Alexander Beard v The Commissioners for HMRC [2024] UKUT 00073 (TCC)

“…it was agreed by the Appellant at the Tribunal that the in-specie dividends should be treated in the same way as the cash dividends. No particular finding in respect of the in-specie dividends was made.”

“Glencore PLC was incorporated on 14 March 2011 in Jersey under the Companies (Jersey) Law 1991 (as amended) (“the CJL 1991”). It was headquartered in Switzerland throughout the period under appeal. Prior to the listing of its shares on the Official List of the London Stock Exchange, Glencore PLC became the immediate holding company of Glencore International AG pursuant to a restructuring of the group. The Appellant, who was an employee of Glencore PLC, became a profit participation shareholder. This entitled him to a portion of Glencore International AG’s funds accumulated during the period that he held the profit participation certificates (such amounts being eventually exchanged for shares in Glencore International AG). The issued shares in Glencore International AG were subsequently contributed to Glencore PLC. We understand this to refer to the restructuring described in the previous paragraph that occurred prior to listing. Glencore PLC then issued 6,000,000,000 shares to Revelstoke Ltd, credited as fully paid up, on behalf of the existing shareholders. An additional 922,714,000 shares were issued by Glencore PLC to institutional and other investors on 24 May 2011. The difference between the nominal and fair value of both sets of shares was recognised as share premium. All of the distributions received by the Appellant during the tax years 2011/12 to 2015/16 were in respect of the 320,260,410 shares that he held in Glencore PLC. The Appellant usually elected to receive his share of Glencore PLC’s cash distributions in sterling but some were in fact received in US dollars. In more detail: i. 2011/12: An interim dividend of $0.05 per share out of Glencore PLC’s capital contribution reserves was declared by the directors on 22 August 2011 and paid on 30 September 2011. ii. 2012/13: The directors recommended a final dividend of $0.10 per share out of Glencore PLC’s capital contribution reserves which was paid on 1 June 2012. An interim dividend of $0.054 per share was also declared out of Glencore PLC’s capital contribution reserves which was paid on 13 September 2012. iii. 2013/14: The directors recommended a final dividend of $0.1035 per share out of Glencore PLC’s capital contribution reserves which was paid on 7 June 2013. iv. 2014/15: The directors recommended a final distribution of $0.111 per share out of Glencore PLC’s capital contribution reserves which was paid on 30 May 2014. An interim distribution of $0.06 per share was also declared out of Glencore PLC’s capital contribution reserves which was paid on 19 September 2014. v. 2015/16: The directors recommended a final distribution of $0.12 per share out of Glencore PLC’s capital contribution reserves which was paid on 21 May 2015. An interim distribution of $0.06 per share was also declared out of Glencore PLC’s capital contribution reserves which was paid on 29 September 2015. At the Annual General Meeting on 7 May 2015, the shareholders were asked to approve a distribution in specie of 139,513,430 ordinary shares of $1 each in Lonmin PLC (which had been acquired by Xstrata PLC prior to its merger with Glencore PLC) to the shareholders. The Appellant received 3,456,037.22 shares in Lonmin PLC as a result. The sterling value of the distributions received by the Appellant during the period under appeal was agreed by the parties in a “Statement of agreed value of the ‘distributions’ received’” as follows: UK Tax Year Value of Distribution received by the Appellant (GBP) 2011/12 £10,372,469.26 2012/13 £31,272,820.54 2013/14 £32,956,347.85 2014/15 £32,964,799.40 2015/16 £42,167,539.61 …” i. 2011/12: An interim dividend of $0.05 per share out of Glencore PLC’s capital contribution reserves was declared by the directors on 22 August 2011 and paid on 30 September 2011. ii. 2012/13: The directors recommended a final dividend of $0.10 per share out of Glencore PLC’s capital contribution reserves which was paid on 1 June 2012. An interim dividend of $0.054 per share was also declared out of Glencore PLC’s capital contribution reserves which was paid on 13 September 2012. iii. 2013/14: The directors recommended a final dividend of $0.1035 per share out of Glencore PLC’s capital contribution reserves which was paid on 7 June 2013. iv. 2014/15: The directors recommended a final distribution of $0.111 per share out of Glencore PLC’s capital contribution reserves which was paid on 30 May 2014. An interim distribution of $0.06 per share was also declared out of Glencore PLC’s capital contribution reserves which was paid on 19 September 2014. v. 2015/16: The directors recommended a final distribution of $0.12 per share out of Glencore PLC’s capital contribution reserves which was paid on 21 May 2015. An interim distribution of $0.06 per share was also declared out of Glencore PLC’s capital contribution reserves which was paid on 29 September 2015. At the Annual General Meeting on 7 May 2015, the shareholders were asked to approve a distribution in specie of 139,513,430 ordinary shares of $1 each in Lonmin PLC (which had been acquired by Xstrata PLC prior to its merger with Glencore PLC) to the shareholders. The Appellant received 3,456,037.22 shares in Lonmin PLC as a result. The sterling value of the distributions received by the Appellant during the period under appeal was agreed by the parties in a “Statement of agreed value of the ‘distributions’ received’” as follows: UK Tax Year Value of Distribution received by the Appellant (GBP) 2011/12 £10,372,469.26 2012/13 £31,272,820.54 2013/14 £32,956,347.85 2014/15 £32,964,799.40 2015/16 £42,167,539.61 …”

