What is a dividend and more: the Court of Appeal in Beard

The question of what is meant by a ‘dividend�� can be an important one in a tax context. That is most obviously true in relation to distributions received by individuals and trusts from non-UK resident companies, where the charge to income tax on dividends is restricted to ‘dividends�� not ‘of a capital nature��. Whilst, by contrast, the charge to corporation tax applies to distributions rather than just ‘dividends��, the concept of a ’dividend�� can still be important, as the rules for quantifying a taxable distribution differ for ‘dividends�� and ‘other distributions�� and so the corporation tax treatment of, say, a distribution from a non-UK company made out of share premium can vary significantly according to whether that distribution is a ‘dividend��.

It is therefore unsurprising that practitioners in varying areas of tax have been keenly following the progress of the litigation in Beard v HMRC, which has been concerned with precisely this question of what is meant by a ‘dividend�� together with the linked issue of when it should be regarded as ‘of a capital nature��.

The latest stage of this �� the newly published decision of the Court of Appeal () �� is on one level unsurprising: as widely expected, the Court (like the First-tier Tribunal and the Upper Tribunal before it and for broadly the same reasons) has essentially agreed with HMRC that it is the relevant overseas corporate law mechanism used to make the distribution which will determine whether this is a ‘dividend�� and (almost always) whether it is income rather than capital.

Paul Freeman

Partner, Head of Corporate Tax Central Technical

��㣨Leyu�� in the UK

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That view, essentially echoing the outcome of the earlier decisions in First Nationwide v HMRC and , is consistent with the ‘tax orthodoxy�� that most will have applied in practice.

Although the Court of Appeal decision is largely confirming what most people already thought to be true, the Court’s analysis of the issues still makes interesting reading �� even by those with little interest in the concept of a ‘dividend�� or what it means for a dividend to be ‘of a capital nature��.

That is because the first explicit statutory reference to ‘dividends of a capital nature�� was a product of the Tax Law Rewrite Project, and the taxpayer’s (ultimately unsuccessful) arguments on how this should be approached were in clear conflict with the Explanatory Notes published alongside the draft legislation and their references to case law relating to the predecessor legislation. In the course of rebutting the taxpayer’s analysis, therefore, the Court of Appeal provided a helpful overview of the role of Explanatory Notes in statutory interpretation, together with an assessment of the relevance of case law predating the Tax Law Rewrite Project (an area in which the Supreme Court has given somewhat mixed messages in recent years).

The Court of Appeal also took the opportunity to provide guidance on the extent to which factual findings by a First-tier Tribunal on matters relating to foreign law can be revisited on subsequent appeals. The Court’s conclusions on this point �� which suggest that the scope to challenge findings of this kind may be greater than previously thought �� is likely to be significant for future litigation on tax disputes with cross-border aspects.

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