Jones v Garnett (Inspector of Taxes)
| Jurisdiction | England & Wales |
| Judge | Lord Justice Keene,Lord Justice Carnwath,Chancellor |
| Judgment Date | 25 July 2007 |
| Neutral Citation | [2005] EWCA Civ 1553 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | Case No: C3/2005/1257(Z) AND C3/2005/1257 |
| Date | 25 July 2007 |
[2005] EWCA Civ 1553
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
THE HON MR JUSTICE PARK
CH 2004 APP 0753
Royal Courts of Justice
Strand, London, WC2A 2LL
THE CHANCELLOR OF THE HIGH COURT
LORD JUSTICE KEENE and
LORD JUSTICE CARNWATH
Case No: C3/2005/1257(Z) AND C3/2005/1257
Mr Malcolm Gammie QC and Mr Keith Gordon (instructed by Messrs Nelsons) for the Appellant
Mr Rupert Baldry (instructed by HM Revenue and Customs) for the Respondent
Crown Copyright ©
Chancellor
Introduction
In 1992 each of the appellant Mr Jones and his wife acquired from company formation agents one of the two issued shares in Arctic Systems Ltd ("the Company") through which to exploit the personal services of Mr Jones as an information technology consultant. Mr Jones was appointed the sole director and Mrs Jones the company secretary. The business of the Company prospered and by 1997 it was paying dividends to Mr and Mrs Jones in addition to the remuneration it paid them for their respective services. In the year 1999/2000 each of them received the sum of £25,767.25 by way of dividend.
The Inspector of Taxes assessed Mr Jones to tax in respect of the dividend paid to Mrs Jones on the ground that the arrangements they had made in 1992 constituted a settlement within the definition contained in s.660G(1) Income and Corporation Taxes Act 1988 comprising the share in the Company registered in her name. He maintained that the dividend paid to Mrs Jones was income arising under that settlement so that it was deemed, pursuant to s.660A(1) ICTA, to be the income of Mr Jones.
Mr Jones disagreed and appealed against the assessment to the Special Commissioners. He contended that the arrangements made between himself and his wife did not constitute a settlement, as so defined, because they did not contain the requisite element of bounty required by the judicial gloss put upon the statutory definition by the House of Lords in IRC v Plummer [1980] AC 896, see Chinn v Hochstrasser [1981] AC 533, 555. He also maintained that if there was such an element of bounty then the acquisition of her share by Mrs Jones came within the exemption for outright gifts between spouses for which provision is made by s.660A(6)ICTA.
The Special Commissioners rejected the contentions of Mr Jones on both points, by a majority constituted by the casting vote of the presiding commissioner. Mr Jones appealed to the High Court. He contended that the presiding commissioner's right to a second or casting vote had not been properly exercised and that the Special Commissioners were wrong on both the grounds on which he challenged the assessment. The appeal came before Park J. He declined to deal with the casting vote point on the ground that it was not a live issue. He dismissed the appeal on the substantive points on the grounds that the arrangements made in 1992 did contain the requisite element of bounty but did not come within the provisions of s.660A(6). Mr Jones applied for permission to appeal to this court. Permission to appeal was granted by Lloyd LJ on the substantive points but refused on the casting vote point for the substantially the same reason Park J refused to decide it. Mr Jones gave notice that he wished to renew his application for permission to appeal on the casting vote point at the hearing of the appeal for which Lloyd LJ granted permission to appeal. At the conclusion of the hearing we dismissed the application for permission to appeal. We said that we would give our reasons in our judgments on the substantive points.
Accordingly the issues for our determination are:
(a) whether there was a settlement within the statutory definition contained in s.660G(1), and if so
(b) whether it was an outright gift within s.660A(6) so as to be excluded from the operation of s.660A(1).
The answer to the first question depends on the proper construction and application of the long-standing provisions to be found in the years in dispute in ss. 660A to 660G ICTA in the light of the guidance afforded by a number of reported cases decided since 1939. The answer to the second question depends on the true construction and application of s.660A(6). I shall deal with the relevant legislation, the decided cases, the facts as found by the Special Commissioners, the decision of the Special Commissioners and of Park J before considering the submissions made to us on this appeal.
