Sharon Clipperton & Anor v The Commissioners for HMRC

A purposive construction of tax legislation may treat a series of pre-planned steps as one composite transaction. A distribution made by a company out of its assets may therefore be a distribution in respect of shares even where it reaches shareholders indirectly through artificial steps inserted solely to avoid tax.

The distribution code and settlements code must be analysed separately. Taxation under the distribution code does not itself exclude the settlements code. However, the settlements code applies only where the income arises from property in which the settlor retains an interest. A distribution arising from shareholders’ shares in one company was not income arising from a settled share in another company.

The appellants were equal shareholders and directors of Winn & Co. (Yorkshire) Ltd. They used the Aikido tax avoidance scheme to extract funds through a subsidiary and a trust, without declaring the sums received as dividend income.

The First-tier Tribunal dismissed their appeals, accepting HMRC’s Ramsay argument and rejecting the settlements argument: [2021] UKFTT 12 (TC). The Upper Tribunal dismissed the appellants’ appeal and would have allowed HMRC’s cross-appeal on the settlements code: [2022] UKUT 00351 (TCC).

The Court of Appeal considered whether the sums were distributions in respect of shares, whether the settlements code applied, and two further grounds concerning bounty and double taxation. The central issues were the scope of the Ramsay principle and the interaction between the distribution and settlements codes.

Appeal dismissed. Lord Justice Nugee gave the leading judgment, with which Lord Justice Newey and Lord Justice Lewison agreed.

1. The Ramsay approach involves two related stages. First, the court identifies purposively the class of facts intended to be affected by the statutory charge. Secondly, it asks whether the actual facts answer the statutory description. The stages may require an iterative analysis. Rossendale BC v Hurstwood Properties (A) Ltd [2021] UKSC 16, [2022] AC 690 provided a sufficient description of the principle.

2. Applying that approach to the distribution provisions of the Income Tax (Trading and Other Income) Act 2005 and the Corporation Tax Act 2010, the payment by Winn Yorkshire into the scheme was a distribution in respect of the appellants’ shares. The scheme was designed to deliver the company’s assets to its shareholders, and the money did reach them. The inserted steps had no business purpose apart from avoiding tax.

3. Khan v HMRC [2021] EWCA Civ 624, [2022] 1 WLR 539 concerned the separate question of who received or was entitled to an already identified distribution under section 385(1)(b) ITTOIA. Its reasoning did not determine the earlier question of what constituted a taxable distribution in respect of shares.

4. The settlements code was not automatically displaced because the income was taxed under the distribution provisions. Nevertheless, the relevant Winn Yorkshire distribution arose from the appellants’ shares in Winn Yorkshire. Those shares were not settled, and Winn Yorkshire retained no interest in them. Section 624(1) ITTOIA therefore did not apply.

5. The Winn Scarborough dividend was a different distribution, made by a different company in respect of a different share and in a different amount. It could be treated as an intermediate step with no separate fiscal existence, or its separate tax treatment could simply be left without effect on the Winn Yorkshire distribution. Grounds 3 and 4 did not arise and were not decided.

• Court of Appeal (Civil Division). The appeal was dismissed: [2024] EWCA Civ 180.
• Upper Tribunal (Tax and Chancery Chamber). The appellants’ appeal was dismissed and HMRC’s cross-appeal on the settlements code would have been allowed: [2022] UKUT 00351 (TCC).
• First-tier Tribunal (Tax Chamber). The lead appeals were dismissed: [2021] UKFTT 12 (TC).