“That is because UK case law has long established that in determining the correct tax treatment of a payment made by a non-UK company such as Glencore, the correct approach is to establish the character of the payment under the corporate law of the jurisdiction in which the paying company is incorporated, in this case Jersey, and apply UK tax legislation to that payment.”

“402 Charge to tax on dividends from non-UK resident companies (1) Income tax is charged on dividends of a non-UK resident company. … (4) In this Chapter “dividends” does not include dividends of a capital nature.” (1) Income tax is charged on dividends of a non-UK resident company. … (4) In this Chapter “dividends” does not include dividends of a capital nature.”

“(e) in the making of a distribution in accordance with Part 17.”

“61. Reduction of capital accounts (1) A company may by special resolution reduce its capital accounts in any way. (2) In particular, and without prejudice to the generality of paragraph (1), the company – (a) may extinguish or reduce the liability on any of its shares in respect of share capital not paid up; and (b) may, with or without extinguishing or reducing liability on any of its shares – (i) reduce any capital account by an amount which is lost or is unrepresented by available assets, or (ii) pay off any amount standing to the credit of a capital account which is in excess of the company’s wants. (3) Except as provided in paragraphs (4) and (5), every reduction of capital shall be subject to confirmation by the court.”

“(1) A company may reduce its capital accounts in any way. (1A) A reduction of capital shall be sanctioned by a special resolution of the company. (2) In particular, and without prejudice to the generality of paragraph (1), the company – (a). may extinguish or reduce the liability on any of its shares in respect of share capital not paid up; and (b). may, with or without extinguishing or reducing liability on any of its shares – (i) reduce any capital account by an amount which is lost or is unrepresented by available assets, or (ii) pay off any amount standing to the credit of a capital account which is in excess of the company’s wants. (3). Subject to paragraphs (4) and (5), every reduction of capital shall either – (a) be supported by a solvency statement (see Articles 61A and 61B); or (b) be subject to confirmation by the court (see Articles 62 to 64).”

“(9) A distribution made in accordance with this Article is not for the purposes of Part 12 a reduction of capital.”

“(1) The genesis of the law in Jersey, …. (2) That at the time when Glencore made its distributions to Mr Beard, if a Jersey company wanted to make a distribution under Part 17 CJL 1991, the directors were obliged to form a view of the company’s solvency and make a relevant statement. (3) That the CJL 1991 does not require a Part 17 distribution to be made from the profits of the company, the only requirement is that the directors form the prescribed view in relation to the company’s solvency. (4) The term “dividend” is used but not defined by the CJL 1991. There is no operative provision in the CJL 1991 relating to the payment of a dividend. In particular the term dividend is not used in Part 17 CJL 1991. (5) The term distribution is defined by Article 114 CJL 1991 and is used for the purposes of Part 17 to describe a payment made by a company to its members. (6) Article 115 does not state whether a distribution should be regarded as capital or income or use those terms in this context. (7) The CJL 1991 does not state whether share premium is “assimilated” to capital and the question of assimilation to capital has not been considered by the Jersey courts. (8) A distribution made under Part 17 CJL 1991 and debited to a share premium account reduces the amount standing to the credit of a capital account. (9) If the Jersey legislature had intended the amendment which introduced Part 17 to have the effect of characterising all distributions made under Part 17 which are debited to share premium account as distributions of income or profit, express language would have been required to achieve that.”

