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March 18, 2015

Overseas Dividends Taxed at Lower Effective Rate - Shirley v HMRC

The Tax Law Rewrite Project was initiated in 1996 by HMRC in an attempt to make tax legislation more consistent, understandable and clear by removing archaic and impenetrable terminology.

However, the legislation written as part of the project has caused unexpected complexities, and the unintentional effects of the rewrite are still being felt to this day, as illustrated in the 2014 case Shirley v HMRC.

The case dealt with the interpretation of the rewritten legislation found in The Income Tax (Trading and Other Income) Act 2005 in relation to the taxation of overseas dividend income.


-          Mr Shirley was a UK resident who was not domiciled in the UK

-          He is the life tenant and interest in possession beneficiary of two overseas trusts which were established by his parents and based in Ireland

-          The case arose in respect of the dividends arising on shares owned by the trusts in companies resident in a number of different countries, including Canada, Hong Kong, Switzerland and the USA. The dividends from these companies were paid directly into the UK by a overseas company

The Legislation

As a UK resident making a claim for remittance basis, Mr Shirley is chargeable to income tax on the dividends to the extent that the dividends are brought into and enjoyed in the UK.

s. 397 ITTOIA 2005 provides for a tax credit for “qualifying distributions from UK resident companies”. The value of the dividend is grossed-up so as to include the tax credit, and it is this figure which is treated as the taxpayer’s taxable income.  For example, if a taxpayer received a dividend from a UK resident company of £90, the tax credit is £10.

s. 399 ITTOIA 2005 states that where a dividend is not grossed up and the taxpayer is not entitled to a tax credit under s. 397, the taxpayer will be treated as having paid income tax at the ordinary rate, e.g. if a taxpayer received a dividend of £90, he would be treated as having paid income tax on that dividend at the dividend rate at 10%, i.e. £9.

The effect of this legislation is such that a higher rate taxpayer, under s. 397 would have to account for £100 of income (with a £10 credit), whereas under s. 399 they would have to account for £90 of income (with a £9 credit), therefore enjoying a lower effective rate of tax.

The Case

The matter at hand was whether Mr Shirley could enjoy this lower effective rate of tax. He argued that the wording of the legislation was clear and that as s.397 could not apply as the distributions came from non-UK resident companies, s.399 would apply instead. The legislation could not have any other meaning.

HMRC’s disputed this point and argued that s.399 does not apply to UK resident individuals who receive distributions from non-UK resident companies. The overall purpose and rationale of the chapter was that s. 399 was limited in its application to distributions from UK companies only.

HMRC’s position was that by looking at the overall purpose and rationale of Chapter 3, Part 4 of ITTOIA, and taking into consideration to content and wording of other sections of ITTOIA, it was clear that this was the legislation’s intended meaning.

It was also stressed that ITTOIA is a tax rewrite statute, and therefore there was no intention to change the law. In this situation, they requested that the previous law should be considered when interpreting the re-written provisions.

Following case law from Eclipse Film Partners (No 35) LLP v HMRC, IRC v Joiner and Farrell v Alexander, it was held that interpreting a tax law rewrite statute reference to the prior legislation is not permitted unless the rewrite statute is itself ambiguous.

The Tribunal adopted a literal interpretation of the provisions and dismissed HMRC’s argument, holding that the rewritten legislation was clear in its meaning. On this basis, they were not required to consider earlier legislation and agreed with Mr Shirley’s interpretation of the legislation. It is thought that this decision may have wider implications to other higher-rate taxpayers, and suggests that they have been overcharged tax since the legislation in question was implemented.



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