Timing is everything – making the most of dividends

The answer to the question of when a dividend is due and payable might appear straightforward. However, tax is rarely simple, as demonstrated by a recent tribunal case.

In the Upper Tribunal, the taxpayer successfully argued that a single interim dividend, agreed to be paid at different times to a company’s two shareholders was taxable on the recipients in different tax years.

The tribunal case

On 31 March 2016, the directors of the company concerned voted to pay an interim dividend totalling £40m to its shareholders, NG and PG.

The payment to NG was made on 31 March 2016, prior to a change in the dividend tax rate for the 2016-17 tax year, and he included the income in his self-assessment for 2015-16. However, it was agreed between the parties that the payment to PG would be delayed until the 2016-17 tax year, when he was no longer resident in the UK. Arguing that PG could have enforced payment of his dividend in 2015-16, HMRC considered that the dividend was taxable in full on both recipients when it was declared in 2015-16 – good news for NG, who was therefore taxed at an effective rate of 30.56% rather than 38.1%, but potentially bad news for PG. PG appealed, arguing that as he was non-UK resident in the year his dividend was paid, he was not taxable on it at all. 

On appeal, the First-tier Tribunal agreed with the taxpayer, a decision recently upheld by the Upper Tribunal. This judgment means that the shareholders were able to successfully treat the receipt of their respective share of a single interim dividend as taxable in different tax years, on the basis that such interim dividends are generally due and payable for income tax purposes when they are received by the relevant shareholder, not when they are declared or recognised in the company’s accounts, and as both shareholders and the company had agreed the payment arrangements, no debt to PG had arisen as a result of the payment to NG.

Although of little comfort to HMRC, final dividends are always taxable when they are declared, so it is clear that small differences in approach can have big tax consequences.

The impact of the case

The effect of the ruling is to confirm that if a company declares an interim dividend, or makes payment of that dividend to one or more shareholders, income tax does not automatically become payable by other shareholders. By reaching agreement to pay interim dividends at different times to different recipients, companies can potentially match distributions to the different needs of individual shareholders. Not all shareholders will be able to save millions of pounds in tax as in this case, but with a bit of forethought, other companies may be able to make dividend payments to their owners in a flexible way to allow recipients to make best use of the tax allowances and reliefs to which they are entitled. 

The tribunal’s analysis highlights the importance of understanding the detail of the legislation and case law on the taxation of dividends. It might also suggest that companies should review their Articles of Association and, if necessary, amend them to expressly incorporate the flexibility to vary the timing of dividend payments. 

For more information, please get in touch with Andrew Robins or your usual RSM contact.