First Nationwide and DividendsApr 2011 | Client publication/article
The taxpayer (advised by Slaughter and May) has successfully defended the appeal by HMRC in the case of The Commissioners for HMRC v First Nationwide. This is an important decision, as the arguments that HMRC were running in this case as to the nature of a dividend had potentially significant consequences for other taxpayers and the integrity of the UK’s tax regime for dividends.
This case was first heard by the First Tier Tax Tribunal in November 2009, and HMRC’s appeal was heard by the Upper Tier Tax Tribunal in February 2011.
The case concerned a series of dividends paid by a Cayman Islands company out of its share premium account. This is no longer permissible under English company law, but is permissible for a company incorporated in the Cayman Islands.
HMRC’s arguments were that, because the dividend was paid out of the company’s share premium account, either:
- the receipt was not a "dividend", as that term would be understood by the business community, because they would understand such term to be limited to a distribution of commercial profits; or
- even if it were a dividend, it was a dividend that was capital in nature in the hands of the recipient
The Tribunal thought that it was artificial to compartmentalise the arguments in this way, but in any event it rejected both arguments, holding that the receipt was a dividend and that for this reason it was income in nature. Cayman law permitted a dividend to be paid out of share premium, and there was no reason to go behind the payment mechanic used when determining the nature of the receipt. Although under the terms of the shares the payment of the dividends effectively reduced the shareholder’s entitlement on a winding up of the Cayman company, this did not make the receipt capital in nature in the hands of the recipient.
HMRC also ran a second argument, based on the UK tax regime for repos, that relied on treating First Nationwide as "buying" shares when it subscribed for new shares. This argument was also rejected by the Tribunal.
Sara Luder (partner)
Publications and seminars landing page