Overview

HMRC's recent stance
HMRC have been refusing to confirm that dividends paid out of reserves on a reduction of share capital are dividends of an income nature. If this view were correct, UK companies would pay corporation tax on such dividends under the capital gains regime rather than receive income dividends (which are usually exempt).

HMRC did not publish a general statement describing their analysis. We can only assume that their approach largely followed the arguments raised in the First Nationwide case heard recently in the First Tier Tribunal albeit in a slightly different context. In that case (judgment in which was released in January), HMRC argued, first, that "dividend" has a meaning for tax purposes which is different from its company law meaning; and second, that, if a dividend had been paid, it was a dividend of a capital nature because of the nature of the reserves out of which it was paid. The judge rejected both arguments.

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