Court of Appeal Judgment

Introduction

In 1992 each of the appellant Mr Jones and his wife acquired from company formation agents one of the two issued shares in Arctic Systems Ltd ("the Company") through which to exploit the personal services of Mr Jones as an information technology consultant. Mr Jones was appointed the sole director and Mrs Jones the company secretary. The business of the Company prospered and by 1997 it was paying dividends to Mr and Mrs Jones in addition to the remuneration it paid them for their respective services. In the year 1999/2000 each of them received the sum of £25,767.25 by way of dividend.

The Inspector of Taxes assessed Mr Jones to tax in respect of the dividend paid to Mrs Jones on the ground that the arrangements they had made in 1992 constituted a settlement within the definition contained in s.660G(1) Income and Corporation Taxes Act 1988 comprising the share in the Company registered in her name. He maintained that the dividend paid to Mrs Jones was income arising under that settlement so that it was deemed, pursuant to s.660A(1) ICTA, to be the income of Mr Jones.

Mr Jones disagreed and appealed against the assessment to the Special Commissioners. He contended that the arrangements made between himself and his wife did not constitute a settlement, as so defined, because they did not contain the requisite element of bounty required by the judicial gloss put upon the statutory definition by the House of Lords in IRC v Plummer [1980] AC 896, see Chinn v Hochstrasser [1981] AC 533, 555 . He also maintained that if there was such an element of bounty then the acquisition of her share by Mrs Jones came within the exemption for outright gifts between spouses for which provision is made by s.660A(6)ICTA.

The Special Commissioners rejected the contentions of Mr Jones on both points, by a majority constituted by the casting vote of the presiding commissioner. Mr Jones appealed to the High Court. He contended that the presiding commissioner's right to a second or casting vote had not been properly exercised and that the Special Commissioners were wrong on both the grounds on which he challenged the assessment. The appeal came before Park J. He declined to deal with the casting vote point on the ground that it was not a live issue. He dismissed the appeal on the substantive points on the grounds that the arrangements made in 1992 did contain the requisite element of bounty but did not come within the provisions of s.660A(6). Mr Jones applied for permission to appeal to this court. Permission to appeal was granted by Lloyd LJ on the substantive points but refused on the casting vote point for the substantially the same reason Park J refused to decide it. Mr Jones gave notice that he wished to renew his application for permission to appeal on the casting vote point at the hearing of the appeal for which Lloyd LJ granted permission to appeal. At the conclusion of the hearing we dismissed the application for permission to appeal. We said that we would give our reasons in our judgments on the substantive points.

Accordingly the issues for our determination are:

(a) whether there was a settlement within the statutory definition contained in s.660G(1), and if so

(b) whether it was an outright gift within s.660A(6) so as to be excluded from the operation of s.660A(1).

The answer to the first question depends on the proper construction and application of the long-standing provisions to be found in the years in dispute in ss. 660A to 660G ICTA in the light of the guidance afforded by a number of reported cases decided since 1939. The answer to the second question depends on the true construction and application of s.660A(6). I shall deal with the relevant legislation, the decided cases, the facts as found by the Special Commissioners, the decision of the Special Commissioners and of Park J before considering the submissions made to us on this appeal.

The Legislation

It is not necessary to trace the legislative history in any detail. Suffice it to note that, except for s.660A(6), the provisions found in Part XV ICTA headed "Settlements" originated in the Finance Acts 1922 to 1946. The substantive provisions are governed by the definitions contained in s.660G(1) and (2). They are, so far as relevant, in the following terms:

"(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..."

Those definitions apply for the purposes of s.660A headed "Income arising under settlement where settlor retains an interest". The relevant subsections are in the following terms:

"(1) Income arising under a settlement during the life of the settlor shall be treated for all purposes of the Income Tax Acts 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 whatsoever.

[(3) - (5)]

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

[(7) – (9)]

(10) In this section "derived property", in relation to any property, means income from that property or any other property directly or indirectly representing proceeds of, or income from, that property or income therefrom."

What is now s.660A(6) was originally introduced by s.108 Finance Act 1989. This followed the abolition of the aggregation of a wife's income with that of her husband by s.32 Finance Act 1988. Parliament did not take the opportunity then or thereafter to remove the reference to a spouse contained in s.660A(2).

