Clipperton and Another
| Jurisdiction | UK Non-devolved |
| Judgment Date | 20 January 2021 |
| Neutral Citation | [2021] UKFTT 12 (TC) |
| Date | 20 January 2021 |
| Court | First Tier Tribunal (Tax Chamber) |
[2021] UKFTT 12 (TC)
Judge Harriet Morgan
Mr Michael Jones, counsel, appeared for the appellants
Ms Aparna Nathan (now QC) and Ms Laura Poots, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents (“HMRC”)
The FTT has held that a scheme to exploit the settlements anti-avoidance legislation by causing dividends to be taxable on a corporate settlor rather than beneficiaries who were individuals in order to avoid income tax failed on WT Ramsay Ltd v IR Commrs (1981) 54 TC 101 principles.
Sharon Clipperton and Steven Lloyd (the appellants) were the sole shareholders and directors of Winn & Co (Yorkshire) Ltd (Winn Yorkshire) which carried on an accountancy business. The appellants used a planning arrangement that had been designed to enable dividends to be received by shareholders tax-free (and this was explicit in correspondence with those marketing the arrangements). The steps were as follows:
- Winn Yorkshire incorporated a subsidiary (Winn Scarborough) and subscribed for 199 A shares and one B share. The latter only had rights to income.
- Winn Yorkshire settled the B share on trust, largely for the benefit of the appellants but retaining a right to a small amount of income and with reversion to settlor.
- Winn Yorkshire subscribed for a further A share at a premium of £200,000 and Winn Scarborough's share capital was then reduced by cancelling the resulting share premium account and crediting the premium to distributable reserves
- Winn Scarborough declared a dividend of £200,000 and the trust paid the dividend to the beneficiaries with the result that each appellant received £98,465 (the income in dispute)
The intention was that ITTOIA 2005, s. 624 should apply to treat the income of the settlement as income of Winn Yorkshire as the settlor because Winn Yorkshire had an interest in the settlement.
This was an appeal against HMRC's decision that the income in dispute was subject to income tax on the appellants on the alternative grounds that (1) on a purposive construction, the income in dispute was a distribution made by Winn Yorkshire to the appellants (the Ramsay argument); and (2) that the settlements legislation applied to treat the appellants as settlors and hence they were subject to income tax on the income in dispute (the settlement argument).
The Tribunal concluded that, on a purposive approach to ITTOIA 2005, s. 383–385 (charge to tax on dividends and other distributions) and CTA 2010, s. 1000 (meaning of distribution), Winn Yorkshire made a distribution to the appellants by providing funds to Winn Scarborough with the sole purpose of enabling it to pay the B share dividend for the intended benefit of the appellants. This was on the basis that the purpose of those provisions is to tax a shareholder on any value which a company delivers out of its assets into a shareholder's hands. It was plain from the description of the planning provided by the scheme providers that each step was implemented with the sole objective of providing a tax-free return on the appellants' shares in Winn Yorkshire.
The FTT declined to follow the approach in Dunsby [2020] TC 07755 (that was decided between the hearing in the present case and the release of the decision) in which the FTT held that a payment to Mr Dunsby could not be categorised as a dividend or other distribution because it did not satisfy the company law definition of a distribution, on the grounds that a distribution should be more widely interpreted as “every description of distribution of a company's assets to its members”.
Although the FTT agreed with the appellants that the distributions rules were not given priority over the settlements code by ITTOIA 2005, s. 575 because there is no overlap with s. 524 (which provides that the settlement income is that of the settlor alone), they found that it was unnecessary for HMRC to rely on s. 575 because the corollary of the finding that Winn Yorkshire was to be regarded as having made a distribution was that the income in dispute was not income arising under a settlement.
The FTT found that Winn Yorkshire was plainly the settlor as it had entered into the arrangements and directly provided the funds and had provided an element of bounty in using its cash resources to fund the B share dividend that created income for the trust beneficiaries.
Although the appellants could be regarded as having indirectly made or entered into the arrangement, either because they were the driving force behind the arrangements or on the basis that, as sole directors and shareholders, they would otherwise have been expected to benefit from the company's funds that had instead been used to fund the arrangements, they had not provided any material benefit to any other party and thus there was no element of bounty and they could not be regarded as having made a settlement for the purposes of the settlements code.
