Sharon Clipperton & Anor. v The Commissioners for HMRC

Tax legislation must be construed purposively, with the facts viewed realistically. Where a planned series of transactions has commercial unity, individual steps may be deprived of significance if the statutory purpose requires the composite arrangement to be considered.

For distribution provisions, the relevant question is whether value is delivered from a company’s assets to a shareholder, directly or indirectly, in the shareholder’s capacity as such. The settlements code does not displace a separate distribution arising from the shareholder’s company.

The statutory definition of settlor is wide. The judicial requirement for an element of bounty limits the concept of settlement and does not prevent a person who makes a settlement from being a settlor merely because that person is also its principal beneficiary.

HMRC assessed the taxpayers to income tax on sums received through a marketed dividend-replacement arrangement involving their company, a subsidiary, a trust and a dividend paid on a B share. The First-tier Tribunal held that the sums were taxable distributions made by the taxpayers’ company. It further held that, if the distribution analysis was wrong, the taxpayers were not settlors and would not be taxable under the settlements code.

The taxpayers appealed on the distribution issue and on the interaction between the distribution provisions and the settlements code. HMRC cross-appealed on the settlor issue. The Upper Tribunal also considered the extent of the settlement and the operation of the multiple-settlor provisions.

1. Distribution. The taxpayers’ appeal was dismissed. On a purposive construction of sections 383 to 385 ITTOIA and section 1000 CTA 2010, the arrangement produced a distribution out of the assets of Winn Yorkshire in respect of the taxpayers’ shares. The relevant value was put into their hands, indirectly, in their capacity as shareholders and as a return on their investment.
2. The fact that each step had legal reality did not prevent the composite arrangement from being considered. The arrangement was deliberately planned and implemented as a commercially unified sequence whose purpose was to replace taxable dividends with equivalent tax-free receipts. Khan v HMRC concerned the construction of the specific phrase “receiving or entitled to” in section 385 ITTOIA. It did not prescribe a composite or single-step approach for every provision in the distribution code.
3. Settlements code. The taxpayers’ appeal on priority and interaction was dismissed. The distribution by Winn Yorkshire was distinct from the dividend paid by Winn Scarborough on the B share. Applying the settlements code to the latter could not eliminate the separate distribution charge on the former.
4. Settlor status and bounty. HMRC’s cross-appeal was allowed. The statutory definition of “settlor” in section 620 ITTOIA is wide. The element of bounty is a judicial gloss used principally to limit the scope of “settlement”. It does not mean that a person who makes a settlement ceases to be a settlor merely because that person is a principal beneficiary. In any event, the taxpayers provided an element of bounty to Winn Yorkshire and Cancer Research UK. The absence of a materiality or de minimis threshold was significant.
5. Extent and multiple settlors. The settlement comprised all steps in the planned scheme, not merely the creation of the trust. The multiple-settlor provisions were capable of applying where the same property was provided by more than one settlor. The taxpayers had indirectly provided property for the settlement and their income could not be treated as attributable solely to Winn Yorkshire.
6. The Upper Tribunal dismissed the taxpayers’ appeal, allowed HMRC’s cross-appeal, set aside the FTT’s decision that the taxpayers were not settlors and remade that decision on the basis that, if the sums were not taxable as distributions, the taxpayers were settlors.

• First-tier Tribunal (Tax Chamber). Held that the sums were taxable distributions, but alternatively that the taxpayers were not settlors under the settlements code.
• Upper Tribunal (Tax and Chancery Chamber). The taxpayers’ appeal was dismissed. HMRC’s cross-appeal was allowed and the decision on settlor status was remade.