Income tax is charged “on the amount or value of dividends paid and other distributions made in the tax year” (ITTOIA 2005, s. 384(1). The meaning of this phrase was considered in Jays v HMRC  UKFTT 420 (TC).
The case also considered the validity of discovery assessments, made under TMA 1970, s. 29.
The FTT stated that:
“The task of this Tribunal is … to construe the terms of the minutes and determine whether there is a stipulation as to the date on which the declared dividend is to paid and/or if there is some other stipulation how the Potel judgment is to be applied to the stipulation.”
The FTT then commented as follows:
“The Tribunal determines that in each case it is clear that the shareholder in question has no immediate right to enforce the identified part of the dividend at the point at which it is declared, and that payment was deferred ‘until further notice’ [in the case of one dividend] and ‘until mutually agreed’ in the case of [the other] dividend. The deferral in each case was in consequence of the terms of the undertaking given to Lloyds. Those terms, as described by the solicitor, represented a covenant which, if breached would mean that Lloyds would be ‘within their legal rights to suspend all borrowings and immediately call in the indebtedness. In the worst-case scenario, this would result in a forced sale and foreclosure of the company’s properties.’
The terms of that covenant did not legally prevent QPL from declaring any such dividend as was chosen nor did it prevent payment being made of the declared dividend (as a breach of the covenants would not have undermined the legality of the declaration or payment of the dividend). However, acting in the best interests of the company and the shareholders and otherwise in accordance with his fiduciary duties as a director, MJ recommended the declaration of dividends subject to stringent stipulations which, in the view of the Tribunal, had the legal effect of deferring the date on which the stated proportion of the dividends was payable. This conclusion is not, in the Tribunal’s view, precluded because of the absence of a date to which payment is deferred, in each case there was a mechanism by reference to which the date was to be determined (on further notice or as mutually agreed).”
On the basis of these facts, it was clear that the dividend had not been paid for the purposes of s. 384. The taxpayer’s appeal therefore succeeded.
If the taxpayer had lost on that main point, HMRC would have been entitled to raise a discovery assessment. As the FTT stated:
“It is a very low threshold for HMRC to show that they could not have been reasonably expected to be aware of the insufficiency. … Put another way the hurdle of adequacy of disclosure by a taxpayer is extremely high”.
Related content from Claritax Books
Discovery Assessments, by tax barrister Keith Gordon, is a detailed, clearly written guide to the law and practice in this area. Based on the author’s personal involvement in many leading cases, the book contains much practical advice explaining when and how such assessments may be challenged.