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Clipperton and Another v R & C Commissioners

CCH British Tax Cases Cited authorities 40 Cited in 3 Precedent Map Related
Vincent
JurisdictionUK Non-devolved
Judgment Date20 December 2022
Neutral Citation[2022] UKUT 351 (TCC)
CourtUpper Tribunal (Tax and Chancery Chamber)
Clipperton & Anor
and
R & C Commrs

[2022] UKUT 351 (TCC)

Mr Justice Adam Johnson, Judge Thomas Scott

Upper Tribunal (Tax and Chancery Chamber)

Income tax – Dividend avoidance scheme involving trust – Whether taxable dividend or distribution received by taxpayers – Whether settlements legislation (ITTOIA 2005, Pt. 5, ch. 5) overrode any charge under distribution code – Aapplication of settlements legislation – Element of bounty requirement – Whether taxpayers were settlors – Application of multiple settlor provisions.

Abstract

In Clipperton & Anor v R & C Commrs [2023] BTC 502, the Upper Tribunal (UT) dismissed the taxpayer’s appeal against the decision of the First-tier Tribunal (FTT) in Clipperton [2021] TC 07998 that sums received by the taxpayers under a dividend replacement scheme were taxable on them as distributions.

Summary

Ms Clipperton and Mr Lloyd (the Appellants), who were sole shareholders and directors of Winn & Co (Yorkshire) Ltd (Winn Yorkshire), had entered into a marketed ‘dividend replacement scheme’. The intention was that the settlements legislation (ITTOIA 2005, Pt. 5, ch. 5) would apply with the result that sums paid to the Appellants would be treated for tax purposes as dividend income of Winn Yorkshire. Had the scheme been successful, the amounts received by the Appellants would have been largely tax-free. The FTT held that:

  • the sums were taxable on the Appellants as dividend income; and
  • as a result of (1), the sums were not to be regarded as arising under a settlement; but
  • if that were wrong, the income arising under the settlement could not be apportioned to the Appellants because they provided no element of bounty.

The Appellants were unsuccessful in their appeals against (1) and (2). For the UT, the FTT did not err in law in construing the relevant provisions as giving rise to a distribution for the Appellants when applied to the arrangements viewed as a composite whole: the approach taken by the FTT was correct and remained correct in light of Khan v R & C Commrs [2021] BTC 13 and Dunsby v R & C Commrs [2021] BTC 548.

HMRC’s cross-appeal in respect of (3) was successful. For the UT, the FTT had misdirected itself in relation to the legal test imposed in case law by the element of bounty requirement. The element of bounty test means that ‘the settlor must provide a benefit which would not have been provided in a transaction at arm’s length’, and this was not the test applied by the FTT. Further, applying the FTT’s test, there was an element of bounty and this could not be ignored merely because it was small.

In opposing HMRC’s cross-appeal, the Appellants put forward two additional or alternative reasons: first, that the settlement was limited to certain steps involving Winn Yorkshire, which was therefore the only settlor; and second, that under the provisions dealing with multiple settlors, the Appellants were to be treated as having provided no property to the settlement and so could not be attributed any of its income. Both reasons were rejected by the UT.

Comment

This is a clear victory for HMRC in respect of a marketed scheme (referred to as ‘Aikido’) which relied on the settlements legislation to generate tax-free income for the individuals.

Comment by Stephen Relf, Content Manager - Tax, Croner-i Ltd.

Michael Jones KC, instructed by Reynolds Porter Chamberlain LLP appeared for the appellant

Aparna Nathan KC and Laura Poots, instructed by the General Counsel and Solicitor to His Majesty's Revenue and Customs appeared for the respondents

DECISION
Introduction

[1] His Majesty's Revenue and Customs (“HMRC”) assessed Ms Clipperton and Mr Lloyd (the “Appellants”) to income tax on sums which they received in 2011/12 from arrangements involving a company of which they were the sole shareholders and directors. The Appellants appealed against the assessments to the First-tier Tax Tribunal (“FTT”). The FTT held that the sums in question were liable to income tax as distributions (the “distribution issue”), but, if that were wrong, would not have been liable to tax in the hands of the Appellants under the settlements legislation.

