Bird and Another v HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judgment Date | 03 November 2008 |
| Date | 03 November 2008 |
| Court | Special Commissioners |
special commissioners decision
Sir Stephen Oliver QC
No representation for the Appellant
Rupert Baldry, counsel, instructed by the general counsel and solicitor to HM Revenue and Customs, for the Respondents
Income tax - settlement - company owned by husband and wife - allotment of shares in company to their minor children on subscription at par - payment of dividends to children - whether settlement by virtue or in consequence of which dividends were paid within meaning of Income and Corporation Taxes Act 1988, Income and Corporation Taxes Act 1988 section 660A subsec-or-para 1 section 660G subsec-or-para 1s. 660A(1) and 660G(1) - yes - appeal dismissedAssessment - extended time limits - negligent conduct - husband and wife owned all shares in company - husband and wife allowed minor children to subscribe for shares at par - dividends paid to daughters - whether husband and wife were negligent in omitting daughters' dividends as dividend income of husband and wife in their tax returns - no
A special commissioner decided that dividend income paid to three minor children (while each was a minor) in relation to a loan made out of a settlement fund to which they would become entitled on becoming 18, was properly chargeable as the income of the taxpayers (their parents) under the taxation of settlor provisions in Income and Corporation Taxes Act 1988 section 660ICTA 1988, s. 660. However, in all the circumstances, the taxpayers had not been guilty of negligent conduct in omitting the children's dividends as their dividend income in their tax returns such that extended time-limit assessments might be made on them.
C Ltd was incorporated to trade as a wholesaler of specialist kitchen furniture. Its authorised share capital was £1,000 divided into 1,000 shares of £1 each. Two subscriber shares were issued to the taxpayers, a husband and wife. The annual returns for the relevant period showed the husband as the sole director and he and his wife as joint company secretaries. The company embarked on its trade of selling kitchen components that it had imported from Spain. It wished to expand but had difficulty in raising funds, although it borrowed £60,000 from its bank secured by way of a second charge over the taxpayers' home.
Late in December 1994 the husband's father died. He left his estate to such of the taxpayers' three daughters as should reach 18 in equal shares. The eldest daughter was 15 at the start of 1995; the other twin daughters were then ten. The husband was the sole executor under his father's will. The husband transferred £7,000 from the estate to the company as an unsecured loan with interest of 2 per cent over Bank of England base rate. A further payment of £54,364 was subsequently made characterised as an unsecured loan from the minor beneficiaries to the company. The accounts indicated that that loan remained outstanding for at least two years. On 4 April 1995 the company issued a further 98 ordinary shares at par, 19 to each of the taxpayers and 20 to each of the three daughters. There was no evidence as to whose money the daughters used to pay the subscription moneys of £1 per share. C Ltd carried on its trade profitably and in each year to 2002, when it ceased business. Dividends were paid to the shareholders including the three daughters.
The taxpayer and his wife appealed against amendments made pursuant to Taxes Management Act 1970 section 28A subsec-or-para 1 section 29TMA 1970, s. 28A(1), (2) and 29 in respect of their self-assessment tax returns for the two years ended 5 April 2001 and against amendments to their self-assessments pursuant to TMA 1970, s. 29. They also appealed against extended time-limit assessments to income tax pursuant to TMA 1970, Taxes Management Act 1970 section 36s. 36 which raised the question whether there had been a loss of tax attributable to negligent conduct on the part of the taxpayers. The day before the hearing, the solicitors acting for the taxpayers informed the tribunal that no one would attend to present their cases but the special commissioner decided to deal with the appeal in their absence pursuant to r. 16(2) of the Special Commissioners Rules.
Revenue and Customs argued that the dividends paid to the three daughters (until they each reached 18) constituted income arising under a "settlement" within the meaning ICTA 1988, Income and Corporation Taxes Act 1988 section 660Gs. 660G. In consequence, the dividend income should be treated as that of the taxpayers equally by virtue of Income and Corporation Taxes Act 1988 section 660B subsec-or-para 1s. 660B(1). The steps taken to make each of the three daughters a 20 per cent shareholder in C Ltd amounted to an "arrangement" within the statutory definition of "settlement". The taxpayers' case as presented in the correspondence was that the daughters' acquisitions of their shares had been part of a purely commercial transaction. The shares had been a quid pro quo for a loan or loans which the daughters should be regarded as having made to C Ltd.
