Jones v Michael Vincent Garnett (HM Inspector of Taxes)

For the settlement provisions to apply, an “arrangement” may exist without a trust or legally binding obligations. A structure can constitute an arrangement where it is established with the intention that income-producing assets or activities will provide bounty to another person in the future. The required element of bounty is assessed by looking at the arrangement as a whole.

Where a husband creates and funds a company through his services, receives remuneration below his earning capacity, and facilitates dividends to his wife, the arrangement may be a settlement even though the wife bought her shares herself. The spouse exemption for an outright gift does not apply where the relevant settlement is the wider arrangement rather than a straightforward gift of income-producing property.

The taxpayer appealed from a decision of the Special Commissioners concerning the application of the settlement provisions in the Income and Corporation Taxes Act 1988. The Commissioners were divided, and the presiding Commissioner used the casting vote to dismiss the appeal.

The taxpayer and his wife each owned one share in a company through which the taxpayer provided specialist services. He received a modest salary, the company accumulated profits, and dividends were paid equally to the shareholders. The issues were whether the structure was an “arrangement” constituting a settlement, and whether the arrangement fell within the exemption for an outright gift by one spouse to the other.

1. Appeal dismissed. The assessments for 1999/2000 were correctly made.
2. The court declined to decide the separate procedural question concerning the presiding Commissioner’s casting vote because it was not live on the appeal and would have been guidance only.
3. Under sections 660G(1) and (2) of the Income and Corporation Taxes Act 1988, a settlement may include an arrangement which does not create a trust. The relevant question is whether the arrangement, viewed as a whole, contains the element of bounty required by the authorities.
4. The company structure was an arrangement. Its relevant elements included the wife’s acquisition of a share, the taxpayer’s work for the company, his expectation of receiving only a modest salary, and the intended distribution of profits as dividends. The absence of contractual obligations to maintain that salary level did not prevent those expectations forming part of the arrangement.
5. The taxpayer was the settlor because he provided funds indirectly by supplying his services to the company for remuneration substantially below his earning capacity. The dividends on the wife’s share were income arising under the arrangement, and the statutory deeming provisions consequently treated them as the taxpayer’s income.
6. Section 660A(6) did not apply. The relevant settlement was the wider arrangement, not an outright gift by the taxpayer. The wife bought her share with her own money, and the arrangement included more than the acquisition of the share. Alternatively, the share was substantially a right to income.
7. The decision was confined to its facts. A husband and wife company operated jointly, with both contributing materially and the principal earner receiving the going rate for the work, would not necessarily constitute a settlement.

Special Commissioners: the Commissioners were divided. The presiding Commissioner exercised the casting vote and dismissed the appeal.

High Court (Chancery Division): the appeal was dismissed with costs. The time for serving a notice of appeal was extended to six weeks.