The Decided Cases

Thus, in terms of the statute, the first issue is whether there was in 1992 an 'arrangement' within the meaning of that word in the definition of 'settlement' now contained in s.660G(1) in the context of Part XV ICTA. The excessive width of that word has given rise to a restriction on its application to arrangements or dispositions by which some element of bounty is conferred. The element of bounty test was applied by Plowman J in IRC v Leiner (1964) 41 TC 589, 596 and Pennycuick J in Bulmer v IRC [1967] Ch.145 and approved by a majority of the House of Lords in IRC v Plummer [1980] AC 896, 911-913. As the application of this test is at the heart of this appeal I should refer to those three cases.

In IRC v Leiner (1964) 41 TC 589 there was a circular transaction by which an interest free loan to an associated company from the taxpayer's mother was replaced by another interest free loan from the taxpayer. But the circle included an interest bearing loan to the taxpayer from the trustees of a settlement made by the taxpayer's mother in which the taxpayer was interested. The Revenue assessed the taxpayer to tax on the income of the settlement which included the interest payable on the loan to him. Before Plowman J the taxpayer accepted the conclusions of the Special Commissioners that the circular transaction constituted an 'arrangement' within the relevant definition and that the taxpayer was a settlor. The outstanding issue was whether the interest on the loan paid by the taxpayer to the trustees was income originating from him. As to this point (p.596) Plowman J said:

"On the face of it, it obviously is income provided by him in the sense that he paid it, but it is common ground that it is implicit in the fasciculus of sections of which section 401 forms a part that some element of bounty is necessary to make the sections apply and that a bona fide commercial transaction would be excluded from their operation."

Later he added:

"The arrangement in my view must be looked at as a whole, and looked at in this way, I find it impossible to say that the [taxpayer] did not provide the trustees with an income of [the amount of the interest] a year in the sense in which the word "provided" is used in s.401..that is to say as importing an element of bounty. The transaction, taken as a whole, was not, in my judgment, one which, from the point of view of the [taxpayer] can be described as a commercial arrangement because he was liable to pay [the amount of the interest] without any compensating advantage to him."

In Bulmer v IRC [1967] 1 Ch 145 shareholders in a company (B) who feared a takeover bid agreed with another company (S) to sell their shares in B to its subsidiary (Y). The price was well below market value and was left outstanding as an interest free loan. Y borrowed money from S at a commercial rate of interest with which to buy further shares in B on the market. It was provided that as and when the loan to Y from S was fully repaid the shareholders in B might reacquire their original shares and any others acquired by Y in consideration of the cancellation of the original loan by the shareholders to Y. The dividends on the shares in B held by Y for the time being were to be applied in paying the money due, both interest and capital, to S. The Inspector assessed the shareholders to tax on the dividends on the shares in B on the footing that the arrangements constituted a settlement and they had not been excluded from the property, that is the shares in B. The shareholders disputed their liability on the ground that the arrangement did not constitute a settlement.

Pennycuick J upheld the contention of the shareholders. He considered that the scheme or arrangement was a bona fide commercial transaction. He added:

"Again, in case that imports in any respect a different test, it is clear that there was no element of bounty as between [the shareholders] and [S]... To avoid misunderstanding, in the extraordinary wide field covered by such words as "agreement" and "arrangement", one may well find a commercial transaction between A and B and then built into that, so to speak, a transaction by way of bounty between A and C, but there is nothing of that kind here....Clearly the [shareholders] did not intend to confer a bounty either on [Y] or on [S]. It may be that the transaction has been framed...in such a way as to procure tax advantages to the [shareholders] but that circumstance does not of itself prevent it from being a bona fide commercial transaction or import any element of bounty."

IRC v Plummer [1980] AC 896 concerned a surtax saving scheme whereby a surtax payer covenanted to pay a sum certain over a specified number of years to a charity in consideration of a capital sum paid to him by the charity. There were a number of other features such as insurance on the life of the surtax payer effected by the charity. The surtax payer claimed to deduct the amount of the annual payment in the computation of his income for the purposes of surtax. He succeeded before the Special Commissioners, Walton J, the Court of Appeal and, by a majority, the House of Lords. The Inland Revenue relied, inter alia, on s.457 ICTA 1970 which, if it applied, deemed the covenanted payment to be the income of the surtax payer. Its application depended on whether the scheme constituted an arrangement and so a settlement within the definition now contained in s.660G(1).

Lord Wilberforce, with whom Lord Keith of Kinkel agreed, considered that it was not possible to read into the definition an exception in favour of commercial transactions but that it was necessary to consider the scope of the words of the definition. He said:

"If it appears, on the one hand, that a completely literal reading of the relevant words would so widely extend the reach of the section that no agreement of whatever character fell outside it, but that, on the other hand, a legislative purpose may be discerned, of a more limited character, which Parliament can reasonably be supposed to have intended, and that the words used fairly admit of such a meaning as to give effect to that purpose, it would be legitimate, indeed necessary, for the courts to adopt such meaning."

