Dividends paid from share premium01 Mar 2012 | Newsletter/briefing
The Court of Appeal has today ruled emphatically in favour of the taxpayer in First Nationwide v The Commissioners for HMRC, upholding the decisions of the First Tier Tribunal and the Upper Tribunal. The taxpayer was advised by Slaughter and May.
HMRC had argued that a dividend paid by a Cayman company out of share premium (permissible under Cayman company law, in contrast to the modern English law position) was for UK tax purposes capital rather than income in the hands of the recipient. They relied on the fact that Cayman company law imposes a solvency test on the payment of dividends from share premium and on the fact that the particular shares in question could only pay dividends from share premium and that their rights to capital on a winding-up abated in proportion to dividends so paid.
The Court of Appeal, adopting the same reasoning as the tribunals below, confirmed what had been the commonly understood position, namely that it is the legal machinery that is determinative of the nature of a payment as capital or income in the recipient’s hands. It therefore followed from the fact that the payment was made by way of a dividend (and was made otherwise than in the course of the winding-up of the company) that it was income for the recipient.
HMRC’s secondary argument on the application of the repo rules was also rejected. This argument was essentially that references to "buying back" equivalent securities in the repo legislation included subscribing for newly issued equivalent securities. Again, the Court of Appeal affirmed the decision and reasoning of the tribunals below, noting that the meaning of "purchase" in the context of securities was well-established as not including acquisition by way of a subscription.
Whilst it is not yet known whether HMRC will seek leave to appeal to the Supreme Court, it is to be hoped that this decision will restore a degree of certainty in this important area.
Sara Luder (partner)
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