Given that HMRC succeeded on the Ramsay argument, the appeal was dismissed.
It is understood that this case has been designated as a lead appeal and therefore it is likely that considerably more tax is at stake. It therefore seems likely that there will be an appeal, particularly as the appellants succeeded on the second ground and because of the different view that was taken in the Dunsby case.
[1] The appellants appealed against HMRC's decision that sums which they received from arrangements set up by a company Winn & Co (Yorkshire) Ltd (“Winn Yorkshire”), of which they were the sole shareholders and directors, were subject to income tax in the tax year 2011/12. It was not disputed that the arrangements were put in place for the sole purpose of enabling Winn Yorkshire to put sums into the hands of the appellants, as its shareholders, without attracting the income tax charge which would usually apply if Winn Yorkshire had paid a dividend or made a distribution to them. These appeals have been designated as lead appeals for the purposes of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.
[2] As set out in more detail in Part A, in outline, under the arrangements, the following took place within a period of just under one month:
- Winn Yorkshire subscribed for 199 A ordinary shares of £1 each (the A shares) and one B ordinary share of £1 (the B share) in a newly formed subsidiary, Winn Scarborough Limited (Winn Scarborough).
- Winn Yorkshire settled the B share on trust largely for the benefit of the appellants but on the basis that it was entitled to receive a small amount of any income arising to the trust and that the trust property was to revert to it.
- Winn Yorkshire subscribed for a further A share of £1 in Winn Scarborough at a premium of £200,000 (the additional A share).
- Winn Scarborough's share capital was reduced by £200,000 by the cancellation of the share premium account created on the issue of the additional A share and that amount was credited to its distributable reserves.
- Winn Scarborough declared a dividend of £200,000 on the B share using the distributable reserves created by the capital reduction (the B share dividend).
- The trustee of the trust paid the sum it received as the dividend to the beneficiaries of the trust. As the principal beneficiaries, each appellant received £98,465 (the income in dispute).I refer to these arrangements as the planning or the plan.
[3] In the appellants' view, the income in dispute is to be treated for income tax purposes as the income of Winn Yorkshire alone under the legislation relating to settlements in Chapter 5 of part 5 of the Income Tax (Trading and Other income) Act 2005 (“ITTOIA”). I refer to these provisions as “the settlements code”.
- This is the effect, so the appellants say, of s 624 ITTOIA which provides that income which arises under a settlement is treated for income tax purposes as the income of the settlor and of the settlor alone if it arises (a) during the life of the settlor, and (b) from property in which the settlor has an interest (see also s 620 and s 625 ITTOIA).
- In the appellants' view, the income in dispute arose under a settlement made by Winn Yorkshire as settlor from the property in the settlement, the B share, in relation to which Winn Yorkshire had an interest given that some of the income arising from the B share held in the trust was payable to Winn Yorkshire and that the trust property was to revert to it.
[4] HMRC's stance is that, on the contrary, the appellants are subject to income tax on the income in dispute on the basis that, in the alternative:
- On a purposive construction of the relevant provisions, the income in dispute constitutes a distribution made by Winn Yorkshire to each of the appellants within the meaning of s 383 to 385 ITTOIA and s 1000 of the Corporation Taxes Act 2010 (CTA 2010). Ms Nathan referred to the well-known case of WT Ramsay Ltd v IR Commrs (1981) 54 TC 101 (Ramsay) which established that, in line with how other legislation is interpreted, the courts and tribunals must apply a purposive approach in interpreting tax legislation and the subsequent line of cases. HMRC relied, in particular, on the Court of Appeal's decision in R & C Commrs v PA Holdings Ltd [2011] BTC 705 (PA Holdings). I refer to this as the Ramsay argument.
- The settlements code applies to subject the appellants (and not Winn Yorkshire) to income tax on the income in dispute on the basis that they were the settlors of any relevant settlement given that they, as the sole directors and shareholders of Winn Yorkshire, arranged for all of the steps involved in the arrangements to be put in place. I refer to this as the settlement argument.
[5] For all the reasons set out below, in summary, I...
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Clipperton and Another v R & C Commissioners
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