Lord Wilberforce then examined what is now, for the most part, Part XV ICTA 1988. He observed:

"..it can, I think, fairly be seen that all of these provisions...have a common character. They are designed to bring within the net of taxation dispositions of various kinds, in favour of a settlor's spouse, or children, or of charities, cases, in popular terminology, in which a taxpayer gives away a portion of his income, or of his assets, to such persons, or for such periods, or subject to such conditions, that Parliament considers it right to continue to treat such income, or income of the assets, as still the settlor's income. These sections, in other words, though drafted in wide, and increasingly wider language, are nevertheless dealing with a limited field – one far narrower than the field of the totality of dispositions, or arrangements, or agreements, which a man may make in the course of his life. Is there then any common description which can be applied to this."

After referring to a number of reported cases, including the statement of Pennycuick J in Bulmer v IRC [1967] Ch.145 which I have quoted in paragraph 12 above Lord Wilberforce concluded:

"My Lords, I think that in doing so the learned judge was well within the limits of permissible interpretation, and that with the "element of bounty" test we have a definition which is in agreement with the intention of Parliament as revealed through the whole miniature code of Chapter [XV]."

He considered that, as the Special Commissioners had held, "there cannot be any doubt that in this case no element of bounty existed".

Lord Fraser of Tullybelton agreed. He considered that the definition of settlement applied only where there was an element of bounty because the word "settlement", even allowing for its extended definition was used throughout the relevant Part "with a flavour of donation or bounty".

In Chinn v Hochstrasser [1981] AC 533, 555 Lord Roskill observed:

"My Lords, I would venture to point out that the word "bounty" appears nowhere in the statute. It is a judicial gloss upon the statute descriptive of those classes of cases which are caught by the section in contrast to those which are not. The courts must, I think, be extremely careful not to interpret this descriptive word too rigidly....What the cases have sought to do is to distinguish between those cases where the recipient has in return for that benefit which he has received accepted some obligation which he has to perform, either before receiving the benefit or at some stated time thereafter, and those cases where the recipient benefits without any assumption by him of any correlative obligation."

Although the decision of the House of Lords in IRC v Plummer established conclusively that the relevant test was "element of bounty" rather than "commercial transaction" it was not suggested that any of the previously decided cases in which the latter test had been applied was wrongly decided. Accordingly the examples of the application of the statutory definition which the previously decided cases provide remain relevant even though some of the dicta may require reinterpretation. It is to those cases, in so far as we were referred to them, that I now turn.

The first is Copeman v Coleman (1939) 22 TC 594. In that case a company had been formed to take over the taxpayer's business in which the shares were held equally between him and his wife. Some three years later the company created a class of preference shares of £200 each carrying a fixed preferential dividend, the right to vote if such dividend were in arrear for three years or more and the right in a winding up to a return of capital paid up. Some of the shares were taken up by his children on which they paid £10 per share. Dividends substantially in excess of the amounts paid up were then declared and the taxpayer, on behalf of his children claimed repayment of the tax paid in respect of the dividend to the extent of that child's personal allowance. That claim was rejected by the Special Commissioners and by Lawrence J on appeal. He said:

"In my opinion, it is impossible to come to any other conclusion but that this was not a bona fide commercial transaction, and it appears to me that there was a disposition within the meaning of the definition or an arrangement in the nature of a disposition within [that meaning]."

That conclusion was evidently justified by the benefit or bounty obtained by the taxpayer's children by means of the dividend on the partly paid up preference shares.

In CIR v Payne (1940) 23 TC 610 the taxpayer covenanted to pay an annual sum to a company controlled by him for his life or until it was wound up. He claimed to deduct the amount of the covenant in the computation of his total income for surtax purposes. The Revenue refused his claim on the ground that the arrangement constituted a revocable settlement so that the income arising from the property comprised in it was to be deemed to be his. The contentions of the Revenue were upheld by both Lawrence J and the Court of Appeal. Sir Wilfrid Greene MR noted that:

"The covenant had, apparently, no business purpose whatsoever. It was linked up with the rest of the scheme, the essential parts of which were that [the taxpayer] should put himself in such a relationship to the company that he could entirely control it by means of his voting power."

