The recent Special Commissioner’s decision in Buck v HMRC SpC 716 examined whether a dividend waiver represented a settlement for the purposes of income tax.
Mr Buck had 9,999 shares in an unquoted trading company and one share was owned by his wife. Shortly before the year end, Mr Buck waived his dividend entitlement and a dividend was subsequently paid of £35,000 per share for the year, all of which was paid to his wife. The same occurred in the following year.
HMRC argued that the dividend waivers and the subsequent dividends represented an arrangement for the purposes of Section 660G Taxes Act 1988 (now Section 620 ITTOIA 2005) and, therefore, a settlement within Section 660A TA1988 (now Section 625 ITTOIA 2005). They did not consider that exemption in Section 626 ITTOIA 2005 applied, because the arrangement did not represent an outright gift by one spouse to another of property from which income arises. Also, in any event, the subject matter of the gift was wholly or substantially right to income. The taxpayer claimed that there was no arrangement; it was in the company’s interest to pay out maximum dividends, and he had not wanted to receive them.
The Special Commissioners found the HMRC arguments compelling (and who can blame them?), with the result that the whole of the dividend was treated as the income of Mr Buck and taxable on him accordingly.
It seems pretty clear that a dividend waiver can be a settlement – providing, of course, there is an element of bounty. This would seem particularly to apply to a dividend waiver enabling another shareholder to receive an increased dividend. However, this will not always be the case. A dividend waiver is the abandonment of a contingent right so that the relevant shareholder does not receive the dividend. That does not necessarily mean anybody else receives more. It will do so if a dividend is proposed of a fixed monetary amount and one shareholder waives their entitlement; clearly, the whole of the fixed sum will then go to the others and they will receive more than would otherwise have been the case. That would represent bounty, and the settlement provisions would apply. However, if a dividend is proposed of a fixed amount per share, the fact that one shareholder waives his or her entitlement does not increase the amounts payable to the others. In those circumstances, there can be no bounty and no settlement. But you should not be too clever, because (as in the case of Mr Buck) if you propose a dividend per share that is clearly in excess of the company’s distributable profits, the whole arrangement will be a settlement. The amount payable to the other shareholders will be possible only because the proposed dividends will obviously have been made in the knowledge that the waiver would be made.
Nobody can take exception to a shareholder receiving a dividend on his or her shares, even if nobody else receives a corresponding dividend. HMRC are likely to get excited only ifarrangements are made whereby a (say) 30-percent shareholder receives more than 30 percent of the distributable profits. In such circumstances, HMRC are likely to cast around for reasons for this discrepancy in an attempt to invoke the settlements law.
The proposals for new provisions on income splitting may have been quietly dropped – but Section 625 ITTOIA 2005 is still a powerful weapon in the hands of HMRC.