Introduction

This commentary examines the Court of Appeal’s decision in Beard v Commissioners for His Majesty’s Revenue and Customs [2025] EWCA Civ 385, which addresses the interpretation of the phrase “dividends of a capital nature” in section 402(4) of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA). The appeal arises from Alexander Beard’s challenge to HMRC’s view that interim, final and in specie cash distributions paid by Glencore plc—debited to its share premium account—were taxable as income rather than chargeable to capital gains tax. Both the First-tier Tribunal (FTT) and the Upper Tribunal (UT) had held against Mr Beard, relying heavily on established authorities such as Reid’s Trustees and Rae v Lazard. On appeal, the Court of Appeal dismissed Mr Beard’s grounds, reaffirming that the form or mechanism of a distribution is decisive in distinguishing income from capital for non-UK dividends.

Summary of the Judgment

The Court of Appeal (Asplin LJ, Peter Jackson LJ and Moylan LJ) dismissed Mr Beard’s appeal. It held:

• The FTT made no material error of law in finding that Glencore’s distributions, though debited to share premium, were dividends under s.402(1) ITTOIA and not “of a capital nature” under s.402(4).
• The statutory test depends on UK law to decide whether a receipt is income or capital, but foreign law determines the form and mechanism of distribution.
• The established case law—Reid’s Trustees, Rae v Lazard, Re Duff’s Settlement and Courtaulds v Fleming—shows that the mechanism (or “machinery”) by which a distribution is made typically dictates its character as income or capital.
• Jersey law expressly permits distributions from share premium under Part 17 of the Companies (Jersey) Law 1991. A payment under that mechanism is prima facie income, notwithstanding Article 39(4)’s deeming of share premium as capital in other contexts.
• The Lonmin in specie distribution fell within the same Part 17 procedure and was likewise not “of a capital nature.”

Analysis

Precedents Cited

• Inland Revenue Commissioners v Trustees of Joseph Reid (dec’d) (1949) 30 TC 431 (HL) (“Reid’s Trustees”) – Introduced the “corpus intact” test and emphasized that foreign dividends, even if derived from capital profits, are prima facie income unless the corpus of the asset is impaired.
• Rae (Inspector of Taxes) v Lazard Investment Co Ltd [1963] 1 WLR 555 (HL) – Reaffirmed that the form or machinery of distribution determines whether a receipt is income or capital; foreign law defines the mechanism; UK law then applies the income/capital distinction.
• Re Duff’s Settlement [1951] Ch 923 (CA) – Examined s.56 of the Companies Act 1948: distributions from share premium treated as a return of capital only when effected by a court-sanctioned capital reduction.
• Courtaulds Investments Ltd v Fleming [1969] 1 WLR 1683 (Ch D) – Applied Reid’s Trustees and Rae v Lazard to an Italian distribution from share premium; mechanistic form was determinative.
• First Nationwide Building Society v Revenue and Customs Commissioners [2011] UKUT 174 (TCC) & [2012] EWCA Civ 278 – Confirmed that a foreign company’s legislative change permitting share premium distributions as dividends turned those payments into income under UK law, because the mechanism chosen was that of a dividend.

Legal Reasoning

The Court of Appeal’s reasoning unfolded in the following steps:

1. Foreign Law as a Factual Foundation
   The courts below had correctly treated findings of Jersey company law as factual findings. On appeal, no Edwards v Bairstow challenge succeeded, and this court has capacity to appraise Jersey law directly given its common-law pedigree and Privy Council supervision.
2. Mechanism of Distribution Controls Character
   Consistent with Reid’s Trustees and Rae v Lazard, the form and procedures prescribed by the law of incorporation determine the legal character of a distribution. UK tax law then asks whether that character is income or capital. Though labels and source notions may assist, the chosen mechanistic route (dividend under Part 17 vs. capital reduction under Part 12 of the Jersey law) is ordinarily conclusive.
3. Statutory Context of ITTOIA
   ITTOIA was a restatement, not a substantive change, of the pre-2005 law. Section 402(1) charges “dividends of a non-UK resident company” to income tax, and s.402(4) excludes “dividends of a capital nature.” Explanatory Notes explicitly refer back to the Reid’s Trustees/Rae v Lazard corpus test and confirm that only income falls to be taxed under s.402.
4. Jersey Company Law and Part 17 Distributions
   The Companies (Jersey) Law 1991 allowed distributions from share premium (deemed a capital account) only under Part 17 with a solvency statement. Articles 39(4) (assimilating share premium to capital) is expressly “subject to” Part 17, which treat distributions under that Part as akin to dividends out of profit for creditors’ protection. The FTT and UT correctly found that Glencore used Part 17 exclusively.
5. Application to the Distributions
   All Cash Distributions and the in specie Lonmin share distribution were made under Part 17. Their mechanism aligned with standard dividend procedures, leaving the share corpus intact. They were therefore prima facie income dividends. No credible departure was shown to “capital nature.”

Impact

This decision:

• Reaffirms the enduring vitality of the mechanism-based test for the income/capital divide, as applied to non-UK dividends under s.402 ITTOIA.
• Clarifies the role of foreign law: it shapes the form of distribution, but UK law then determines whether that form results in income or capital.
• Offers practical certainty: taxpayers and advisers must consider which statutory machinery is used by a foreign company when planning returns from capital accounts such as share premium.
• Warns that labels (“capital contribution reserve,” “distribution” vs. “dividend”) do not bind UK tax treatment.
• Sets a precedent discouraging attempts to recast income distributions as capital receipts by relying on non-UK capital law reforms that permit share premium outflows.

Complex Concepts Simplified

“Dividend of a Capital Nature”

A dividend paid out of a corporation’s capital, not its profits. Under UK law, this rare category exists only if the distribution machinery treats the payment as a capital return (e.g., a court-sanctioned reduction of capital under s.56 of the Companies Act 1948). Such dividends escape the s.402 income tax charge but become subject to capital gains tax as “capital distributions.”

Mechanism/Machinery of Distribution

The legal procedure through which a payment is effected under the law of incorporation. Examples:

• Dissolution or winding-up (liquidation) – capital.
• Court-approved capital reduction under Part 12 CJL 1991 – capital.
• Ordinary dividend or Part 17 distribution with solvency statement – income.

The mechanism typically dictates whether the recipient’s receipt is income or capital.

“Corpus Intact” Test

Originating in Reid’s Trustees, this asks whether, after a distribution, the corporate asset (e.g., shares) remains legally unchanged. If yes, the distribution is income; if not (e.g., a partial liquidation splitting assets), it may be capital.

Foreign Law vs. UK Tax Law

Foreign company law defines the form (e.g., Part 17 vs. Part 12); UK tax law then applies its own rules to decide whether that form results in income or capital for tax purposes.

Edwards v Bairstow Challenge

An appeal on law only cannot successfully challenge factual findings unless no reasonable tribunal properly instructed could have made them. Jersey law findings thus stand unless shown to be perverse or unsupported.

Conclusion

The Court of Appeal in Beard v HMRC has firmly endorsed the long-standing principle that the character of a non-UK dividend for UK income tax hinges on the legal machinery of its distribution under the law of incorporation. A distribution made under Part 17 of the Jersey Companies Law, even if debited to share premium, remains an income-taxable dividend unless it follows the specific capital-reduction machinery. This ruling reinforces certainty for cross-border corporate distributions and preserves the clear boundary between income and capital established by Reid’s Trustees, Rae v Lazard and related authorities.