He concluded that there was a settlement within the definition. He said:

"It appears to me that the whole of what was done must be looked at; and when that is done, the true view, in my judgment, is that Mr. Walter Payne deliberately placed himself into a certain relationship to the company as part of one definite scheme, the essential heads of which could have been put down in numbered paragraphs on half a sheet of notepaper. Those were the things which it was essential that Mr. Payne should do if he wished to bring about the result desired. He did it by a combination of obtaining the control of the company, entering into the covenant, and then dealing with the company in such a way as to achieve his object. Now, if a deliberate scheme, perfectly clear cut, of that description is not an "arrangement" within the meaning of the definition clause, I have difficulty myself in seeing what useful purpose was achieved by the Legislature in putting that word into the definition at all. I am clearly of opinion that, by placing himself into these relationships with the company, Mr. Walter Payne was engaged in making an "arrangement" within the meaning of that clause."

In this case too there was obviously the requisite element of bounty in that the company gave no consideration for the annual payments.

The decision in Crossland v Hawkins (1960) 39 TC 493 lies at the heart of the argument in this case. Jack Hawkins, a well known film actor, agreed with a newly formed company for a period of three years to render his services as that company might determine at a salary of £50 per week. The shares in the company were transferred by the subscribers to the Memorandum of Association to his wife and his accountant. His father in law set up a £100 settlement for the benefit of Jack Hawkins' children of which his wife and accountant were the trustees. They used the trust fund in subscribing for the remaining 98 shares in the company. Jack Hawkins appeared in a film for which the company was paid £25,000. The company paid a dividend which was applied by the trustees for the benefit of the children. Jack Hawkins then applied on behalf of his children for a repayment of tax to give effect to their personal allowances. The repayment claim was rejected on the grounds that the whole arrangement constituted a settlement of which Jack Hawkins was a settlor because he had provided the funds for it. Jack Hawkins' appeal against that rejection was allowed by the General Commissioners and Danckwerts J but dismissed by the Court of Appeal.

On the argument that as the settlement executed by Jack Hawkins father in law had not been contemplated at the outset it could not be included in any arrangement Donovan LJ said:

"I will accept for the moment the proposition that the family settlement which followed was not decided upon at the outset; but what is important, I think, is that the eventual enjoyment by some individual or individuals of the money which had escaped surtax must have been in contemplation at the outset. Otherwise, as I say, the scheme had no rational purpose."

He repeated this conclusion later and added:

"But, even were it otherwise, I think that there is sufficient unity about the whole matter to justify it being called an "arrangement" for this purpose, because, as I have said, the ultimate object is to secure for somebody money free from what would otherwise be the burden, or the full burden of surtax. Merely because the final step to secure this objective is left unresolved at the outset and decided upon later does not seem to me to rob the scheme of the necessary unity to justify it being called an "arrangement"."

Pearce LJ reached the same conclusion. He said:

"The mere fact that he [Jack Hawkins] did not concern himself with some of the steps in the legal machinery involved does not make it any the less his arrangement within the [section]. A man does not avoid the incidence of [the section] by merely being absent from, and leaving to his solicitors and accountants, certain parts of the legal machinery, if he is aware of the proposals for an "arrangement" or a settlement and actively forwards them by personally carrying out and assisting in the vital parts in which his performance and co-operation are necessary."

Upjohn LJ agreed with both judgments. There can be no doubt that the test of an element of bounty was satisfied in that case too.

To the same effect was the decision of the House of Lords in Mills v Commissioners of Inland Revenue (1974) 49 TC 367. In that case John Mills, the father of Hayley a child actress, was concerned to protect her and her income from the Revenue amongst others. He formed a company (S) and settled the shares on Hayley contingently on attaining the age of 25. Hayley entered into a service agreement with S for five years at a salary of £400 per year. The following year S and Hayley entered into a contract with a film company to render Hayley's exclusive services for five years for annual sums ranging from $30,000 to $75,000. The resultant profits of S were paid by way of dividend to the trustees of the settlement who accumulated them. Hayley was assessed to surtax on the basis that the overall arrangement was a settlement of which she was a settlor and that she was liable to be assessed on the dividend income accruing to the trustees. The Revenue's contention was upheld by the Special Commissioners and Goulding J.

