Analysis
This was an appeal concerning a tax avoidance scheme designed to allow shareholders in private companies to extract profits without paying income tax on them.
Prior to entering into the scheme, T was sole director and shareholder of M Ltd. The scheme had three steps:
- (1) On 11 March 2013, the board of directors of M Ltd (ie T as sole director) and T resolved to approve the creation of a new class of ‘S’ ordinary shares and the necessary amendments to M Ltd’s articles of association. On the same day, M Ltd (by resolution of T as sole shareholder) created the new S class of shares and made the necessary amendments. The board of directors (ie T) then approved the allotment and issue of one S share to a Mrs Fiona Gower (who was non-UK resident) for a subscription price of £100. Mrs Gower paid her subscription money a week later. The S share carried a right to participate in income profits and distributions (either as a single class or together with all existing shares) as the board might recommend, but carried no voting rights, and only carried a right to a return of capital at nominal value (ie £100).
- (2) On 14 March 2013, Mrs Gower entered into a deed of settlement with PTCL, a Jersey-incorporated trust company. Under the deed, Mrs Gower created a trust and settled the S share on its terms. The trust’s terms included that, during the ‘initial period’ from 14 March 2013 to 5 April 2013 (or such earlier date as the trustee should specify), the income was to be held as to the first £500 for a Jersey charity, as to the next £100 for Mrs Gower, and as to any further income 0.5% for the charity, 1.5% for Mrs Gower, and 98% on protective trusts for T. After the initial period, the trustee was to hold the income on discretionary trusts for the beneficiaries with power to accumulate (the beneficiaries being T, his spouse, children and descendants, Mrs Gower, and the charity). Subject to those trusts and various powers, any income was to be held on trust for Mrs Gower absolutely or in default, for the charity, or in default, for charitable purposes generally. Also on 14 March 2013, Mrs Gower transferred the S share to PTCL, and the trustee wrote to T (as director of M Ltd) giving an irrevocable instruction that any dividend declared on the S share on or before 28 March 2013 should be remitted to the beneficiaries directly.
- (3) On 15 March 2013, M Ltd’s board of directors (ie T) resolved to pay an interim dividend of £200,000 in respect of the S share, and duly paid £195,400 to T on 18 March 2013.
T’s return disclosed details of the arrangement in the tax year 2012-13. He did not include any amount of the dividend paid by M Ltd in his taxable income on the ground that the income was treated as income of Mrs Gower alone (as settlor of the trust) under the settlements legislation in Ch 5 Part 5 Income Tax (Trading and Other Income) Act 2005 (ITTOIA). HMRC opened an inquiry and, on 31 March 2017, closed the inquiry and amended his return to include the £195,400 as taxable income. T appealed.
A direction was made under r18 Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 that the appeal be used to determine the following issues which were common to other appeals:
- (1) whether the dividends paid by M Ltd in respect of the S share were a distribution made to T and taxable on him under s383 ITTOIA;
- (2) whether T was the ‘settlor’ of a ‘settlement’ for the purposes of Ch 5 Part 5 ITTOIA;
- (3) whether, if T was a ‘settlor’ of a ‘settlement’ for the purposes of Ch 5 Part 5 ITTOIA:
- a) any income arising under the ‘settlement’ should be treated as income of T under Ch 5 Part 5 ITTOIA; and
- b) if so, how much of that income should be treated as T’s income under Ch 5 Part 5 ITTOIA; and
- (4) whether T was taxable under the transfer of assets abroad provisions in Ch 2 Part 13 Income Tax Act 2007 (ITA).
Held (dismissing the appeal):
Section 383 ITTOIA
Given the context, the meaning of the term ‘dividend’ must be informed by the understanding of that term for company law purposes (Revenue & Customs v First Nationwide [2012] referred to). In this case, the only dividend in company law terms was the dividend paid on the S share. There was therefore no ‘dividend’ on the ordinary shares within the meaning of s1000(1)A Corporation Tax Act 2010 (CTA 2010).
Neither was there any ‘other distribution out of the assets of the company in respect of [the ordinary] shares’ and therefore a dividend on the ordinary shares within the meaning of s1000(1)B CTA 2010. While the concept of a distribution in para B is not so closely tied to a particular form of corporate action as para B, it is still grounded in the corporate transactions that are undertaken and their effect on the capital structure of the company (HMRC v PA Holdings Ltd [2011] distinguished).
