Buck v HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judgment Date | 23 October 2008 |
| Date | 23 October 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 for HM Revenue and Customs, for the Respondents
Settlement - dividend waiver - income arising under a settlement in which settlor retains interest - arrangement - company owned by husband and as to one share by wife - husband waived dividend in relation to all his 9,999 shares - enhanced dividend consequently paid to wife in respect of her one share - dividend income paid to wife - whether waiver arrangement constituted a settlement - yes - whether element of bounty in arrangement - yes - appeal dismissed - 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)
A special commissioner decided that dividends waived by a husband so that his wife could receive an enhanced dividend was income arising under an arrangement within the definition of settlement in ICTA 1988, Income and Corporation Taxes Act 1988 section 660G subsec-or-para 1s. 660G(1) to be treated as his income for tax purposes since it arose from property in which he had an interest.
Since its incorporation in 1976 LBC's issued share capital had been £10,000 divided into 10,000 shares of £1 each. LBC's trade had been that of a joinery business. At all material times since January 1994 (when B's father died) 9,999 of the issued shares were owned by the taxpayer and the remaining one issued share was owned by his former wife. The taxpayer had been the sole director of LBC since 1986.
LBC's profits after tax for the 12 months to 31 March 1999 were £35,707 and the profit carried forward at that date was £46,287. For the 12 months to 31 March 2000 the profit after tax was £5,647 and the profit carried forward was £46,994. In March 1999 the taxpayer, by formal notice in writing to LBC, waived his dividend entitlement for the year ending 31 March 1999. At a director's meeting it was resolved that a dividend of £35,000 per share be paid on 25 March 1999 for the year ending 31 March 1999. The following year the taxpayer waived his dividend entitlement. According to the company minutes, he subsequently resolved at a director's meeting that a dividend of £35,000 per share be paid for the financial year ended 30 March 2000.
Both meetings were attended by the taxpayer and his wife (the other shareholder but not a director of the company). The wife consequently received gross dividends of £39,371 and £27,774 for each of the two years ended 31 March 1999 and 31 March 2000. LBC did not have the distributable reserves to enable dividends to be paid in respect of each of the issued shares held by the taxpayer.
The taxpayer appealed against amendment of his self-assessment tax return for the year 1998-99 and against a Revenue assessment for 1999-2000.
Whether the dividend income was income arising under an arrangement coming within the definition of a settlement in ICTA 1988, Income and Corporation Taxes Act 1988 section 660G subsec-or-para 1s. 660G(1); and if so, whether it arose from property in which the taxpayer had an interest.
The special commissioner (Sir Stephen Oliver) (dismissing the appeal) said that the irresistible inference from the facts was that the taxpayer had waived his entitlements to both dividends as the first step in his plan that the dividend income should become payable to his wife. 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 (HMIT) v WildinTAX[1988] BTC 475; 61 TC 666. Those cases made it clear that there was no need for any formal legal trust or settlement to bring the statutory provisions into operation. The cases also provided authority for the proposition that a definite plan, including a relatively simple one, to use a company's shares to divert income fell within the meaning of an arrangement. On that basis there was an arrangement in relation to each dividend.
It remained to be determined whether as regards each dividend there was an arrangement containing an element of "bounty". The test was whether that was an arrangement which the taxpayer would have entered into with someone with whom he was dealing at arm's length (see Jones v Garnett). The arrangement in the present circumstances plainly contained an element of bounty. There was no commercial purpose for either of the waivers and neither would have taken place on an arm's length basis. The dividends were declared at a rate that would have been impossible due to the lack of sufficient distributable profits within the company were it not for the fact that the taxpayer had waived the dividends in respect of all his 9,999 shares.
The question then was whether the taxpayer, as settlor, had an interest in the property from which the dividend income arose. The income, being income that arose under the settlement, would be treated as his for tax purposes unless it arose from property in which he had no interest. Following the dividend waivers, the dividend income paid to the wife arose from her shares in LBC and those shares, together with the dividend rights attached to them, were benefits enjoyed by her. They constituted the property in which the taxpayer had an interest by virtue of Income and Corporation Taxes Act 1988 section 660A subsec-or-para 2s. 660A(2) which treated the settlor as having retained an interest if the property from which the income arose (or any derived property) might be payable to or applicable for his spouse.
Income and Corporation Taxes Act 1988 section 660A subsec-or-para 6Section 660A(6) was the provision that, on the basis of the decision of the House of Lords in Jones v Garnett, excluded the wife's income under the arrangement in that case from being taxed as her husband's. The section excluded an 'outright gift' of property from one spouse to the other from the scope of the taxation of settlor provisions. That exclusion did not however apply where, as here, the property given was wholly or substantially a right to income (s. 660A(6)(b)). Here, income was diverted by means of a dividend waiver in anticipation of the declaration of a dividend. There was no "outright gift", merely a one-off waiver of any dividend that might be declared in respect of shares: and the shares in question were retained by the person making the waiver and not given to the other spouse.
The exemption in Income and Corporation Taxes Act 1988 section 660A subsec-or-para 6s. 660A(6) applied in Jones v Garnett because, in contrast to the present situation, the essential arrangement identified in that case was the transfer of the share from the husband to the wife. It followed that the present situation did not come within s. 660A(6). There was no outright gift of property from which income arose.
Finally, there had been no violation of the taxpayer's rights to a fair and public hearing within a reasonable time. From the time of the amendment to the self-assessment and the Revenue assessment, there were appeal rights and the...
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