The Legislation
It is not necessary to trace the legislative history in any detail. Suffice it to note that, except for s.660A(6), the provisions found in Part XV ICTA headed "Settlements" originated in the Finance Acts 1922 to 1946. The substantive provisions are governed by the definitions contained in s.660G(1) and (2). They are, so far as relevant, in the following terms:
"(1) In this Chapter -
"settlement" includes any disposition, trust, covenant, agreement, arrangement or transfer of assets, and
"settlor", in relation to a settlement, means any person by whom the settlement was made.
(2) A person shall be deemed for the purposes of this Chapter to have made a settlement if he has made or entered into the settlement directly or indirectly, and, in particular, but without prejudice to the generality of the preceding words, if he has provided or undertaken to provide funds directly or indirectly for the purpose of the settlement…"
Those definitions apply for the purposes of s.660A headed "Income arising under settlement where settlor retains an interest". The relevant subsections are in the following terms:
"(1) Income arising under a settlement during the life of the settlor shall be treated for all purposes of the Income Tax Acts as the income of the settlor and not as the income of any other person unless the income arises from property in which the settlor has no interest.
(2) Subject to the following provisions of this section, a settlor shall be regarded as having an interest in property if that property or any derived property is, or will or may become, payable to or applicable for the benefit of the settlor or his spouse in any circumstances whatsoever.
[(3)—(5)]
(6) The reference in subsection (1) above to a settlement does not include an outright gift by one spouse to the other of property from which income arises, unless-
(a) the gift does not carry a right to the whole of that income, or
(b) the property given is wholly or substantially a right to income.
For this purpose a gift is not an outright gift if it is subject to conditions, or if the property given or any derived property is or will or may become, in any circumstances whatsoever, payable to or applicable for the benefit of the donor.
[(7) – (9)]
(10) In this section "derived property", in relation to any property, means income from that property or any other property directly or indirectly representing proceeds of, or income from, that property or income therefrom."
What is now s.660A(6) was originally introduced by s.108 Finance Act 1989. This followed the abolition of the aggregation of a wife's income with that of her husband by s.32 Finance Act 1988. Parliament did not take the opportunity then or thereafter to remove the reference to a spouse contained in s.660A(2).
The Decided Cases
Thus, in terms of the statute, the first issue is whether there was in 1992 an 'arrangement' within the meaning of that word in the definition of 'settlement' now contained in s.660G(1) in the context of Part XV ICTA. The excessive width of that word has given rise to a restriction on its application to arrangements or dispositions by which some element of bounty is conferred. The element of bounty test was applied by Plowman J in IRC v Leiner (1964) 41 TC 589, 596 and Pennycuick J in Bulmer v IRC [1967] Ch.145 and approved by a majority of the House of Lords in IRC v Plummer [1980] AC 896, 911–913. As the application of this test is at the heart of this appeal I should refer to those three cases.
In IRC v Leiner (1964) 41 TC 589 there was a circular transaction by which an interest free loan to an associated company from the taxpayer's mother was replaced by another interest free loan from the taxpayer. But the circle included an interest bearing loan to the taxpayer from the trustees of a settlement made by the taxpayer's mother in which the taxpayer was interested. The Revenue assessed the taxpayer to tax on the income of the settlement which included the interest payable on the loan to him. Before Plowman J the taxpayer accepted the conclusions of the Special Commissioners that the circular transaction constituted an 'arrangement' within the relevant definition and that the taxpayer was a settlor. The outstanding issue was whether the interest on the loan paid by the taxpayer to the trustees was income originating from him. As to this point (p.596) Plowman J said:
"On the face of it, it obviously is income provided by him in the sense that he paid it, but it is common ground that it is implicit in the fasciculus of sections of which section 401 forms a part that some element of bounty is necessary to make the sections apply and that a bona fide commercial transaction would be excluded from their operation."
Later he added:
"The arrangement in my view must be looked at as a whole, and looked at in this way, I find it impossible to say that the [taxpayer] did not provide the trustees with an income of [the amount of the interest] a year in the sense in which the word "provided" is used in s.401..that is to say as importing an...
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