“(1) If Glencore had chosen to pay the Distributions in reliance on Part 12 CJL 1991 the Distributions would not have been treated as distributions for Jersey law purposes. (2) The account from which Glencore debited the Distributions was a capital account. For Jersey law purposes that does not necessarily mean that the Distributions were debited to shareholder funds. (3) Under CJL 1991 the only funds from which distributions cannot be made are the nominal capital and capital redemption reserve funds of a Jersey company. (4) Glencore used both the term “dividend” and the term “distribution” to describe the Distributions made to shareholders. (5) Part 17 CJL 1991 is the only relevant machinery which can be used by a company like Glencore to make income distributions.”

“It is well known that before the Act of 1948 these sums [sums received by companies as premiums on the allotment of their shares] ranked as profits available for payment of a dividend …”

“There appears to be little doubt that if, before s. 56 of the Companies Act, 1948, came into operation, the company had distributed amongst its shareholders in cash a sum representing premiums received on the issue of shares, the proportion of such distribution attributable to any trust holding of shares would have been income and not capital as between persons successively interested under the trust. ... The share premiums would have been profits available for dividend (see Drown v Gaumont-British Picture Corporation [1937] Ch. 402), and if any part of them had been distributed by the company otherwise than in liquidation the amount received by trustees in respect of a trust holding would necessarily have been income in their hands, because it was neither a payment in reduction of paid up share capital nor an addition to the shareholders’ capital investment in the company, but simply a cash distribution which, no matter how described, and notwithstanding that in the hands of the company it bore the character of a capital, not an income, profit could not in law be anything else in the hands of the recipients than income derived from their shareholdings.”

“32. But section 56, Companies Act 1948 made all the difference to the result. Since the commencement of the Companies Act 1948, it has not been possible for an English company to pay a dividend out of share premium account. That section took the share premium account out of the category of divisible profit and prevented it being distributable by way of dividend. Accordingly, if a distribution is properly to be made out of share premium account, that can only be done by following a statutory procedure which effectively treats the distribution in the same way as a reduction of capital. The distribution is not a dividend nor is it received by the recipient as income. 33. That is not to say, however, that the ordinary meaning of the word “dividend” has changed. Suppose, for instance, that Jurisdiction X had in 1947 and at all time thereafter a statutory company law code identical to the pre-1948 English code. Prior to the Companies Act 1948, a distribution (being a payment out of distributable profits) could be made, in both Jurisdiction X and in England, out of share premium account by way of dividend. The Companies Act 1948 prevented such distributions being made by way of dividend in the case of an English company. But the company in Jurisdiction X could continue to make such distributions. Those distributions remained dividends within the ordinary meaning of that word. The Companies Act 1948 did not alter the meaning of “dividend”: what it did was to treat what at common law was a distributable profit as no longer such so that it could no longer be paid out as a dividend. As Duff’s Settlement shows, the consequence of the change in the way that share premium account could be distributed was that the receipt, in the hands of the recipient, was capital and not income. … 38 … Accordingly, if it were possible for an English company to effect a distribution out of share premium account by the same mechanism as it pays a dividend out of trading profits, that would constitute a “dividend” within the ordinary meaning of the word.”

“In construing the word “dividend”, we think that it is right to consider what the relevant company is actually permitted to do under its governing law rather than what that company would be able to do with its share premium account if it were an English company.”

“The correct approach to considering whether the Distributions paid by a Jersey company should be treated as dividends for English law purposes is, as set out by the Upper Tribunal in First Nationwide in reliance on earlier decisions particularly Rae v Lazard: (1) first, consider the meaning of dividend as a matter of ordinary usage for English law purposes, then look at the foreign law governing the relevant payment, in this case CJL 1991, and (2) Second, decide whether the payment made under Jersey law fulfils that definition for English law purposes (s 402 ITTOIA).”

“Our conclusion, therefore, is that a distribution out of the share premium account of a Cayman company which is made by the procedure or mechanism of payment of a dividend, is a “dividend” within the manufactured payments provisions. Subject to the second of the Dividend Issues, we therefore agree with the Judge’s conclusion that each of the Preference Dividends was also a “dividend” within those provisions. We do so, having disposed of the two arguments with which we have just dealt, for broadly the same reasons as he gave. That is enough to dispose of the first of the Dividend Issues.[ i.e. of the issue whether the distributions were “dividends”: see para 29 above. ] It will be noted that, under our approach and analysis, the categorisation in Cayman law of the share premium account as capital or profit is not relevant. Nor is it relevant whether Cayman law would treat a dividend paid out of share premium account as income or capital in the hands of the recipient. In case we are wrong on that, we consider the appropriate categorisation later in this decision. … We have thus far only considered the meaning of the term “dividend” without having examined in detail the nature, for English law purposes, of the receipt of a dividend paid out of the share premium account of a Cayman company in the hands of the recipient. If the receipt is in fact income, then that of itself suggests strongly, if not conclusively, that the payment is properly to be seen as a dividend for all the purposes of English law. We propose to look at that question when considering the second of the Dividend Issues. As will be seen, we consider that such a receipt is income in the hands of the recipient.”

