Dunsby v Revenue and Customs Commissioners
| Jurisdiction | UK Non-devolved |
| Neutral Citation | [2021] UKUT 289 (TCC) |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2021] UKUT 289 (TCC)
The Hon. Mrs Justice Bacon, Judge Timothy Herrington
Upper Tribunal (Tax and Chancery Chamber)
Income tax – Settlements legislation – ITTOIA 2005, Pt. 5, Ch. 5 – Meaning of settlement – Meaning of settlor – Whether there were multiple settlors – Application of ITTOIA 2005, s. 645 – Whether dividend or distribution taxable under ITTOIA 2005, s. 383 – Whether taxpayer subject to tax by reference to the income of the settlement under transfer of assets abroad regime – ITA 2007, Pt. 13, Ch. 2
This was an appeal by Mr Dunsby against the FTT's dismissal of his appeal against HMRC's amendment to his 2012–13 SA return. The amendment brought a further amount of £195,400 into account as taxable income, the amount having been received as a result of a tax avoidance scheme (the Scheme) in which Mr Dunsby participated. In brief, Mr Dunsby was the sole shareholder in a company that created a new class of “S” share and issued one such share to a non-resident individual (Mrs Gower) who then transferred the share to a trust in which she retained an interest but from which Mr Dunsby could benefit. The company then declared a dividend (of £200,000) on the new class of share, but under the terms of the trust, Mr Dunsby received almost all the benefit (£195,400). It was intended that the scheme would fall within the settlements anti-avoidance legislation in ITTOIA 2005, Pt. 5, Ch. 5, with the effect that the sums received by Mr Dunsby would be treated as income of Mrs Gower and not as his income.
Mr Dunsby was granted permission to appeal the FTT decision on three grounds:
- that the FTT had erred in identifying what comprised the settlement and that in fact it should only comprise the transfer of the new share to the trust that was made by Mrs Gower (ground 1);
- that the FTT had also erred in interpreting and applying ITTOIA 2005, s. 644 and 645, because the only property provided for the settlement (the S share) had been provided by Mrs Gower, therefore all of the income should have been allocated to her (ground 2); and
- that the FTT had erred in law by concluding that condition B in ITA 2007, s. 721 was satisfied (with the result that the transfer of assets abroad legislation applied), because in fact the income would not otherwise have been chargeable on Mr Dunsby as the settlements legislation treated it as income of Mrs Gower (ground 3).
Although HMRC had not made a formal appeal, they were permitted to appeal against the part of the FTT's decision concluding that the dividend in respect of the S share could not be viewed as a distribution in respect of the ordinary shares held by Mr Dunsby (the distribution issue).
The Upper Tribunal examined the issues as follows:
The Upper Tribunal's starting point was that the distribution provisions in ITTOIA 2005, s. 383–385 had to be given a purposive construction and that their purpose was to “impose income tax on dividends and other distributions of a UK-resident company in the hands of the person receiving or entitled to the distribution”. The disputed question in this case was whether Mr Dunsby was the person receiving or entitled to the distribution under s. 385. The UT noted that s. 385 does not require the taxable person to be the holder of the shares. In their view the effect of the Scheme was that Mr Dunsby directly received the dividends and, moreover, he was entitled to the distribution as principal beneficiary of the trust, therefore the transaction fell squarely within both the scope and purpose of the distribution provisions.
The Upper Tribunal therefore disagreed with the FTT's finding that the receipt of the payment from the trust by Mr Dunsby was not a distribution. It was not strictly necessary to consider the remaining issues, but nevertheless they proceeded as follows.
Mr Dunsby's arguments on ground 1 were that the FTT had erred in failing to apply the distinction in Chamberlain v IR Commrs (1943) 25 TC 317 between steps taken with a view to effecting a settlement or arrangement and the settlement or arrangements itself. In his view the settlement or arrangement was confined to the transfer of the S share into trust, with Mrs Gower being the settlor. The Upper Tribunal distinguished Chamberlain on the grounds that the creation of the trust by Mrs Gower and settling of the S share had no independent economic logic and was therefore inextricably bound to the earlier steps by which the company created the share and Mrs Gower obtained it. Thus the settlement could only sensibly be defined by reference to the sequence of transactions constituting the scheme.
