Article / 1 Nov 2024
In this month’s update we:
In HMRC v Gould [2024] UKUT 00285, the Upper Tribunal (UT) confirmed that when a company pays an interim dividend to one shareholder without paying other shareholders of the same class, those other shareholders will have an enforceable debt against the company (subject to any agreement to the contrary). This decision amounts to an important departure from the previously accepted principle that interim dividends are only enforceable (and, therefore, taxable) when paid to the individual shareholder.
A dividend is subject to income tax in the hands of an individual shareholder when it becomes “due and payable”, and there is a distinction in this regard between final dividends and interim dividends. Once a dividend has become due and payable – i.e. a debt – the directors cannot revoke it and the shareholder becomes entitled to enforce payment.
A final dividend is typically declared by shareholders following a recommendation from the board, and it will become a debt payable to shareholders at the time specified in the shareholder resolution.
In contrast, interim dividends are typically decided solely by the board. Unless declared by shareholders, an interim dividend will generally become a debt payable to shareholders when it is paid, rather than when the board resolves to pay it. However, as a result of this HMRC v Gould case, it would now seem that subject to contrary agreement, where a company pays an interim dividend to one shareholder, another shareholder of the same class will have an enforceable debt against the company, even though that shareholder has not yet received payment. The creation of that enforceable debt will fix the date by reference to which the interim dividend is taxable.
The board of a company resolved to pay an interim dividend of £40m to its two shareholders. £20m was paid to one shareholder (S1) on 5 April 2016 (the last day of the 2015/2016 tax year) and £20m was paid to the other shareholder (S2) on 16 December 2016. S2 had elected to delay receipt of his dividend payment to enable him to claim non-resident status for UK tax purposes for the tax year 2016/2017.
HMRC brought proceedings in the First Tier Tribunal (FTT) to claim unpaid tax on S2’s £20m dividend on the basis that it should have been taxed in the UK for the tax year 2015/2016. HMRC argued that the dividend paid to S2 became an enforceable debt as soon as S1 received his dividend payment in April 2016. This was because the company’s constitution, and English common law, both required the company to pay dividends equally and proportionately across shares of the same class.
The FTT disagreed with HMRC and held that S2’s dividend was not due and payable until it was actually paid to S2 on 16 December 2016. The payment of an interim dividend to one shareholder did not automatically give rise to an enforceable debt for another shareholder. In any event, even if a debt did arise, S2 had either waived his right to receive the dividend at the same time as S1, or the shareholders had agreed to amend the articles of association to allow for split payment dates.
HMRC appealed to the UT on three grounds, with the first ground being that the FTT was wrong to conclude that where a company with Table A articles pays an interim dividend to one shareholder, but not to another of the same class, no debt is owed to the second shareholder (Ground 1).
The UT dismissed the appeal, despite agreeing with HMRC on the first ground of its appeal.
In relation to Ground 1, the UT noted that the declaration of a final dividend by a company in general meeting gives rise to a debt payable by the company to its shareholders. There was no reason to distinguish between final and interim dividends at the stage where the directors have not only resolved to pay a dividend but have also made payment to some, but not all shareholders. If a shareholder was not paid their share of an interim dividend, then a debt would arise at the time that the other shareholders were paid. This followed from the principle (as set out in the articles of association) that shareholders of the same class should be treated equally, including in relation to payment of interim dividends.
On this basis, and subject to any agreement to the contrary, S2 would have had an enforceable debt against the company once S1 had been paid the interim dividend in April 2016. However, the UT found that there had been agreement to the contrary, due to the fact that either:
Although the FTT had been wrong in relation to Ground 1, that was not a material error of law, and so the appeal was dismissed.
This is clearly an important decision concerning the date on which an interim dividend becomes due and payable when payment is made to different shareholders on different dates. Although the case relates specifically to Table A articles of association, it is likely that the position would be the same for a company that has adopted the Model Articles for Private or for Public Companies.
Fortunately, due to the pragmatic decision of the UT, it is still possible to delay the date that an interim dividend becomes legally enforceable when there are split payment dates – an important aspect of tax planning for many shareholders. Companies should ensure that their articles of association authorise directors to pay interim dividends at different times without creating a debt, and/ or that individual shareholders legally waive their right to enforce payment of an interim dividend that has already been paid to other shareholders.
Shareholders should be aware, however, that the flexibility to delay payment of a dividend does leave them exposed to the risk of non-payment. If a shareholder chooses to defer receipt of an interim dividend and the company’s financial position deteriorates in the intervening period, the directors may be obliged to cancel the payment in compliance with their duties to the company.
Companies House has published a policy statement setting out its approach to enforcement when it identifies non-compliance or breaches of the law in relation to the register of companies.
