Mr P A & Mrs F J Bird v Her Majesty's Revenue & Customs, SPC 00720

Spc00720

INCOME TAX – Settlement – Company owned by husband and wife – Allotment of shares in company to their minor children on subscription at par – Payment of dividends to children – Whether settlement by virtue or in consequence of which dividends were paid within meaning of Income and Corporation Taxes Act 1988 ss. 660A(1) and 660G(1) – Yes – Appeal dismissed

ASSESSMENT – Extended time limits – Negligent conduct – Husband and wife owned all shares in company – Husband and wife allowed minor children to subscribe for shares at par – Dividends paid to daughters – Whether husband and wife were negligent in omitting daughters’ dividends as dividend income of husband and wife in their tax returns – No

MR P A & MRS F J BIRD Appellants

• and –

Special Commissioner: SIR STEPHEN OLIVER QC

Sitting in public in London on 24 September 2008

No representation for the Appellants

Rupert Baldry, counsel, instructed by the general counsel and solicitor to HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2008

1. Mr P A Bird and Mrs F J Bird appeal against amendments to self-assessments. The principal issue in the appeals is whether dividend income received by their three minor daughters was income arising under a settlement within the meaning of the income tax “Taxation of Settlor” provisions in Part XV of Income and Corporation Taxes Act 1988 (“the Act”).

2. Specifically Mr Bird and Mrs Bird appeal against amendments to self-assessments pursuant to section 28A(1) and (2) Taxes Management Act 1970 (“TMA”) in respect of their self-assessment tax returns for the two years ended 5 April 2001 and against amendments to their self-assessments pursuant to section 29 TMA in respect of their self-assessment tax returns for the two years ended 5 April 1999. Mr Bird and Mrs Bird also appeal against extended time limit assessments to income tax pursuant to section 36 TMA for the three years ended 5 April 1998; those three assessments, additionally, raise the second issue which is whether there has been a loss of tax attributable to negligent conduct on the parts of Mr and Mrs Bird.

3. The day before the hearing the solicitors acting for Mr Bird and Mrs Bird informed the Tribunal that no one would attend to present their cases. Rule 16(2) of the Special Commissioners Rules enables the Tribunal to go ahead and hear an appeal in the absence of a party. I decided to go ahead and to rely on the facts (i) as presented by HMRC on the basis of the agreed bundle documents, (ii) as set out in an agreed Statement of Facts and (iii) on the narrative accounts of what had happened in letters written by the advisers to Mr and Mrs Bird to the extent that this information has not been in dispute.

The facts

4. Cargoitem Ltd was incorporated in September 1994 to trade as a wholesaler of specialist kitchen furniture. Its authorised share capital was £1,000 divided into 1,000 shares of £1 each. Two subscriber shares were issued. One such share was transferred to Mr Bird and the other to his wife, Mrs Bird. The annual returns for the period to 30 November 1995 show Mr Bird as the sole director and Mr Bird and Mrs Bird as joint company secretaries. The agreed Statement of Facts states that Mr Bird and Mrs Bird were the original directors with Mr Bird as company secretary. (The disparity is of no consequence in this appeal.)

5. Cargoitem through the exertions of Mr Bird and Mrs Bird embarked on its trade of selling kitchen components that it had imported from Spain. By the start of 1995 it was ready to expand. It had difficulty in raising funds. Some time on or before 9 February 1995 Cargoitem borrowed £60,000 from its bank secured by way of a second charge over the Birds’ home.

6. Late in December 1994 Mr Bird’s father died. He left his estate to such of the Birds’ three daughters as should reach 18 in equal shares. The eldest daughter was 15 at the start of 1995; the other twin daughters were then 10. Mr Bird was the sole executor under his father’s will.

7. Mr Bird transferred £7,000 from the estate to Cargoitem on 22 March 1995 as an unsecured loan with interest of 2% over Bank of England base rate. On 3 May 1995 a further payment of £54,364 was made to Cargoitem; this, says the Statement of Facts, was “characterised by the company as an unsecured loan from the minor beneficiaries to the company”. The accounts indicate that that loan remained outstanding for at least two years.

8. On 4 April 1995 Cargoitem issued a further 98 ordinary shares at par. 19 of these were issued to each of Mr Bird and Mrs Bird and 20 were issued to each of the three daughters. There is no evidence as to whose money the daughters used to pay the subscription monies of £1 per share.

9. Cargoitem carried on its trade profitably and in each year to 2002, when it ceased business, dividends were paid to the shareholders including the three daughters.

The arguments on the main issue

10. On those facts, argued Rupert Baldry for HMRC, the dividends paid to the three daughters (until they each reached 18, which the eldest did on 13 July 1998) constituted income arising under a “settlement” within the meaning of that word in section 660G. In consequence the dividend income should be treated as that of Mr Bird and Mrs Bird equally by virtue of section 660B(1) of the Act. The steps taken to make each of the three daughters a 20% shareholder in Cargoitem amounted, say HMRC, to an “arrangement” within the statutory definition of “settlement”.

11. The case for Mr Bird and Mrs Bird as presented in the correspondence was that the daughters’ acquisitions of their shares had been part of a purely commercial transaction. The shares had been a form of quid pro quo for a loan or loans which the daughters should be regarded as having made to Cargoitem.

The legislation

12. The relevant legislation is set out in the Appendix to this decision.

Conclusions

13. Before addressing the principal legal issue, I need to draw certain conclusions from the primary facts as set out above.

14. Until the shares, giving 60% of the equity in Cargoitem to the three daughters, were issued on 4 April 1995, the company and all entitlement and expectation of profit belonged to Mr Bird and Mrs Bird. Those expectations were based on Cargoitem’s business that had already been running for some months before those share issues.

15. The issues of shares to the daughters were not some form of consideration for the loans from Mr Bird’s father’s estate. The £7,000 paid from the estate to Cargoitem on 22 March 1995 was regarded as a loan at interest. There was no evidence that it carried the right to an issue at par of shares amounting to a 60% equity stake in the company. There is no evidence of any connection between the £7,000 loan and the share issue. The share issue documentation says nothing about the share issues being related to the daughters’ interests as loan creditors. If the shares issued had related to the £7,000 loan, why were shares issued to Mr Bird and Mrs Bird as well? The second loan of £54,364 was introduced...