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CTA10/S1000 (1) A

Most 鈥渄ividends鈥� paid by a company, including capital dividends, are Corporation Tax Acts distributions (of income nature).

Exceptions include:

• stock dividends (see CTM17000 onwards),
• dividends paid by building societies (see CTM49370),
• dividends paid by Registered Societies, including Industrial and Provident Societies (see CTM40500 onwards), and
• 鈥渄ividends of a capital nature鈥� (see below).

Terminology needs care. A capital dividend is simply a dividend paid out of capital profits. This is not the same thing as a capital distribution for chargeable gains purposes as defined at TCGA92/S122 (5)(b) or a 鈥渄ividend of capital nature鈥�. For CG purposes a capital distribution is any distribution from a company in money or money鈥檚 worth except one which is income for Income Tax purposes in the hands of the recipient.

There is no general definition of dividend in tax or company law; the latter simply provides model articles for the payment of dividends and defines 鈥渄istributions鈥� at CA06/S829. Neither has tax case law provided a clear definition. In Esso Petroleum Co Ltd v Ministry of Defence [1989] BTC 500 Harman J said 鈥渋n ordinary language among people having some understanding of business a dividend refers to a payment out of a part of the profits of a company鈥� and in Memec v IRC [1996] BTC 590 Robert Walker J referred to 鈥渢he ordinary businessman鈥檚 perception鈥�. It is clear that a dividend may be paid out of share premium account, where this is freely distributable under the governing company law. See the reference to HMRC v First Nationwide [2012] EWCA (Civ) 278 at CTM15205. A 鈥渄ividend of capital nature鈥�, see ITTOIA05/S402, is not a dividend as understood at CTA10/S1000(1) A, because the 鈥渃orpus of the asset鈥�, the company share capital, is itself divided: see CTM00515.

Note that ITA07/S19 defines 鈥渄ividend income鈥� for the purpose of determining rates of charge, but not all the items included there are dividends, and the item at S19(2)(d), release of loan to participator in close company, is not even a CT distribution. The loan release charge is at ITTOIA05/PART4/CHAPTER6 rather than at CHAPTER3 (dividends and other distributions from UK-resident company).

Where a dividend is paid in cash the amount or value of the dividend is the sum paid. Not all dividends are paid in cash. Non-cash dividends may be described as 鈥榙ividends in kind鈥� or 鈥榙ividends in specie鈥�. Such dividends will usually be declared in a given amount, to be satisfied by the transfer of assets. The dividend will be equal to that given amount. Commonly the given amount will be the book value, the value of the assets in the company鈥檚 balance sheet. If the market value of the assets transferred is greater than that given amount, the excess will be a distribution under CTM15250, which deals with distributions under CTA10/S1000 (1) B (distribution out of assets in respect of shares) and G (transfers of assets). Exceptionally, a company may satisfy a dividend by the transfer of assets without specifying any amount. In such cases the amount of the dividend is taken as the book value of the assets and similar treatment applies.

CTM15205 gives further guidance on dividends and distributions from the perspective of company law.