Sharon Clipperton and Steven LLoyd v The Commissioners for His Majesty's Revenue and Customs [2022] UKUT 00351 (TCC)
| Jurisdiction | UK Non-devolved |
| Judge | Mr Justice Adam Johnson,Judge Thomas Scott |
| Neutral Citation | [2022] UKUT 00351 (TCC) |
| Subject Matter | 20 December 2022 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
| Published date | 20 December 2022 |
Neutral Citation: [2022] UKUT 00351 (TCC) Case Number: UT/2021/000070
UT/2021/000071
UT/2021/000095
UT/2021/000096
UPPER TRIBUNAL
(Tax and Chancery Chamber) By remote video hearing
INCOME TAX - dividend avoidance scheme involving trust - whether taxable dividend or
distribution received by taxpayers - whether settlements legislation overrode any charge under
distribution code - application of settlements legislation - element of bounty requirement -
whether taxpayers were settlors - application of multiple settlor provisions
Heard on: 20 and 21 July 2022
Judgment date: 20 December 2022
Before
MR JUSTICE ADAM JOHNSON
JUDGE THOMAS SCOTT
Between
SHARON CLIPPERTON
STEVEN LLOYD Appellants/
Respondents in cross-appeal
and
THE COMMISSIONERS FOR HIS MAJESTY’S REVENUE AND CUSTOMS
Respondents/
Appellants in cross-appeal
Representation:
For the Appellants: Michael Jones KC, instructed by Reynolds Porter Chamberlain LLP
For the Respondents: Aparna Nathan KC and Laura Poots, instructed by the General Counsel
and Solicitor to His Majesty’s Revenue and Customs
1
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 terms
1
:
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:
(1) 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”)
2
.
(2) 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
1
[10].
2
The directors of Winn Scarborough were the Appellants.
2
of any income arising to the trust and that the trust property was to revert
to it.
(3) Winn Yorkshire subscribed for a further A share of £1 in Winn
Scarborough at a premium of £200,000 (“the additional A share”).
(4) 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.
(5) 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”).
(6) 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)]:
(a) 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:
(i) as to the first £500, to Cancer Research UK, a registered charity;
(ii) subject to that, as to the next £500, to Winn Yorkshire;
(iii) 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
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