In HMRC v Gould [2024] UKUT 00285 (TCC), the Upper Tribunal dismissed HMRC’s appeal against the decision in Gould v HMRC [2022] UKFTT 00431 (TC) that an interim dividend was ‘paid’ for income tax purposes in 2016/17 when it was received by the relevant shareholder. However, it did confirm that the First-tier Tribunal (FTT) was wrong to find that no enforceable debt arises where a company pays an interim dividend to one shareholder but not to another.
Background
Peter Gould (PG) and Nicholas Gould (NG) were the principal shareholders of Regis Group (Holdings) Ltd (Company). On 31 March 2016 the board of directors which included PG and NG resolved to pay an interim dividend of £40m. The dividend was paid to NG in 2015/16. It was paid to PG in respect of the same share class in 2016/17 when he was not a UK resident.
Income tax is charged on the value of dividends paid in a tax year (between 6 April and 5 April of any given year). Dividends are treated as ‘paid’ for tax purposes when they become due and payable (i.e. the point at which the obligation to pay the dividend becomes a present debt owed to the shareholder).
HMRC argued that PG’s dividend had become due and payable on the same date that NG actually received his dividend payment (at a time when PG was still a UK resident).
First-tier Tribunal
In Gould v HMRC [2022] UKFTT 00431 (TC), the FTT held, among other things, that there was nothing set out in the Company’s constitution (Table A) that suggested that a debt would arise in the event that interim dividends were paid to different shareholders holding the same class of share at different times.
Appeal
HMRC stated that the FTT was wrong in its conclusion and appealed the decision on three grounds:
- Ground 1: Where a company with Table A articles pays an interim dividend to one shareholder but not to another of the same class, no debt is owed to the second shareholder.
- Ground 2: The effect of the election by PG to have their dividend payment delayed was to vary the Company’s articles pursuant to the Duomatic principle.
- Ground 3: There was a binding contract under which PG waived their right to be paid their share of the dividend at the same time as the other shareholder.
Decision
With regard to Ground 1, the Upper Tribunal noted that the declaration of a final dividend by a company at a general meeting gives rise to a debt payable by a company to its shareholders (re Compania de Electricidad de la Provincia de Buenos Aires Ltd [1980] Ch. 146) and held that it saw no reason to think that a resolution for payment of an interim dividend followed by payment to some shareholders would have a different effect. Consequently, the Upper Tribunal confirmed, where a company with Table A articles pays an interim dividend to one shareholder, another shareholder of the same class would have an enforceable debt against that company, subject to any agreement to the contrary. This follows from the principle that shares of the same class confer the same rights and impose the same liabilities.
Nevertheless, although HMRC succeeded in appealing on Ground 1, the appeal overall was dismissed because:
Concerning Ground 2, the Upper Tribunal agreed with the FTT’s finding that there was an informal agreement within the Duomatic principle whereby the Company’s articles were amended so that the directors were permitted to pay dividends at different times without creating a debt. The Upper Tribunal concluded that, due to the numerous discussions relating to the delayed payment, there was an agreement that PG would not be able to enforce payment of the dividend in 2015-2016.
Even if the decision regarding Ground 2 was incorrect, as regards to Ground 3, the Upper Tribunal agreed with the FTT’s finding that there was a contractually binding waiver by PG of their right to enforce payment of the interim dividend prior to 6 April 2016. HMRC argued that there was no consideration for the waiver, invoking the principle in Foakes v Beer 9 App Cas 605, that a promise to accept part payment of a debt is not binding because it is not supported by consideration. However, the Upper Tribunal agreed with the FTT that the waiver did not fall within Foakes v Beer. The waiver of the right to enforce the debt was agreed before the directors resolved to pay the interim dividend, that is, before there was an enforceable debt. Furthermore, the agreement by the company to pay the dividend at a later date amounted to consideration for the waiver.
Final comments
Although HMRC’s claim was dismissed, this case is still significant for shareholders. The Upper Tribunal has held that, unless a company and its shareholders agree otherwise, where a company decides to pay an interim dividend to its shareholders but in fact pays only some of them, a debt automatically arises in favour of the shareholders it has not yet paid. The point that this debt arises is the relevant point for income tax purposes.
It is important to seek professional tax advice whenever looking to structure dividend payments for tax purposes.
A shareholder who decides to waive their enforcement rights and defer their dividend does however take the risk that the company’s financial position changes and the directors cancel the dividend. In this situation the shareholder will not receive their divided.
It is not uncommon that owners of companies would want to facilitate making dividend payments in differing ways, e.g. to different shareholders, at different times or, to the exclusion of certain shareholders. One approach to dealing with this is to issue alphabet shares to different shareholders. It is important that such alphabet shares are issued properly with identifiable and differing class rights set out in the company’s articles of association.
For further information regarding alphabet shares or dividends please contact our Commercial Team at Ellisons who would be more than happy to assist with any queries. If you require tax planning advice, our team can put you in touch with suitable professionals.