[2] With the permission of the FTT, the Appellants appeal against the FTT's decision in relation to the distribution issue, and against certain aspects of the FTT's decision in relation to the settlements code. Again with the permission of the FTT, HMRC cross-appeal against the FTT's decision that the amounts would not have been taxable on the Appellants under the settlements legislation.

Background and summary facts

[3] The relevant facts are not in dispute and may be summarised as follows. Unless indicated otherwise, references below to paragraphs in the form [*] are to paragraphs of the FTT's decision (the “Decision”).

[4] At all material times each Appellant held 50% of the shares in Winn & Co (Yorkshire) Ltd (“Winn Yorkshire”), a firm of accountants. The Appellants were also the sole directors.

[5] Winn Yorkshire had historically paid the Appellants substantial dividends from the profits of its accounting business. In 2012 a plan was adopted which was marketed by Premier Strategies Limited (“Premier”), designed to enable companies to put monies into the hands of their shareholders, which would otherwise have been taxable as dividends, without any charge to income tax. The plan was described as a “dividend replacement strategy” called Aikido, and was presented to Winn Yorkshire by Premier in the following terms1:

Aikido is suitable for any UK resident company with the desire, and sufficient distributable reserves, to pay a dividend. It provides a means for the company to pay a dividend to its shareholders in a way that avoids the higher and additional rates of income tax on those dividends. In effect, the dividend should be free of tax in the hands of the recipient.

It achieves this by relying upon detailed anti-avoidance legislation to the advantage of your shareholders …

[6] The essential steps involved in the scheme were summarised by the FTT as follows, at [2]:

… 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)22The directors of Winn Scarborough were the Appellants..
  • 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).

[7] Premier stated to Winn Yorkshire that the success of the scheme depended on the settlements provisions (the “settlements legislation” or “settlements code”) contained in Chapter 5 of Part 5 Income Tax (Trading and Other income) Act 2005 (“ITTOIA”). Under those provisions, income arising under a “settlement” is treated for income tax purposes as the income of, and only of, the “settlor”. The intention was that (1) Winn Yorkshire would be the (only) settlor of the trust, (2) income arising under the trust would be treated by the settlements code as income only of Winn Yorkshire, (3) the dividend declared by Winn Scarborough would be income of Winn Yorkshire alone, and (4) no tax would be payable by Winn Yorkshire in respect of the dividend.

[8] Thus, claimed Premier, the Appellants would together receive around 98% of the declared dividend completely free of income tax.

[9] Prior to the steps described above, the Appellants as shareholders and directors in Winn Yorkshire gave consent to actions necessary to implement the steps.

[10] The A shares in Winn Scarborough carried full rights to vote, participate in distributions and to a distribution of capital on a winding up. The B shares carried a right to participate in distributions but no voting rights or rights to distribution of capital on a winding up. A deed of trust was executed between Winn Yorkshire as settlor and RT Corporate Trustee Limited (the “Trustee”) as trustee in respect of the Winn & Co (Yorkshire) Limited Interest in Possession Trust (the “Trust”). The principal terms of the Trust were summarised by the FTT as follows, at [12(6) and (7)]:

  • during an Initial Period (of 18 months from the creation of the Trust), and subject to certain overriding discretionary powers (as set out in clause 3 of the deed), the trustee was to hold the fund on trust to pay or apply any income arising:as to the first £500, to Cancer Research UK, a registered charity;subject to that, as to the next £500, to Winn Yorkshire;subject to that, as to any further income arising (A) as to 0.5% thereof, to Cancer Research UK; (B) as to 0.5% thereof, to Winn Yorkshire; (C) as to the remaining 99% thereof (termed the 99% Income Share), on Protective Trusts as regards 50% of the 99% Income Share for the benefit of each of the appellants during their lives.

The “Protective Trusts” were defined in the trust deed (under clause 1.14) as trusts giving the relevant beneficiary an immediate right to the relevant income during the Protected Period (broadly, during the appellants' lives), but which were subject to being determined in the event that the beneficiary took steps to dispose of...

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