned (I believe 'introduced' is what it's called in journalist circles) within this article ... and, yes, I did run a search on that.

Yeah I'm being lazy, but not all the articles on here intrigue me sufficiently to go and do a deeper dive into the relevant judgement ... which is why journalists usually adhere to certain protocols ... and it annoyed me that this article expected me to search elsewhere.

Thanks (4)