TC03188: P Donovan and related appeal
| Jurisdiction | UK Non-devolved |
| Judgment Date | 06 January 2014 |
| Neutral Citation | [2014] UKFTT 48 (TC) |
| Date | 06 January 2014 |
| Court | First Tier Tribunal (Tax Chamber) |
[2014] UKFTT 048 (TC)
Judge Miss Jennifer Blewitt, Ms Ruth Watts Davies.
Mr M Arthur appeared for the Appellant
Mr J Hillier of HM Revenue and Customs appeared for the Respondents
Settlement - Income arising under a settlement where settlor retains interest - Appellants owning bulk shares in company - Appellants waiving right to receive dividends - Appellants' wives receiving significant dividend payments - Appeals dismissed.
The First-tier Tribunal dismissed the taxpayers' appeals, ruling that the appellants' dividend waivers in favour of their wives constituted a settlement for income tax purposes. The Tribunal also held that discovery assessments raised by HMRC were valid.
The appellants are directors and shareholders of Victory Fire Limited (the company) and the appellants' wives are also shareholders. In 2009 the company declared an interim dividend of £3,200 per ordinary share in respect of the accounting period ended 31 March 2010. On the same date, the appellants signed deeds of dividend waiver, waiving entitlement to the interim dividend arising on their entire holding of ordinary shares in the company from that date for the period of one day. On the same day, the appellants' wives were issued with dividend vouchers showing payments of £32,000 and a 10 per cent tax credit of £3,555.55. On 8 April 2009, the company declared an interim dividend of £825 per ordinary share in respect of the accounting period ended 31 March 2010. On the same date, the appellants' wives signed deeds of dividend waiver, waiving entitlement to the interim dividend arising on their entire holding of ordinary shares in the company from that date for a period of one day. On the same day, the appellants were issued with dividend vouchers showing a dividend payment of £33,000 and a 10 per cent tax credit of £3,666.66.
HMRC submitted that the intention of the dividend waivers was to allow higher dividends to be paid to the appellants' wives than their respective shareholdings entitled and lower dividends to be received by the appellants to take advantage of the wives' unused basic rate band of tax. HMRC also contended that both the appellants' dividend waivers and the consequent payment of dividends to their wives constituted an "arrangement" in accordance with Income Tax (Trading and Other Income) Act 2005s. 620 ITTOIA 2005 and that as it was the appellants who waived the dividends, it was the appellants who were the settlors.
The appellants contended that the reason for executing the dividend waiver was to maintain reserves and cash balances in order to fund the purchase of the company's own freehold property. They submitted that the appellants' wives paid £1 each for the allotted shares and that although no monies were exchanged the accounts were altered to reflect this position. In such circumstances the shares constituted a gift and therefore fell within the exception in ITTOIA 2005, section 626s. 626.
The First-tier Tribunal, dismissing the appeals, found that on the balance of probabilities the intention of the dividend waivers by the appellants was to bring about a near equalisation of the appellants' and their wives' dividend income, thereby reducing their aggregate liability to income tax. If the intention had been to maintain reserves and cash balances this could have been achieved by other means such as voting a lower dividend per share. However, the Tribunal, following the guidance in Jones v GarnettTAX[2007] BTC 476, concluded that irrespective of whether or not there was an intention to avoid tax, an arrangement, and therefore a settlement, clearly existed. There was no evidence to support the assertion that the share allotments were "gifts" and therefore the exception could not be applied to this case.
On the issue of the discovery assessments, the Tribunal did not accept the appellants' argument that the lack of a witness giving oral evidence for HMRC made its case in any way deficient. The statutory test, whether information was available upon which a hypothetical officer could reasonably have been expected to be aware of the insufficiency of the appellants' self-assessment, would not have been altered by live evidence. HMRC concluded that there was not sufficient evidence available to HMRC at that time and were satisfied that the discovery assessments were valid.
It was not surprising that the Tribunal found in favour of HMRC in this case. There was no evidence to support the appellants' assertion that there was a commercial purpose to the dividend waivers, and even if the assertion was correct, there still existed a "plan" in the minds of the appellants which supported HMRC's argument that an arrangement, and therefore a settlement, existed. The appellants' argument that the waivers constituted outright gifts had not been raised prior to the hearings and the appellants' representative only became aware of the argument when HMRC outlined its position on the issue. In the absence of any evidence to support this fact, the Tribunal could not be satisfied that the exception could be applied in this case.
