Spc00716

SETTLEMENT – Dividend waiver – Income arising under a settlement in which settlor retains interest – Arrangement – Company owned by husband and as to one share by wife – Husband waived dividend in relation to all his 9999 shares – Enhanced dividend consequently paid to wife in respect of her one share – Dividend income paid to wife – Whether waiver arrangement constituted a settlement – Yes – Whether  element of bounty in arrangement – Yes – Appeal dismissed – Income and Corporation Taxes Act 1988, ss 660A(1) and 660G(1)

THE SPECIAL COMMISSIONERS

	STAFFORD ROBERT BUCK	Appellant

-	and –

	THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

				Special Commissioner:  SIR STEPHEN OLIVER QC

Sitting in public in London on 26 September 2008

No representation for the Appellant 

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

© CROWN COPYRIGHT 2008

DECISION

1.	Mr S R Buck appeals against the amendment to self-assessment in respect of his self-assessment tax return for the year 1998-99 and against a Revenue assessment for 1999/2000.

2.	The appeal concerns Mr S R Buck’s waiver of dividends in Leicester, Barfitting Company Ltd (“LBC”) with the effect that substantial dividends were paid to Mrs Buck, his then wife and a minority shareholder.  The issue which arises is whether the dividend waivers come within the scope of the income tax “taxation of settlor” provisions. 

The relevant facts

3.	Since its incorporation in 1976 LBC’s issued share capital has been £10,000 divided into 10.000 shares of £1 each.  LBC’s trade has been that of a joinery business.

4.	At all material times since January 1994 (when Mr S R Buck’s father died) 9,999 of the issued shares were owned by Mr S R Buck and the remaining one issued share was owned by his former wife, Mrs G I Buck.  

5.	Mr S R Buck has been the sole director of LBC since 1986.  

6.	LBC’s profits after tax for the twelve months to 31 March 1999 were £35,707 and the profit carried forward at that date was £46,287.  For the twelve months to 31 March 2000 the profit after tax was £5,647 and the profit carried forward was £46,994.  

7.	On Thursday 18 March 1999 Mr S R Buck, by formal notice in writing to LBC, waived his “dividend entitlement for the year ending 31 March 1999”.  Mr Buck, at a director’s “meeting” held on Saturday 20 March 1999 resolved that “a dividend of £35,000 per share be paid on 25 March 1999 for the year ending 31 March 1999”.

8.	The following year, on Saturday 18 March 2000, Mr Buck waived his dividend entitlement.  According to the company minutes, Mr Buck subsequently resolved at a director’s “meeting” held on Monday 20 March 2000 that a dividend of £35,000 per share be paid on Saturday 25 March 2000 for the financial year ended 30 March 2000.

9.	The minutes of those meetings show that both were attended by Mr Buck and by Mrs G Buck (his other shareholder but not a director of the company).  

10.	Mrs Buck consequently received gross dividends of £39,371 and £27,774 for each of the two years ended 31 March1999 and 31 March 2000.  LBC did not have the distributable reserves to enable dividends to be paid in respect of each of the issued shares held by Mr Buck; if that were to have happened, LBC would have needed some £300m of reserves.

The relevant legal provisions

11.	For the relevant years of assessment the settlements legislation was contained in Chapter 1A of Part XV of the Income and Corporation Taxes Act 1998 (“ICTA”).

12.	Section 660A of ICTA provides:

“(1)	Income arising under a settlement during the life of the settlor shall be treated for all purposes of the Income Tax Act 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.”

…

(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 the gift is not an outright gift if it is subject to conditions or if the property given or any derived property is or will become, in any circumstances whatsoever, payable to or applicable for the benefit of the donor”.

13.	Subsection 660G defines expressions for the purposes of Chapter 1A:

“(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, or has made with any other person a reciprocal arrangement for that other person to make or enter into the settlement.”

The contentions of the parties : a summary

14.	HMRC contend that both Mr Buck’s dividend waivers and the consequent payment of dividends to Mrs Buck constituted an “arrangement” for the purposes of section 660G and therefore a “settlement” within section 660A(1) of which Mr Buck was the settlor.  The settlements, not constituting “outright gifts” within the words of exception in section 660A(6), were not covered by the decision of the House of Lords in Jones v Garnett [2007] UK HL 35 and [2007] STC 1536: the income represented by the waived dividends was therefore to be treated as Mr Buck’s for tax purposes.  

