Butler v Evans
| Jurisdiction | England & Wales |
| Judgment Date | 03 November 1988 |
| Date | 03 November 1988 |
| Court | Chancery Division |
Chancery Division.
Mr. Nicholas Warren (instructed by the Solicitor of Inland Revenue) for the Crown.
Mr. Giles Goodfellow (instructed by Gwyn James & Co., Lydney) for the taxpayers.
Before: Vinelott J.
The following cases were referred to in the judgment:
Chinn v. Collins (H.M.I.T.) ELR[1981] A.C. 533
Copeman (H.M.I.T.) v. Coleman TAX(1939) 22 T.C. 594
Herbert (Lord) v. I.R. Commrs. ELR[1943] K.B. 288
Hood Barrs v. I.R. Commrs. TAX(1946) 27 T.C. 385
I.R. Commrs. v. Mills ELR[1975] A.C. 38
Thomas v. Marshall (H.M.I.T.) TAX(1953) 34 T.C. 178
Income tax - Liability of parent for income from "settlement" on children - Shares in new company allotted to children of directors - Company carried out property development financed by loans guaranteed by directors - Dividend paid to children - Whether an "arrangement" constituting the "settlement" on children - Income and Corporation Taxes Act 1970 section 437 subsec-or-para (1) section 444 subsec-or-para (2)Income and Corporation Taxes Act 1970, sec. 437(1), 444(2).
These were appeals by the Revenue against the determination of a Special Commissioner allowing claims for repayment of tax credits attributable to dividends paid by a company to the infant children of the two taxpayers, and an appeal against assessment to higher rate tax in respect of one of the taxpayers.
Mr. Graham Wildin ("Graham") was a chartered accountant and his brother ("Garry") was an architect. In 1980, when each brother had two children aged between one year and ten years, they acquired an "off the shelf" company. Initially, 19 shares in the company were allotted to the four children which were paid for out of money provided by their grandparents and the remaining 24 shares were allotted (as to 12 each) to Graham and Garry.
When a third child, Philip, was born to Graham in 1982 the shareholdings were rearranged: Graham transferred his 12 shares and Garry transferred seven of his shares to Philip. There was a further rearrangement when a daughter, Lisa, was born to Garry in 1983: he transferred his remaining five shares to her and two shares were taken from each of the older children and three from Philip so that each of the older children held 17 shares and the two younger children held 16 shares.
Garry saw the possibility of acquiring an interest in a site for development at Lydney in Gloucestershire belonging to the British Railways Board and negotiations with the Board were opened in September 1980. Garry prepared detailed drawings for shops and offices and obtained planning permission for the development. A licence to build on the site was initially granted by the Board and subsequently the company acquired the freehold.
The cost of the site and development was for the most part financed by bank loans guaranteed by Graham and Garry.
On completion of the development the premises were let and the rents appeared in the company's profit and loss accounts for the year ended 31 October 1982 and subsequent years.
In 1985, when the company's accounts showed a profit of £6,000 it was resolved to pay an interim dividend of £84, costing a total of £12,000 including ACT. Soon after the dividend was paid to the children, they lent the money to the company so that the company's immediate expenditure (leaving the tax out of account) was made good.
Graham and Garry, who were the only directors of the company, received no fees or salary.
Graham and Garry both appealed on behalf of their children against refusals by the inspector to allow repayment claims in respect of tax credits attributable to the dividends paid to the children by the company in the year 1984-85. Graham appealed against an assessment to higher rate income tax made on him under the Income and Corporation Taxes Act 1970 section 437Income and Corporation Taxes Act 1970, sec. 437 for the year 1984-85 in the sum of £6,000.
The issue was whether on the facts the dividend paid to the children was income under a settlement within the meaning of Income and Corporation Taxes Act 1970 section 437sec. 437 of which Graham and Garry were the settlors.
A Special Commissioner allowed the appeals holding that Income and Corporation Taxes Act 1970 section 437sec. 437 did not apply to the dividends. He concluded that the children's income was not provided directly or indirectly by their fathers since the shares had never belonged to them. Nor was the dividend income provided by Graham and Garry by reason merely of the acceptance of risk by giving guarantees to the bank or providing their services without remuneration.
Held, substantially allowing the Revenue's appeal:
1. Each brother was party to an "arrangement" for the purposes ofIncome and Corporation Taxes Act 1970 section 437sec. 437 which constituted a "settlement" within the definition of that word in Income and Corporation Taxes Act 1970 section 444 subsec-or-para (2)sec. 444(2). The brothers had arranged for the shares to be allotted to the children; they had arranged for the acquisition of the site; and they had arranged for the building to be carried out.
