Lee Sharpe looks at how ‘illegal’ (unlawful) dividends classified as loans to shareholders may be released to be taxed as a distribution, without being re-categorised as earnings by HMRC.
In the two previous articles, I have looked at so-called ‘illegal’ dividends and the implications from a tax perspective, for a ‘close’ company.
I shall now look at what happens if a distribution has been categorised as having been made unlawfully, and HMRC deems the money so received by shareholders to be owed back to the company. How would a release from that obligation be taxed?
Is it a loan?
In Precision Dippings Ltd v Precision Dipping Marketing Ltd [1986] Ch 447, it was found that the shareholder held the company’s funds ‘on constructive trust’ for the company, after
