Tax point for payment of interim dividends

The Upper Tribunal has held that, where the payment of an interim dividend is made to one shareholder without payment to other shareholders of the same class, that creates a debt from the company to those other shareholders: HMRC v Gould [2024] UKUT 285. However, whilst this would normally fix the date by reference to which the interim dividend was taxable, the UT also held that in this case, where there was a deliberate delay in the date of payment for tax purposes, there was either an agreement to amend the Articles or an agreement to waive the right to payment at the earlier date and these were effective to prevent the interim dividend becoming taxable in the earlier tax period when the shareholder was UK tax resident.

Background

The case involves the payment of an interim dividend by Regis Group (Regis) to two brothers (NG and PG) who were both shareholders of Regis. In part for tax planning reasons, the brothers wished to receive the payment of the dividend for tax purposes in different tax years. Regis received advice that an interim dividend would only be taxed on the date of payment. Accordingly, NG was paid his dividend on 5 April 2016 and PG received his on the later date of 16 December 2016, when he was no longer UK tax resident.

HMRC took the view that the payment of an interim dividend to one shareholder created a debt in favour of other shareholders of the same class, such that an enforceable debt arose in PG’s favour on 5 April 2016. On the basis of that debt, HMRC sought to tax PG on the interim dividend for the tax year 2015/2016.

The FTT rejected HMRC’s case. The FTT considered that payment of an interim dividend to one shareholder did not automatically give rise to an enforceable debt for another. In any event, the FTT considered that even if a debt arose, PG had either waived his right to receive it at the same time or the shareholders had agreed to an amendment to the Articles of Association to allow split payment dates for the interim dividend.

Upper Tribunal decision

CTA 2010 s.1168 provides that dividends are to be treated as paid for tax purposes on the date they become due and payable. It was common ground that a dividend is “due and payable” for the purposes of CTA 2010 s.1168 where a shareholder has a right to enforce payment.

On the first issue, the UT disagreed with the FTT. The Articles in this case were the standard Table A articles. Articles 102 to 104 dealt with the payment of dividends. Read together, those articles made it clear that shareholders should be treated equally, including in relation to the payment of interim dividends. Just as the declaration of an interim dividend followed by the arrival of the date for payment gives rise to a debt, so the UT considered declaration plus payment to one shareholder gives rise to a debt in favour of other shareholders. Accordingly, in principle, when Regis paid the interim dividend to NG, it created a debt in favour of PG which would determine the tax year in which it was paid.

However, the UT agreed with the FTT that the arrangements in this case disclosed either an agreement to amend the Articles so as to allow varied payment or an agreement by PG to waive his right to payment on the same date.

HMRC argued that since the advice was that interim dividends only became taxable when paid, there had been no basis for an agreement concerning variation of the Articles or waiver of the right to payment. However, the UT considered that too narrow an approach. The Duomatic principle applied in this case. This principle applies where the articles require, for example, approval by shareholders at general meeting and allow such a requirement to be avoided if all members, being aware of the facts, either give approval to a different course of action or conduct themselves in a way so that it would be inequitable for them to deny that they have given approval. On the facts, the FTT was entitled to find that the members intended to informally amend the articles, even if they did not have the articles in mind when agreeing the terms on which the interim dividends would be paid.

Equally, the UT agreed with the FTT that PG had agreed to waive his right to payment on the same date and had given enforceable consideration for such waiver so as to make it legally binding. PG had effectively agreed in advance of the declaration of the dividend that he would waive his right to enforce payment until after 5 April 2016 if Regis agreed to pay the interim dividend. (The fact the agreement was in advance of the declaration was important as there is a principle that a promise by a creditor to give up an existing entitlement to be paid all or part of a debt is not enforceable as to do so lacks consideration: Foakes v Beer).

Again, HMRC argued that it was illogical for the FTT to find such an agreement existed when the parties were simply acting on advice that the payment of an interim dividend to NG would not give rise to a debt to PG in such circumstances. The shareholders had simply proceeded on a shared misunderstanding of the law. The UT nevertheless considered that the FTT as the primary fact finding tribunal was entitled to find that an agreement had been reached and that HMRC had not satisfied the Edwards v Baristow threshold in these circumstances to conclude that the FTT could not, on the facts, have concluded that an oral agreement for amendment or waiver had been implicitly agreed.

Comment

The decision concerning the date on which an interim becomes due and payable is an important one where payment is made on different dates to different shareholders. However, equally the FTT and UT have taken a pragmatic rather than legalistic approach to the situation where it was clear that all parties had agreed to the company delaying payment to one shareholder for tax purposes, so that they delayed payment become effective for those tax purposes.