Whether dividend income received by their three minor daughters was income arising under a settlement within the meaning of the income tax "Taxation of settlor" provisions in Income and Corporation Taxes Act 1988 part XVICTA 1988, Pt. XV.
The special commissioner (Sir Stephen Oliver QC) (allowing the appeal in part) said that the use of a corporate structure to provide an income stream to a minor child, thereby reducing higher rates of tax was a typical situation where the taxation of settlor legislation could and did apply (Copeman v ColemanTAX(1939) 22 TC 594 and Butler (HMIT) v WildinTAX[1988] BTC 475; 61 TC 666). The latter was comparable to the situation here where the taxpayers had conferred on their three minor daughters a 60 per cent stake in the equity of C Ltd and consequently provided the daughters with dividend rights.
In Jones v Garnett (HMIT)TAX[2007] BTC 476, the House of Lords endorsed the broad concept of "arrangement" as developed in the earlier line of cases from IR Commrs v PayneTAX(1940) 23 TC 610 to Butler v Wildin. Those cases made it clear that there was no need for any formal legal trust or settlement for these provisions to apply. The cases were also authority for the proposition that a definite plan (including a relatively simple plan), to use a company's shares to divert income, fell within the meaning of an arrangement.
The court had to take a realistic view of the matter. For an arrangement to constitute a settlement for purposes of the taxation of settlor provisions, there had to have been an element of "bounty" and in determining whether that bounty amounted to an arrangement it was necessary to ask whether the taxpayer in question would have entered into it with someone with whom he was dealing at arm's length.
In the present case, the minor daughters did not take part in any commercial transaction. The risk involved in the transaction accrued to the husband personally rather than to the children. The transaction was not at arm's length and there was the necessary element of bounty to bring the arrangements within the scope of the expression "settlement". Accordingly, the dividend income received by the three minor children (while each was a minor) was properly chargeable as the income of the taxpayers under the taxation of settlor provisions.
Further, the assessments in question related to income that arose outside the ordinary time-limit. TMA 1970, s. 36 enabled Revenue and Customs to make extended time-limit assessments where the taxpayer, as the person in default, had caused the loss of tax attributable to his fraudulent or negligent conduct or the fraudulent or negligent conduct of a person acting on his behalf. The Revenue saw the taxpayers' failure to return as their income the dividends paid to the three minor daughters during those years as negligent conduct.
The transaction by which the shares in C Ltd were issued to the daughters had been carried out with the advice of the company's accountants. The tax accountant with responsibility for the taxpayers' tax returns did not know that those actions had taken place. Therefore, even if there had been negligent conduct on the part of the taxpayers, there was no negligent conduct of the person acting on their behalf. Moreover, each daughter subscribed £20 for her holding of 20 £1 shares and the Revenue, on whom the burden of providing negligent conduct lay, had neither claimed nor put in any evidence to show that that money came from the taxpayers.
The assumed reasonable compliant taxpayer would be expected to read the notes to the tax return, note 34 of which stated: "if you have directly or indirectly provided funds for a settlement, income of that settlement will usually be treated as yours if …" Those words followed the statement that a settlement would include "not only a formal trust … but also … an arrangement". The assumed reasonable compliant taxpayer in a similar position to the taxpayers would not have concluded that he had indirectly provided funds for the purpose of the arrangements that included the payment of the dividend. The thing that was provided to each daughter was the opportunity of participating in dividends and capital growth in C Ltd. While that advantage might have been conferred on the minor daughters at the expense of the taxpayers, the reasonable compliant taxpayer would not recognise it as a situation in which he had indirectly provided "funds" for the purposes of the arrangement. He would see the funds as profits out of which the dividends were paid. It would demand a sophistication that was beyond what was expected of the assumed reasonable compliant taxpayer. Accordingly, there had not been negligent conduct such that extended time-limit assessments might be made on the taxpayers.
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