The payment received by T was therefore not a dividend or distribution on the ordinary shares, and he was therefore not taxable on it under s383 ITTOIA.
The settlements legislation
Scope of the settlement
Four principles could be derived from the authorities (Chamberlain v Inland Revenue Commissioners [1943], Crossland v Hawkins [1961], Butler v Wildin (1988), Jones v Garnett [2007] considered):
- (1) The definition of ‘settlement’ in s620 ITTOIA is very broad and can encompass any arrangements under which income on property becomes payable to others. However it is limited to cases that involve an ‘element of bounty’ or ‘the provision of a benefit which would not have been provided in a transaction at arm’s length’.
- (2) It is possible to find the element of bounty in a future uncertain event, which is not part of the arrangements that follow the settlement, but which was within the contemplation of the parties at the time of the settlement.
- (3) Steps which form an integral part of the arrangements to create a structure under which the income of property becomes payable to others may be regarded as part of the ‘settlement’.
- (4) It is important to identify the property comprised in the settlement as this will also define the income of the settlement which is subject to tax under the settlements legislation.
The creation of the S share, its allotment to Mrs Gower, the creation of the trust, and the transfer of the S share to the trustee by Mrs Gower, are all part of an arrangement that meets the requirements to be treated as a ‘settlement’ within s620 ITTOIA. All of the steps were planned and implemented as a coherent whole. Viewed realistically, they were part of an arrangement under which potentially valuable property – the S share – was made subject to the trust. This arrangement involved an element of bounty. It was not an arrangement which T would have entered if he had been dealing on arm’s length terms. The element of bounty was the prospect of future dividends on the S share being paid to the PTCL on the terms of the trust and held on behalf of the beneficiaries. While the question of whether an arrangement constitutes a settlement has to be determined at the time at which the arrangement is made, the expectation of a future dividend can be taken into account in determining whether or not the arrangement has the necessary element of bounty (Jones v Garnett applied).
Identity of the settlor
On any realistic view of the facts, T was the person who ‘made’ the settlement. He made the arrangements which the tribunal regarded as the settlement. He (as shareholder of M Ltd) passed the resolutions creating the S share. He (as shareholder and sole director of M Ltd) permitted Mrs Gower to subscribe for the S share at nominal value. Mrs Gower transferred the S share to PTCL under arrangements put in place by T. When she did so, there was no real value in the S share – whether or not any value would accrue to the trust remained entirely under T’s control (Crossland and Butler referred to).
There was ‘some force’ in T’s argument that, since the funds were provided by M Ltd, T could not be regarded as providing them for the purposes of s620(3)(a) ITTOIA. However this did not preclude the conclusion that the settlement was ‘made’ by T. The examples in s620(3) are not an exhaustive list. Nor do they address the argument that T should be regarded as providing funds directly or indirectly by arranging for the trust to acquire the S share from Mrs Gower. It was notable in this respect that, in Crossland, Donavan LJ had regarded funds taking the form of distributions on shares in a company as being indirectly provided by a person who had put the relevant arrangements in place.
Mrs Gower, however, also appeared to be a ‘settlor’, the arrangements were not a sham, and she therefore also ‘made’ the settlement or ‘entered into’ it. HMRC argued that she was not a settlor because she did not provide the ‘element of bounty’. However it was not necessary to decide the point and the tribunal did not do so.
In circumstances where property may have been provided directly or indirectly by multiple settlors, the property should be regarded as provided partly by each settlor and the provisions of s645(1)(c) ITTOIA should apply to require a just and reasonable apportionment of the property between them. In the present circumstances, substantially all of the value in the S share had been provided by T, while Mrs Gower was a ‘mere functionary’. A just and reasonable apportionment would therefore treat all or substantially all of the property in the settlement as originating from T and accordingly all of the income from that property as income originating from him.
T should therefore be subject to tax on the income of the settlement under s619 ITTOIA.
The transfer of assets abroad regime
Given the conclusion that T was taxable under the settlements provisions, it was unnecessary to resolve whether the transfer of assets abroad regime applied. However the tribunal nevertheless expressed its view.
