Income tax

Interim dividend was taxable on receipt

The Upper Tribunal (UT) has upheld a First-tier Tribunal (FTT) decision that an interim dividend paid at different times to two shareholders for tax reasons was taxable on each at the date received. HMRC had sought to argue that both should be taxed when the first was paid based on rules for equal treatment of shareholders.

Two brothers wished to extract a dividend from a company but in different tax years. One brother was non-UK resident in the year following receipt of the dividend by the other and therefore wished to delay receipt until after 5 April. On advice, the directors were authorised to pay an interim dividend in accordance with these wishes. HMRC sought to tax the latter dividend at the earlier date and the taxpayer appealed.

A final dividend is usually taxable once declared by the company in a general meeting, because such a declaration creates an enforceable right for the shareholder. By contrast, there is generally no enforceable right to an interim dividend before payment and thus it is only taxable on actual payment.

At the FTT, HMRC accepted that this was the general rule, but proposed that the shareholder who had not been paid on the occasion of the first distribution would have an enforceable claim for unfair prejudice against the company and thus the right to receive the dividend, making it taxable in the earlier year. The FTT found for the taxpayer, noting that the court remedy was discretionary and it was by no means certain, in the circumstances, that it would have ordered payment, if it was available at all. Therefore the taxpayer had no enforceable debt until payment and this later distribution to him was taxable on receipt.

HMRC appealed to the UT, arguing that the FTT had erred in law in finding that no debt was owed to a second shareholder of the same class when a payment is made to the first, that the discussions had varied the articles of association, and that these had formed a binding contract whereby the second shareholder waived his right to be paid a dividend at the same time as the first.

The UT considered the FTT findings in detail. It found that the FTT had erred in law on the first point, as the debt was owed to the second shareholder, but as it found for the taxpayer on the points around the discussions forming a contract then this did not alter the outcome. HMRC’s appeal was dismissed.

Gould v HMRC [2024] UKUT 00285 (TCC)

From Tax Update November 2024, published by Evelyn Partners LLP

Inheritance tax

Business relief not available on furnished offices

The First-tier Tribunal (FTT) has found that serviced offices were still an investment, not carrying out a trading activity. The decision involved a careful analysis of the exact activities, as well as case law, but ultimately determined that business property relief (BPR) was not available.

The late taxpayer held shares in a company (F), that owned the entire share capital of another company (N), whose main asset was an office block. From 2008, after tenants left, two of the six floors were let as serviced offices, while the others remained on commercial leases. From 2010 another two floors also became serviced. N contracted the servicing to another company (O). The executors contended that the shares in F were eligible for BPR as this provision of serviced offices was a trading activity, not investment.

The FTT considered the detail of the operations, and case law, and ultimately found that BPR was not available. O had provided considerable services, including a receptionist and cleaning, but a number of these were covered by an extra facility fee, not just the standard serviced office fees. The services included in the normal fee, such as heating and maintaining equipment, predominantly related to maintaining the investment in the land. The executors’ appeal was dismissed.

As the judge here was keen to point out, although decisions in other cases can be a useful guide, ultimately the eligibility of relief is a matter of fact to be considered afresh in each individual appeal. Here the company provided serviced office space in a central London building. After an extensive review of the facts, the FTT came down on the investment side of the line and refused the claim to BPR, which had been made by the executors of the deceased.

The FTT accepted that this was not a clear-cut case but based its decision on its conclusion that “what is being provided is physical space in a building with some desirable additional services, but not such a level of services as to mean that the principal transaction is the exchange of services for reward”.

This case could have gone either way and given the amounts involved an appeal cannot be ruled out. Much of the case law discussed in the decision will be familiar territory for all involved in IHT matters, but it is always useful to be reminded of the sometimes quite narrow points on which the availability of relief, which is on an all-or-nothing basis, can depend.

Beresford v HMRC [2024] UKFTT 952 (TC)

From Tax Update November 2024, published by Evelyn Partners LLP