Jones v HM Inspector of Taxes

The settlement provisions require an identifiable arrangement containing an element of bounty. A structure that merely enables future payments does not become a settlement because dividends may later be declared. The arrangement must be assessed at the relevant time, excluding uncertain matters dependent on future trading results, remuneration decisions or dividend declarations. An ordinary share acquired for full value in a genuine joint commercial venture, where both spouses contribute substantially, does not itself confer bounty. The ability of one spouse to confer future benefit is insufficient. Alternatively, an ordinary share is not substantially a right to income where it carries voting and winding-up rights. The appeal was allowed.

Mr Jones and his wife acquired one share each in Arctic Systems Ltd, formed to provide Mr Jones’s information technology consultancy services. The Revenue assessed Mr Jones on dividends paid to Mrs Jones, treating them as income arising under a settlement under sections 660A and 660G of the Income and Corporation Taxes Act 1988. The Special Commissioners were divided, and the presiding commissioner’s casting vote favoured the Revenue. Park J dismissed the substantive appeal in CH 2004 APP 0753. The Court of Appeal considered whether the arrangements constituted a settlement containing bounty and, if so, whether the spouse-gift exception applied.

The Court of Appeal unanimously allowed the substantive appeal and dismissed the renewed application for permission to appeal on the casting-vote issue.

1. Settlement. The court held that the relevant arrangement had to be identifiable at the time it was made, and that income and the property comprised in it had to be capable of identification. The statutory definition was wide, but the element-of-bounty gloss remained necessary. The warning in Chinn v Hochstrasser [1981] AC 533 required the concept of bounty to be applied with care.
2. The acquisition of Mrs Jones’s share for full value formed part of a joint commercial venture to which both spouses made substantial contributions. The corporate structure gave Mr Jones the ability to confer future benefits, but did not itself confer bounty. Future charge-out rates, salaries, profits and dividends depended on uncertain trading conditions or later discretionary decisions. They were not part of the arrangement merely because future dividends were contemplated.
3. The cases involving binding service agreements, identified profitable opportunities or beneficiaries who contributed nothing, including Crossland v Hawkins (1960) 39 TC 493, Mills v Commissioners of Inland Revenue (1974) 49 TC 367 and Butler v Wildin (1988) 61 TC 666, were distinguishable.
4. There was therefore no settlement under section 660G(1) of the Income and Corporation Taxes Act 1988, and section 660A(1) could not apply. Alternatively, if there had been a settlement, there was no outright gift of the share, and an ordinary share was not substantially a right to income because it also carried voting and winding-up rights.
5. Permission for a second appeal required both a real prospect of success and an important point of principle or practice under the CPR. The casting-vote issue satisfied neither requirement.

The assessment was discharged and the permission application was dismissed.

• Court of Appeal (Civil Division): Allowed the substantive appeal and dismissed the renewed application for permission on the casting-vote point.
• High Court (Chancery Division): Park J dismissed the substantive appeal in CH 2004 APP 0753 and declined to determine the casting-vote issue.
• Special Commissioners: Rejected Mr Jones’s appeal by the presiding commissioner’s casting vote.