“However, neither it is the case that Jersey law is the equivalent of English law post 1948. Instead, Jersey law inhabits a hybrid territory between the two cases; having retained, from the time when it did have a more restrictive view of the use to which share premium could be put, Part 12, while also including the more recent, and more liberal Part 17.”

“In ordinary language today among people having some understanding of business a “dividend” refers to a payment out of part of the profits for a period in respect of a share in a company.”

“… the share premium account itself represents a profit in the sense that the company got more for its shares than their nominal value.”

“It can, in any case, sensibly be said that the “profit” (see Duff’s Settlement) which accrues when a premium is paid on a subscription is part of the profit for the accounting period during which the subscription is made, …”

“there is nothing to support the view that the ordinary meaning of the word “dividend”... excludes the sort of distribution considered in Duff’s Settlement.”

“…the Distributions fall within the meaning of a dividend as a matter of ordinary usage for English law purposes; in fact, the Distributions fulfil almost exactly the example description provided in First Nationwide; the Distributions were paid out of share premium account by the same mechanism (Part 17 CJL 1991) as would be used for paying a dividend out of trading profits… While accepting that the labels applied by Glencore to the Distributions are not determinative of their legal character, I have concluded that there is nothing either in the Jersey legislation or the manner in which these payments were made by Glencore to indicate that the Distributions cannot be treated as fulling the English law definition of a dividend.”

“The law regarding the approach to construction of a consolidating statute was explained by the House of Lords in Farrell v Alexander [1977] AC 59 and is well settled. When construing a consolidating statute, which is intended to operate as a coherent code or scheme governing some subject matter, the principal inference as to the intention of Parliament is that it should be construed as a single integrated body of law, without any need for reference back to the same provisions as they appeared in earlier legislative versions: see Farrell v Alexander [1977] AC 59, 73B-C (Lord Wilberforce), 82B-D and 83D-H (Lord Simon of Glaisdale) and 97B-E (Lord Edmund-Davies). An important part of the objective of a consolidating statute or a project like the Tax Law Rewrite Project is to gather disparate provisions into a single, easily accessible code. That objective would be undermined if, in order to interpret the consolidating legislation, there was a constant need to refer back to the previous disparate provisions and construe them. Therefore the court’s main task in this case must be to construe the ITTOIA without reference back to section 18 ICTA and Schedule D.”

“… we think we should sound a note of caution that in a future case it may be necessary to give further consideration, with the benefit of submissions on the issue, as to whether and when it is appropriate to refer to earlier case law either in relation to a consolidation statute properly so called or to a Tax Law Rewrite Project statute.”

“Section 402: Charge to tax on dividends from non-UK resident companies 1630. This section charges to tax dividends of companies not resident in the United Kingdom. It is based on section 18(1) and (3) of ICTA. 1631. For the reasons explained in the overview, the expression “distribution” has not been adopted. It is possible that a non-UK resident company may make a distribution of income which would not fall within Chapter 4 of Part 4 of this Act because it is not a “dividend”

“The rights and interests of shareholders in the assets and the profits of companies in which they hold shares vary widely in detail, but I think they can all be said to fall under three heads: (1) rights to participate in the distributable profits of the company while it is a going concern; (2) rights to participate in the division of the assets of the company in a liquidation, and (3) rights to participate in any distribution to shareholders on an actual or notional reduction of capital. Anything received under the first head is treated by English law as income of the recipients for both tax purposes and trust purposes (but subject as to the latter to any special provision of the trust) notwithstanding that the source of the distribution may be a profit not of the company's business but on capital account: see In re Doughty [1947] Ch. 263 and Commissioner of Inland Revenue v Reid's Trustees. Anything received under the second head is treated by English law as capital both for tax purposes and, subject as aforesaid, for trust purposes. So also is anything received under the third head. That this is so for trust purposes is clear from In re Duff's Settlements [1951] Ch. 923, where moneys received by trustees on a distribution of part of a share premium account under the Companies Act 1948, s. 56, were held to be capital for the purposes of their trust. My attention was not drawn to any case where the same has been held to be so for tax purposes on a distribution of a share premium account under s. 56, but in my judgment that must follow. This is because, as the Court of Appeal held in In re Duff's Settlements, s. 56 takes a share premium account of a company incorporated under the Companies Act 1948 out of the category of divisible profits and constitutes any distribution to shareholders from that account a notional repayment of paid-up capital.”