15.	I was informed in writing that Mr Buck would not attend the hearing and would not be represented.  His case was contained in letters provided to the Tribunal. It was contended by Mr Buck that the delay in getting his appeals on for hearing violated his human rights.  I take that to be a reference to Article 6 which, so far as is relevant, provides as follows:

“In the determination of his civil rights and obligations or of any criminal charge against him, everyone is entitle to a fair and public hearing within a reasonable time by an independent and impartial tribunal established by law.  …”

He contended that there had been no “arrangement”.  LBC had been carrying on trade as before; as a director Mr Buck had felt that it had been in LBC’s interest to pay out the maximum dividends available which, as a shareholder, he had not wanted to receive.  Once the dividends had been declared he had had no interest in them.  

Conclusions

16.	The central questions are whether the dividend income was income arising under an arrangement coming within the definition of settlement in section 660G(1); and if the dividend income did so arise, did it arise from property in which Mr Buck had an interest?

17.	The irresistible inference from the facts set out above is that Mr Buck waived his entitlements to both dividends as the first step in his plan that the dividend income should become payable to Mrs Buck.  In Jones v Garnett supra the House of Lords endorsed the broad concept of arrangement as developed in the earlier line of cases from IRC v Payne 23 TC 610 to Butler v Wildin 61 TC 666.  These cases make it clear that there is no need for any formal legal trust or settlement to bring the statutory provisions into operation.  The cases also provide authority for the proposition that a definite plan, including a relatively simple one, to use a company’s shares to divert income falls within the meaning of an arrangement: see paragraphs 48-49 per Lord Walker.  This, as I read it, is consistent with Lord Hoffmann’s approval of the “realistic” view that the court should take of the matter: see paragraph 11 of the judgment.  On that basis there was an arrangement in relation to each dividend.  

18.	It remains to be determined whether as regards each dividend there was an arrangement containing an element of “bounty”. In this respect I follow Lord Hoffmann’s approach in Jones v Garnett and asked whether this was an arrangement which Mr Buck would have entered into with someone with whom he was dealing at arm’s length? See paragraphs 23-24 of Lord Hoffmann’s speech and see also paragraph 55 of Lord Walker’s speech. The arrangement in the present circumstances plainly contained an element of bounty.  There was no commercial purpose or either of the waivers and it would surely not have taken place on an arm’s length basis.  In this respect I disagree with the contrary arguments put forward by Mr Buck.  Indeed, the dividends were declared at a rate that would have been impossible due to the lack of sufficient distributable profits within the company were it not for the fact that Mr Buck had waived the dividends in respect of all his 9,999 shares.
  
19.	Did Mr Buck the settlor, have an interest in the property from which the dividend income arose?  The income, being income that arises under the “settlement”, will be treated as his for tax purposes unless it arises from property in which he has no interest.  Here, following the dividend waivers, the dividend income paid to Mrs Buck arose from her shares in LBC and those shares, together with a dividend rights attached to them, are benefits enjoyed by her.  They constitute the property in which Mr Buck has an interest by virtue of section 660A(2) which treats the settlor as having retained an interest if the property from which the income arises (or any derived property) may be payable to or applicable for his spouse.

20.	For completeness, I turn now to section 660A(6).  That was the provision that, on the basis of the decision of the House of Lords in Jones v Garnett, excluded the wife’s income under the arrangement in that case from being taxed as her husband’s.

21.	Section 660A(6) excludes an “outright gift” of property from one spouse to the other from the scope of the taxation of settlor provisions.  That exclusion does not however apply whereas here the property given is wholly or substantially a right to income: section 660A(6)(b).  Here, income is diverted by means of a dividend waiver in anticipation of the declaration of a dividend.  There is no “outright gift”, merely a one-off waiver of any dividend that might be declared in respect of shares: and the shares in question are retained by the previous person making the waiver and not given to the other spouse.

22.	The exemption in section 660A(6) did apply in Jones v Garnett because, in contrast to the present situation, the essential arrangement identified in that case was the transfer of the share from the husband to the wife.  It follows in my view that the present situation does not come within section 660A(6).  There is no outright gift of property from which income arises.

23.	Finally, I deal with the Article 6 point raised by Mr Buck.  I do not think that there has been any violation of his rights to a fair and public hearing within a reasonable time.  From the time of the amendment to the self-assessment and the Revenue assessment, there were appeal rights and Mr Buck exercised these.  The taxation of settlor appeals were, I understand, held in suspense and not referred to the Special Commissioners until the law had been clarified by Jones v Garnett which was regarded as a test case.  It would always have been open to Mr Buck to have applied to the Tribunal who have had his appeal heard, quite irrespective of the Jones v Garnett proceedings.  Mr Buck did not do so; but his Article 6 right is there to be exercised nonetheless.

24.	For all those reasons I dismiss the appeal.

SIR STEPHEN OLIVER
SPECIAL COMMISSIONER

RELEASED: 23 October 2008

SC 3152/2004