In conjunction with this enforcement policy, Companies House has also published guidance explaining its approach to issuing financial penalties under the new civil penalties regime introduced in May 2024.
The Economic Crime and Corporate Transparency Act 2023 introduced new statutory objectives for the Registrar of Companies to improve the accuracy and integrity of information on the register. It also gave the Registrar new powers (and enhanced existing ones) to promote those objectives and to encourage and support businesses to comply with their legal obligations. The recently published policy statement sets out Companies House approach to enforcement when businesses do not comply with their obligations.
In addition to providing advice and published information, the enforcement methods available to Companies House include:
When looking at its enforcement options, Companies House has stated that it will adopt a proportionate approach, recognising the importance of economic growth and the impact that its actions are likely to have on businesses.
The policy statement includes a compliance framework that shows how Companies House will consider what enforcement or other action may be appropriate. For example, for companies that are usually compliant but occasionally fail to file on time, Companies House will provide support and guidance and will usually limit penalties to fines. In contrast, for companies that have a significant history of late or inaccurate filing and are wilfully non-compliant (failing to bring records up to date when prompted), Companies House will consider using any and all sanctions against the company. These may include criminal prosecution, director disqualification, financial penalties and striking the company off the register.
Since May 2024, Companies House has had the power to impose civil financial penalties instead of criminal prosecution, for most offences under the Companies Act 2006. Offences excluded from the new financial penalty regime include those relating to company secretaries, resolutions and meetings, and audit.
Companies House had indicated that it would not exercise these new fining powers until it had published guidance on their use. This guidance has now been published, and it sets out:
The calculation of a financial penalty will be based on the seriousness of the offence (minor, serious or very serious) and whether it is the first, or a repeat offence of the same type. For example, the guidance states that a first minor offence may incur a financial penalty of £250, whereas the fourth or more occurrence of a very serious offence may result in a fine of £2,000.
Although penalties will increase for repeat offenders, Companies House may consider prosecution instead of a financial penalty where the case warrants it.
With the exception of late filing of accounts, the Registrar has historically taken a fairly light approach to offences under the Companies Act 2006. However, the publication of the Companies House enforcement policy, and the guidance on financial penalties, suggests that a stricter approach will now be taken. Companies (and registered individuals) would be well advised to ensure that relevant filings are brought and remain up to date, and that they have appropriate procedures in place to ensure timely compliance in the future.
In Omnimax International LLC v Simon Cullen & Ors [2024] EWHC 2367 (Ch), the High Court granted summary judgment against a director, ordering him to repay monies he had received from two companies. In the absence of appropriate accounting records (which the director was responsible for maintaining), the defendant had no real prospect of establishing that the monies had only been applied for the proper purposes of the companies.
Mr Cullen was the sole director (Director) of two companies (Companies) that had gone into liquidation owing significant sums to one of their customers (Customer). The liquidators assigned any claims they may have had against the Director to the Customer.
The Customer brought an action for summary judgment claiming that the Director had caused the Companies to make payments of over £1.6m to his private bank account, in breach of the fiduciary duties which the Director owed to the Companies.
It was not disputed that the Director had received the payments, nor that he owed a duty to the Companies to apply their assets for proper purposes only. The Customer alleged that the Director had breached this duty by using part of the monies he had received from the Companies to fund a private house purchase.
The issue to be determined at the summary hearing was whether the Director had a realistic prospect of establishing that the payments he had received were for a proper purpose.
The Court granted summary judgment against the Director, ordering him to account for a portion of the monies he had received from the Companies.
When making its judgment, the Court confirmed that once a director has received company money, the burden of proof is on that director to show that the payment was for a proper purpose.
The Director was not able to discharge this burden because, in breach of his director’s duties (and in breach of the Companies Act 2006), he had failed to keep proper accounting records. In particular, he had failed to keep financial records recording transactions between him and the Companies (other than in relation to salary, dividends or expenses).
In response to the Director’s argument that it was for the Customer to prove that the Director had no real prospect of success, the Court held that the Director could not rely in his defence on the absence of financial records that he was responsible for maintaining.
This case is a useful reminder for directors of the importance of keeping accurate and comprehensive financial records in all circumstances, but particularly so when a director enters into a transaction with their company.
In these circumstances, the onus will be on the director to show that the transaction was for a proper purpose and did not amount to a breach of the director’s duties to the company. There may also be requirements under the Companies Act 2006 for the transaction to be approved by the shareholders before it is entered into (failing which it will be voidable).
Where there has been a breach of director’s duties, the director may be required to pay damages to the company or to pay equitable compensation (including an account of any profits made by the director as a result of the breach).
First published in Accountancy Daily.
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