In Marcus and Karen Jays v HMRC  TC8639, two shareholders avoided dividend tax discovery assessments when their company declared large final dividends. They were denied an enforceable right to receive payment due to an agreement made with their bank to restrict the size of dividends. HMRC had assessed the amounts voted and not paid.
- The taxpayers jointly owned Questor Properties Limited (QPL), a property management company.
- QPL wished to show strong Dividend declarations to help attract external investors.
- Lloyds Bank, which provided financing for the properties owned, was unwilling to allow substantial funds to be withdrawn from QPL.
- The taxpayers made undertakings to Lloyds to limit the funds withdrawn.
- Actual funds withdrawn were less than the dividends declared, the dividend vouchers (which were final dividends) and minutes reflected the taxpayers’ commitments to Lloyds.
- Only dividends drawn were declared on the appropriate Tax Returns.
- Discovery Assessments were raised by HMRC on the basis that it was the dividends declared, not drawn, which were taxable.
- The taxpayers Appealed to the FTT.
The First Tier Tribunal (FTT) found that:
- Dividends are taxable when they are 'paid', which there is an enforceable right for the recipient to receive the funds.
- The dividends, while declared, did not give rise to enforceable rights to receive all of the dividends declared as income as:
- The amounts withheld were credited to a 'blocked account' and were not accessible until both parties (Lloyds and QPL) could reach an agreement.
- The withholding of the dividend payments represented a covenant to Lloyds who would have been able to suspend borrowings to QPL if breached with potentially dire commercial consequences for QPL.
- The director was acting in accordance with his fiduciary duty to act in QPL’s best interest in declaring and paying dividends subject to the stipulations imposed by Lloyds.
- As there was no enforceable right to receive the income, the withheld dividends were not paid and not subject to Income Tax.
- As there was no insufficiency of tax there was no discovery and the Discovery Assessments fell away.
The appeal was allowed.
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