Let me take you back to March 2016, which seems like a lifetime ago in political and economic terms. George Osborne announced that the dividend tax credit system was being abolished from 6 April 2016. This change was also going to put up effective dividend tax rates by about 7.5 percentage points; for an additional rate taxpayer, it was rising from 30.56% to 38.1%.
This is the backdrop to a recent Upper Tribunal (UT) case, in which two brothers managed to save a large amount of tax by careful planning of when they received dividend payments. With only one class of share in issue (which they owned equally), there was no opportunity to pay different levels of dividend to each shareholder.
Their strategy relied on the fact that an interim dividend is ‘paid’ for income tax purposes when it is received by the shareholder; in contrast, a final dividend is ‘paid’ when the motion proposing the dividend is passed by the shareholders (unless the motion specifies a later payment date).
HMRC v Gould [2024] UKUT 285
In March 2016, Regis Group (Holdings) Limited (‘Regis’) resolved to pay an interim dividend of £40m, split equally between Peter Gould (‘PG’) and his brother.
It suited the brothers to be taxed on the dividends in different tax years. PG wanted his in 2016/17 (i.e., when he would be non-resident and thus not subject to tax on the dividend), whereas his brother wanted the dividend in 2015/16 when his effective tax rate was 30.56%, not 38.1%.
His brother’s £20m dividend was paid on 5 April 2016; PG’s dividend was not paid until December 2016. HMRC sought to tax PG’s dividend on the earlier date, arguing that:
- the two dividends must be treated as being due and payable on the same date; and
- that date was the day on which the earlier dividend was paid to his brother.
The First-tier Tribunal (FTT) allowed PG’s appeal, finding that no debt was created for him by the payment of the dividend to his brother. HMRC appealed.
The UT Decision
The FTT had erred in law in determining that PG did not have an enforceable debt when Regis paid the dividend to his brother in 2015/16.
However, this was not a material error in law, as there was an informal agreement between the shareholders for Peter Gould to receive his dividend later. This meant that the principle set out in re Duomatic Limited [1969] 2 Ch 365 applied, as all the shareholders had (informally) agreed to vary the Articles of Association, such that the directors were permitted to pay dividends at different times without creating an enforceable debt.
HMRC’s appeal was dismissed.
Re Duomatic Ltd
This case (which may well be new to many readers) laid down the principle that, where there has been unanimous consent, shareholders can be deemed to approve decisions of the company as if there had been a general meeting. It concerned whether certain payments made to directors of a company were valid, even though:
- none of the directors had contracts of service with the company; and
- no resolution had ever been passed authorising them to receive the payments.
The company went into liquidation and the liquidator made an application for repayment of the money. The High Court held that the payments were to be regarded as properly authorised because they had been made with the full knowledge and consent of all the shareholders.
Practical Tip
Subject to any appeal, the Gould decision confirms that family-owned companies can vary the timing of interim dividends to minimise the tax liabilities of shareholders.