In relation to ground 2, the Upper Tribunal's decision on ground 1 pointed to the conclusion that the settlor was Mr Dunsby, but even if that were not so, they would still have reached that conclusion, on the basis that Mr Dunsby had put in place the entire arrangement and Mrs Gower was simply a functionary who, moreover, had not provided any funds for the settlement. Moreover, the effect of s. 645 was that because Mr Dunsby provided the only property of the settlement, the income arising originated from him and was taxable as his income. They thus upheld the FTT's conclusion on the settlements issue.
The Upper Tribunal rejected the argument that condition B in s. 721 was not satisfied because Mr Dansby would not otherwise have been taxed on the income (on the basis that it was taxable as Mrs Gower's income under the settlements legislation) because that ran directly counter to the purpose of s. 721, which imposes the tax that would have been chargeable if the income had not been alienated. The correct interpretation of condition B was to ask if the income would have been chargeable if it had belonged to the taxpayer and been received by them in the UK. The condition was therefore satisfied.
The Upper Tribunal therefore also dismissed Mr Dunsby's appeal in relation to the settlements issue. However, they also found it necessary to exercise their powers to remake the FTT decision. This was because the FTT had concluded that the settlements legislation applied and had therefore increased the assessment to £200,000 (the full amount of the dividend paid on the S share) whereas the Upper Tribunal concluded that the dividend payable to Mr Dunsby of £195,400 was taxable under the distribution provisions. The sum to be brought into account as taxable income was therefore determined at £195,400.
Although this case was designated a lead case under r. 18 of the Tribunal Procedure rules (being part of a marketed tax avoidance scheme), therefore presumably co-funded by the parties, the effect of the Upper Tribunal decision is that the appellants have failed on all three arguments put forward, so it remains to be seen whether there will be a further appeal.
Michael Jones QC, instructed by Reynolds Porter Chamberlain LLP, appeared for the appellant
Laura Poots, Counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
[1] Mark Dunsby (“Mr Dunsby”) appeals against a decision by the First-tier Tribunal (“FTT”) (Judge Ashley Greenbank) released on 24 June 2020 and amended on 21 August 2020 (“the Decision”). The FTT dismissed Mr Dunsby's appeal against an amendment to his tax return for the year 2012/2013. The amendment was made in a closure notice dated 31 March 2017, and brought an amount of £195,400 into account as taxable income. That amount had been received by Mr Dunsby as a result of transactions that formed part of a tax avoidance scheme (the “Scheme”) in which Mr Dunsby participated.
[2] The Scheme was devised and promoted by De Sales Promotions Limited (“De Sales”) and was designed to allow shareholders in private companies with distributable profits to receive those profits free of income tax. Mr Dunsby was the sole shareholder and sole director in such a company (the “Company”) which implemented the Scheme by carrying out the following steps:
- the creation of a new class of shares and the issue of a share (the S share) in that new class to a non-resident individual, Mrs Fiona Gower;
- the transfer by the non-resident individual of that share to a trust (the Trust) in which Mrs Gower retained an interest, but from which Mr Dunsby could benefit;
- the declaration of a dividend on the new class of shares, in circumstances where, under the terms of the Trust, Mr Dunsby received almost all of the benefit of the dividend.
[3] The Scheme was intended to operate on the basis that the income would fall within the ambit of the settlements legislation in Chapter 5 of Part 5 Income Tax (Trading and Other Income) Act 2005 (“ITTOIA”), such that under s 624 ITTOIA the sums paid to Mr Dunsby would be treated as the income of Mrs Gower and not as his income.
[4] HMRC disagreed. They found in their closure notice, and submitted before the FTT, that Mr Dunsby was taxable on three alternative bases as follows:
- On a realistic view of the facts, Mr Dunsby received a dividend or distribution from the Company in respect of his ordinary shares and was subject to income tax on that distribution under s 383 ITTOIA.
- Mr Dunsby was the settlor of a settlement, and the full amount of income arising to the settlement should therefore be treated as his income under the settlements legislation.
- Mr Dunsby was the transferor under the transfer of assets abroad regime in Chapter 2 of Part 13 of the Income Tax Act 2007 (ITA), and the full amount of income was accordingly to be treated as arising to him.
[5] In relation to those issues the FTT concluded that:
- The payment received by Mr Dunsby was not a dividend or distribution on the ordinary shares within s 383 ITTOIA (the Distribution Issue).
- Mr Dunsby was, however, a settlor of a settlement, and the income arising under the settlement should therefore be...
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