A relevant transfer
The issue of the S share to Mrs Gower was a ‘relevant transfer’.
While the issue of a share would not normally be regarded as a ‘transfer’ of assets, the definition in s716(2) ITA includes in that term ‘the creation of rights’. There was no reason to take a restrictive view of that definition.
Neither did it matter that the transfer was made by a person other than the person to whom HMRC sought to attribute income. While the starting point is that the individual charged under s720 ITA must be the person who transfers assets to a person abroad (Vestey v Inland Revenue Commissioners [1980] referred to), the charge may also apply where, although the transfer is made by one person (eg M Ltd) there is another person who should be regarded as the ‘real’ transferor (Inland Revenue Commissioners v Pratt [1982] applied). These are circumstances where the ‘real’ transferor has ‘procured’ the transferor and include the circumstances under appeal where T was the sole shareholder and director of M Ltd and the steps concerned formed part of a pre-ordained scheme designed to ensure that part of the share capital of the company (which at the start of the scheme was wholly owned by T) was placed in the hands of offshore trustees in a manner in which the dividend income from those shares accrued primarily for the benefit of T.
Other conditions
The other conditions were also met. A transfer was made to a person abroad (Mrs Gower) and as a result of the transfer and associated operations (the transfer of the S share to the trustee), income (the dividend on the S share) became payable to a person abroad (the trustee).
Income treated as arising to the transferor under s721 ITA
Both conditions in s721 ITA were satisfied. Condition A was satisfied – T had power to enjoy the dividend income of the trustee derived from the S share. Condition B was also satisfied – T would have been subject to income tax if he had received dividend income in the UK.
Absent s624 ITTOIA, therefore, T would be subject to a charge to income tax under s720 ITA on the dividend income on the S shares.
The interaction of the transfer of assets abroad regime and the settlements legislation
If T is treated as the settlor under the settlement provisions, the settlement code takes priority over the transfer of assets abroad provisions because s624 ITTOIA provides that income of the settlement is treated as income of the settlor alone. In those circumstances, condition A in s721(2) ITA is not met since the income is not income of a person abroad for income tax purposes.
If Mrs Gower is treated as settlor, it would be treated as her income alone under s624 ITTOIA. While she was not UK-resident, she was in theory subject to UK income tax on the income albeit that the associated tax credit would have met that liability and she would have been treated as having paid the tax by s399 ITTOIA. However this would not affect T’s liability under s720 ITA as the conditions in ss720-721 ITA were still met. Section 624 ITTOIA does not preclude a charge under s720 ITA, it simply treats the income as income of the settlor for income tax purposes. Section 720 ITA does not charge tax on the income of the person abroad, it simply treats that income as arising to the transferor for the purposes of computing a charge to tax on that person. The income does not become the income of the transferor. It is in fact a necessary requirement of s720 ITA that there is income of another person which is then treated as arising to the transferor. This conclusion is supported by s721(5)(a) which, at the time, provided that it did not matter for the purposes of s721 ITA that the income treated as arising to a transfer would be chargeable to income tax apart from s720.
This conclusion was not reached by reference to Lord Steyn’s statement in Inland Revenue Commissioners v McGuckian [1997], to the effect that a predecessor of s720 ITA could be applied even where there were other provisions which could be invoked to prevent the avoidance of tax. The issue which Lord Steyn was addressing was an argument that the transfer of assets abroad provisions could not apply where the taxpayer was liable to tax under another anti-avoidance provision (s470 Income and Corporation Taxes 1970) which applied to sales of the right to interest payable on securities without selling the securities. While s470 also contained a provision which deemed income to be the income of a particular person alone, the House of Lords held that it did not apply in McGuckian, and it is evident that the argument was raised in the context of two provisions which sought to impose tax on the same person, which was not the case in this appeal.
JUDGMENT JUDGE ASHLEY GREENBANK: Introduction [1] This decision relates to an appeal by the appellant, Mr Mark Dunsby, against the amendments made by the respondents, the Commissioners for Her Majesty’s Revenue and Customs (HMRC), to his self-assessment tax return for the tax year 2012-13 by a closure notice dated 31 March 2017. [2] The amendments …Continue reading "Dunsby v Commissioners for Her Majesty’s Revenue and Customs [2021] WTLR 157"