On 12 June 2017, the First-tier Tribunal1 held that the price paid for the acquisition of rights to receive dividends was not deductible for corporation tax purposes.

A number of steps were undertaken as part of the arrangements in this case but, essentially, the taxpayer bought the right to receive dividends from a related party before selling the right to an unconnected party a day later. The taxpayer submitted its corporation tax return for the year in question on the basis that the arrangements had generated a substantial trading loss. The taxpayer’s position was that:

• the price paid for the dividend rights was tax deductible from the profits of its banking trade, but

• the sale price received was not taxable.

The taxpayer was seeking to avail itself of a tax treatment which, at the relevant time, was afforded by section 730(3) of ICTA 1988 (now contained in the income stream transfer rules in CTA 2010).

After an extensive review of the facts and relevant case law, the Tribunal held that:

• the price paid for the dividend rights was not deductible for corporation tax purposes, as this was not a trading transaction within the course of the taxpayer’s trade. Although the Tribunal accepted that the dividend rights were “analogous” to other financial instruments in which the taxpayer dealt for the purposes of realising profit, “looking at all the circumstances, including the inception of the transaction and the manner of its implementation…this transaction was not trading in financial instruments for a profit but was a tax recovery device”. This conclusion determined the appeal

• in any event, the price paid was not incurred “wholly and exclusively” for trade purposes. The Tribunal held, looking at the subjective intentions of the taxpayer, that it had a non-trading purpose (ie securing the tax benefit) in incurring the expenditure, with the result that the price was not paid “exclusively” for trade purposes

• the amount received by the taxpayer for the subsequent sale of the dividend rights was not to be excluded from the taxpayer’s profits subject to corporation tax.

The decision demonstrates, amongst other things, that the “wholly and exclusively” test is separate to that of whether the transaction is a trading one. Although the answers in each case will often point in the same direction, it should not be taken for granted that meeting the “trading” test will automatically mean that the “wholly and exclusively” test is met.

The decision can be viewed here