My limited company has a large cash balance, built up via share investment and business savings some eight or more years after no more trade was carried on in the company. Could HMRC argue that dividends, paid over a number of years, are actually capital distributions? 

Arthur replies: 

You have explained that the cash balance has been built up via share investment and business savings. HMRC’s Company Taxation Manual at CTM15205 confirms that dividends can only be paid out of ‘profits available for distribution’, into which category your cash balances appear to fall. These are bona fide dividends and are subject to income tax in the hands of the recipient. A capital distribution is something different. It is broadly when a company returns capital to shareholders (i.e., repayment of the amount paid for the shares). This is normally subject to capital gains tax.