2. The arrangement conferred the requisite element of bounty on the four older children who were exposed to no risk. Graham and Garry had guaranteed the bank loans and if it had turned out badly the loss would have fallen on them. Graham and Garry were therefore settlors within the definition in Income and Corporation Taxes Act 1970 section 444 subsec-or-para (2)sec. 444(2) having provided the funds for the development by guaranteeing the bank loans. (Dictum of Lord Roskill inChinn v. Collins (H.M.I.T.) ELR[1981] A.C. 533 at p. 555, followed.)
3. It could not be inferred that the relevant arrangement made before Philip and Lisa were born was intended to confer a benefit on them. As regards Philip, the shares transferred to him by his uncle could be disregarded since there was no finding of any reciprocal arrangement between Graham and Garry that Graham would provide a similar benefit for a future child of Garry. However, the income that Philip received in respect of the shares transferred to him by his father were caught by Income and Corporation Taxes Act 1970 section 437sec. 437 as there was no evidence that he had paid for them.
4. In view of a concession made by the Revenue before the Special Commissioner that Lisa had given full value for her shares, the Revenue's appeal in relation to the dividend attributable to her shares was dismissed.
1. On 4 March 1987 one of the Special Commissioners heard the appeals of Graham Michael Wildin ("Mr. Wildin") against:
(a) an assessment to income tax (at the higher rates) made on him underIncome and Corporation Taxes Act 1970 section 437sec. 437 of the Income and Corporation Taxes Act 1970, for the year 1984-85 in the sum of £6,000; and
(b) (on behalf of his three infant children) refusals by H.M. Inspector of Taxes of repayment claims in respect of tax credits attributable to certain dividends received by his infant children in the year 1984-85.
The two matters are complementary.
2. On the same occasion the Commissioner heard appeals by Mr. Wildin's brother, Mr. G.R. Wildin (on behalf of his infant children) against refusals of claims mutatis mutandis the same as those referred to in para. 1(b) above. At the conclusion of the hearings the Commissioner reserved his decision; and a single decision was issued in writing on 15 April 1987.
3. The issue, shortly stated, was whether on the facts, the children's dividend income was income under a "settlement" (within the meaning of Pt. XVI, Ch. II of the Income and Corporation Taxes Act 1970) of which Mr. Wildin and his brother were the "settlors".
4. Mr. Wildin gave evidence before the Commissioner.
5. A statement of facts (which, as indicated in the decision, was modified during the hearing) was admitted.
6. The facts and the contentions of the parties are set out in the decision. It will be seen therefrom that the Commissioner answered the question for decision in the negative and accordingly discharged the assessment on Mr. Wildin and allowed his children's claims as made.
7. Immediately after receipt of the decision H.M. Inspector of Taxes declared his dissatisfaction therewith as being erroneous in point of law and on 14 May 1987 required the Commissioner to state a case for the opinion of the High Court pursuant to the Taxes Management Act 1970 section 56Taxes Management Act 1970, sec. 56.
8. The question of law for the opinion of the court was whether the Commissioner erred in his decision.
(2) The Special Commissioner heard the appeals by Garry Ronald Wildin ("Mr. Garry Wildin"), acting on behalf of his three minor children, against refusals by H.M. Inspector of Taxes of repayment claims in respect of tax credits attributable to certain dividends received by his infant children in the year 1984-85.
(3) These appeals were heard together with similar appeals by Mr. Garry Wildin's brother, Mr. G.M. Wildin, against (inter alia) refusals of similar claims. The issue and evidence in each set of appeals was the same, as was the Commissioner's decision.
Mr. Graham Wildin ("Mr. Wildin") is a chartered accountant. He has three children, namely Deborah and Jacqueline (born on 4 May 1976 and 12 September 1979 respectively) and Philip (born on 27 January 1982).
Mr. Wildin's brother Garry ("Mr. Garry Wildin") is an architect. He also has three children - Andrew and Nicola (born on 2 January 1970 and 17 March 1978 respectively) and Lisa (born on 19 May 1983).
On 3 July 1980 a limited company, Expresser Ltd. ("the company"), was incorporated with a share capital of £100 divided into 100 shares of £1 each. Mr. Wildin and his brother are and have always been its only directors. From and after 20 October 1984 the only shareholders in the company have been their six children; the four born before the company was incorporated holding 17 shares...
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