TAX CASES - 21.05.2024

Were distributions capital or income in nature?

Beard v HMRC. Mr Beard (B) received distributions from a company not resident in the UK (G). These came from the company’s capital account, but HMRC determined that they should be subject to income tax in the UK. The First-tier Tribunal agreed, so B appealed to the Upper Tribunal (UT).

Law. The established approach in such situations is to consider the character of the payments under the law prevailing in the jurisdiction the company is incorporated in, then apply UK tax law. The appropriate jurisdiction in this case was Jersey.

Decision. The UT found that there was nothing in Jersey law to suggest the distributions could not be treated as an income distribution for UK tax purposes. The payments came from the capital account, but did not reduce the capital of the company due to a particular mechanism chosen to make the payments. They were income in nature, not capital, and the appeal was dismissed.

It’s important to remember that distributions can be capital as well as income, i.e. dividends. Where overseas companies are involved, it may be necessary to consider the nature of the income in a foreign jurisdiction.

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