“the question is whether “the corpus of the asset” or “shares of the company” or “the capital of the possession” did or did not remain intact after the Bestwall shares were distributed…”

“To ask in what would be the effect of such a distribution if made in England is to embark on a fruitless inquiry because English law gives no guiding light. According to English law a distribution of capital profits would be income in the hands of the shareholder: [Reid’s Trustees]. But this is nihil ad rem in the present case, where the distribution has been made under Maryland law. In the Stated Case there are findings of fact as to the law of Maryland, and they leave me in no doubt that according to the law of Maryland there was a capital distribution.”

“The distinction has depended upon the mechanics of distribution. If the payments are made by deploying the mechanisms appropriate for reduction of capital, then they are payments of capital. Such mechanisms can be readily identified as designed to protect the capital of a company.”

“The nature of the foreign possession can only be ascertained by reference to the law which governs it, which in the present case is Italian law. The effect of the distribution upon the foreign possession must also be ascertained by the same law.”

“On the true view of the facts I think that the share premium reserve stands in the same position [as the legal reserve]. Italian law demands that this fund be set aside and that it be not distributed at all so long as the legal reserve is less than 20 per cent. of the share capital and that when the legal reserve has achieved that level, the share premium reserve may be distributed but only apparently on the footing that the distribution is treated as a return of capital. It seems that no legal formalities need be fulfilled to justify a distribution from a share premium reserve at any time when the legal reserve is complete, such as are required under the Companies Act 1948 to justify distribution of a sum standing to the credit of a share premium account of an English company, but the capital character of the distribution appears, upon the finding of the commissioners, to be no less clear under Italian law than under our own law. In my judgment, on the findings in this case, Italian law must be regarded as treating premiums paid on shares as being, ab initio and always, notional paid-up capital of the company….”

“United Kingdom law recognises only two species of payment in respect of shares: capital or income payments.”

“that payments debited from a capital account, such as a share premium account, in Jersey, are no more “assimilated to capital” than payments from any other type of account from which distributions can be legally made.”

“On my analysis, and even taking account of Article 39(4), my view is that Part 17 overrides the “assimilation to capital” provided by Article 39; the deeming provision at Article 39(4) is made subject to the ability of a company to pay a distribution under Part 17 (Article 39(3)(e)). The legal character of share premium as assimilated to share capital is broken by Article 39(3)(e) and payments made under Part 17 cannot properly be treated as anything other than distributable profits.”

“When and to the extent that the issue calls for the exercise of legal judgment, by reference to principles and legal concepts which are familiar to an English lawyer, then the court is as well placed as the trial judge to form its own independent view.”

“Albeit that a question of foreign law is a question of a peculiar kind, the answer to the question remains a finding of fact. Our statutory jurisdiction is restricted to appeals on a point of law. Accordingly, unless the Judge has made a finding about Cayman law (or, which comes to much the same thing, about what the Cayman court would be likely to decide) which he could not properly make on the evidence before him, there is no relevant error of law. It is one thing for the Court of Appeal on an appeal from the High Court to carry out the sort of reappraisal indicated in Parksha and MCC Proceeds in the exercise of the appellate jurisdiction which it possesses; it is another for us to do so in the context of a statutory right of appeal restricted to an error of law.”

“The principle of the maintenance of capital is now of very limited application in Jersey”

“I would describe share premium as having a chameleon character, taking its colour from the law which is applied to it; it has no intrinsic colour of its own.”

“Unlike under the relevant Italian law, there appears to be no mechanism under Jersey law to protect shareholders if the directors choose to make a payment out of share premium account. The only protection is directed at creditors of the company in the form of the solvency statement.”

“In a case like the present, where the company has power to determine whether profits reserved and temporarily devoted to capital purposes, shall be distributed as dividend or permanently added to its capital, the interest of the life tenant depends, in my opinion, upon the decision of the company.”

“There are cases, where, on a true analysis of the facts, it is possible to identify a declaration of a dividend as being other than a payment of income.”

“… in my view, to regard the I.C.I. transaction as a distribution of profits, akin to payment of a dividend in specie and hence income, would be to exalt company form over commercial substance to an unacceptable event…. Unless constrained by binding authority to the contrary, I consider the I.C.I. transaction is to be characterised as a company reconstruction, with two capital assets (shares in I.C.I. and Zeneca Group) in the trustees' hands replacing one existing capital asset (shares in I.C.I.).”