[1]By Notices of Appeal dated 9 January 2013 the Appellants appealed against the following HMRC decisions:
| Appellant | Tax Year Ended | Decision of HMRC | Additional tax |
| Mr Donovan | 5 April 2010 | Closure Notice dated 21 June 2012 | £4,749.98 |
| Mr Donovan | 5 April 2009 | Discovery Assessment dated 21 June 2012 | £3,689.77 |
| Mr Donovan | 5 April 2008 | Discovery Assessment dated 22 March 2012 | £5,350.85 |
| Mr McLaren | 5 April 2010 | Closure Notice dated 19 June 2012 | £4,731.07 |
| Mr McLaren | 5 April 2009 | Discovery Assessment dated 19 June 2012 | £3,715.20 |
| Mr McLaren | 5 April 2008 | Discovery Assessment dated 22 March 2012 | £5,350.85 |
[2]The ground of appeal relied upon by the Appellants, as set out in their respective Notices of Appeal, is that "HMRC's decision is wrong in law".
[3]It was confirmed by Mr Arthur on behalf of the Appellants that no issue was taken with the backgrounds and facts set out in HMRC's Statement of Case dated 15 August 2013 and we therefore accepted the following facts:
[4]On 16 December 2010 the Appellants filed Self Assessment tax returns for the tax year ended 5 April 2010. On 18 February 2011 HMRC Officer Haytack gave notice to the Appellants under section 9Asection 9A Taxes Management Act 1970 of her intention to enquire into the tax returns for the year ended 5 April 2010.
[5]The Appellants have been directors and shareholders of Victory Fire Limited ("the company") since 1992. The Appellants' wives became shareholders in the company following an allotment of shares being made in 2001.
[6]The shareholdings following the allotment in 2001 were as follows:
| Mr P. Donovan: | 40 £1 ordinary shares (40%) |
| Mrs R. Donovan | 10 £1 ordinary shares (10%) |
| Mr P. McLaren | 40 £1 ordinary shares (40%) |
| Mrs A. McLaren | 10 £1 ordinary shares (10%) |
[7]Prior to the allotment of shares and for the accounting period ended 31 March 2000 the relevant shareholdings were as follows:
| Mr P. Donovan: | 1 £1 ordinary shares (50%) |
| Mrs R. Donovan | no shareholding |
| Mr P. McLaren | 1 £1 ordinary shares (50%) |
| Mrs A. McLaren | no shareholding |
[8]In the company's accounting period to 31 March 2010 a total of £130,000 of dividends were paid in respect of ordinary shares, divided as follows (the figure in brackets represents the percentage of the £130,000):
| Mr P. Donovan: | £33,000 (25.38%) |
| Mrs R. Donovan | £32,000 (24.62%) |
| Mr P. McLaren | £33,000 (25.38%) |
| Mrs A. McLaren | £32,000 (24.62%) |
[9]On 6 April 2009 the company declared an interim dividend of £3,200 per ordinary share in respect of the accounting period ended 31 March 2010.
[10]On the same date the Appellants signed deeds of dividend waiver, waiving entitlement to the interim dividend arising on their entire holding of ordinary shares in the company from that date for a period of one day.
[11]On the same date the Appellants' wives were issued with dividend vouchers showing dividend payments of £32,000 and a 10% tax credit of £3,555.55.
[12]On 8 April 2009 the company declared an interim dividend of £825 per ordinary share in respect of the accounting period ended 31 March 2010.
[13]On the same date the Appellants' wives signed deeds of dividend waiver, waiving entitlement to the interim dividend arising on their entire holding of ordinary shares in the company from that date for a period of one day.
[14]On the same date the Appellants were issued with dividend vouchers showing a dividend payment of £33,000 and a 10% tax credit of £3,666.66.
[15]On reviewing the company's accounts and the tax returns of the Appellants for the earlier years, HMRC found the following information pertaining to dividend payments:
| Company accounting period end date and total dividends paid | Mr P Donovan and Mr P McLaren (each) | Mrs R Donovan and Mrs A McLaren (each) | ||
| A | B | A | B | |
| 31 March 2010 | £52,000 | £33,000 | £13,000 | £32,000 |
| £130,000 | ||||
| 31 March 2009 | £45,000 | £30,200 | £11,250 | £26,050 |
| £112,500 | ||||
| 31 March 2008 | £51,585.60 | £30,200 | £12,896.40 | £34,282 |
| £128,964 | ||||
| 31 March 2007 | £46,896 | £28,200 | £11,724 | £30,420 |
| £117,240 | ||||
| 31 March 2006 | £44,496 | £27,000 | £11,124 | £28,620 |
| £111,240 | ||||
| 31 March 2005 | £46,400 | £27,000 | £11,600 | £31,000 |
| £116,000 | ||||
| 31 March 2004 | ££43,200 | £27,000 | £11,600 | £31,000 |
| £108,000 | ||||
| 31 March 2003 | £40,800 | £27,000 | £10,200 | £24,000 |
| £102,000 | ||||
| 31 March 2002 | £36,800 | £26,000 | £9,200 | £20,000 |
| £92,000 | ||||
| 31 March 2001 | £28,800 | £26,000 | £7,200 | £10,000 |
| £72,000 | ||||
| 31 March 2000 | £28,500 | £28,500 |
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