The Court of Appeal, Orr LJ dissenting, took a different view. But the order of the Court of Appeal discharging the assessments was, in turn, reversed by the House of Lords. Viscount Dilhorne, with whom Lords Reid, Morris of Borth-y-Gest, Hodson and Salmon agreed, considered that the Special Commissioners were clearly right to have concluded that the incorporation of S, the issue of the shares, the making of the settlement, the making of the service agreement were all acts done in furtherance of an integrated scheme planned solely for the benefit of Hayley which was an "arrangement" and therefore a settlement to which the relevant section applied. He then considered whether Hayley had provided funds for the purpose of that settlement so as to be a settlor in respect of it. After referring to Crossland v Hawkins (1960) 39 TC 493 he concluded that she had. He said:

"Similarly, in this case it is, to my mind, taking too narrow a view of the arrangement to conclude that the funds which went to the trustees by way of dividends were just provided by [S]. To do so means shutting one's eyes to the fact that the source of the dividends was money paid for [Hayley's] work, and money which but for the arrangement would have been received by her. In my opinion she must be held to have provided funds for the purposes of the "settlement"."

In Butler v Wildin (1988) 61 TC 666 Vinelott J was concerned with a case in which two brothers had acquired a shell company of which they were appointed the sole directors. By 19th September 1980 the 100 issued shares were held as to 19 each by their four infant children. Such shares had been acquired by the children with their own money. Two later born children also acquired 19 shares therein with their own money from their respective fathers and others so that the brothers had no shares in the company. The company developed a site by building offices with the use of loans from a bank repayment of which was guaranteed by the brothers and let the offices. The company declared a dividend and the brothers, on behalf of their children, made repayment claims in relation to the tax credits attributable to those dividends. Such claims were rejected on the grounds that there was a settlement in consequence of which the dividends were deemed to be the income of the brothers and not of their children. Such a contention was rejected by the Special Commissioners on appeal but accepted by Vinelott J.

Vinelott J considered that the time at which the existence or otherwise of the settlement was to be judged was when the company was acquired and the shares allotted. He added (p.678):

"At that date a potentially profitable venture had been identified and, as will be seen, from that date the brothers did everything that needed to be done to ensure that the opportunity was exploited by the company."

He concluded (p.683) that:

"It is in my judgment plain beyond question that each brother was a party to an arrangement within the definition of a settlement and that the dividends paid to the four older children were paid to them "by virtue or in consequence of" that arrangement. The brothers together arranged for shares in the company to be allotted to the four older children; and they arranged for the negotiations with British Rail to be opened, for the agreement with British Rail to be entered into and for the site to be developed by the company. The steps they took were thoughout directed to achieving the end that was in fact achieved, namely of ensuring that the company and so indirectly the four older children (to the extent of their respective shareholdings) took the benefit of the development of the site at no cost or risk to themselves."

Later, after referring to Copeman v Coleman 22 TC 594 and Chinn v Hochstrasser [1981] AC 533 he continued (p.684):

"In deciding whether an arrangement is within or without the classes of cases caught by s.437 the starting point must be to identify the arrangement. The question then is whether taken as a whole it did contain the requisite element of bounty. To that question again there can in the instant case be only one answer. The children contributed nothing except the trifling sums which I must assume were paid on the allotment of the shares. They were exposed to no risk."

Finally I should refer to Young v Pearce (1996) 70 TC 331. In that case a company created a special class of preference share which were allotted to the wives of the then two shareholders and directors. Substantial preference dividends were paid to the wives but the husbands were assessed in respect of them under the predecessor of s.660A(1). It was conceded that the issue of the preference shares to the wives involved an element of bounty on the part of their husbands. Accordingly Sir John Vinelott, following the decision of Lawrence J in Copeman v Coleman, concluded that the creation of the preference shares, the application by each wife and the allotment of the same constituted an arrangement or disposition within the definition of settlement. The wives contended that the subsection was disapplied by the forerunner of s.660A(6). The judge rejected that submission on the ground that the preference share was "wholly or substantially a right to income".

The facts as found by the Special Commissioners

Having carried out this broad survey of the relevant cases I turn to the findings of the Special Commissioners (Dr Nuala Brice and Ms Judith Powell). The appeal was heard over three days from 14th to 16th June 2004. They had a statement of agreed facts, four bundles of documents and the oral evidence of both Mr and Mrs Jones. The relevant facts, as found by them, are set out in paragraphs 9 to 25.

In paragraphs 9 and 10 they described the background and previous experience of Mr and Mrs Jones as follows:

"The appellant and his wife were married in 1980. Until 1989 Mrs Jones had a career in management in catering. By 1989 she was working for Gardner Merchant Ltd as a catering manager responsible for eleven staff and departmental budgeting. Thus she had acquired experience in financial and business management. In 1989 she left work to start a family and then did not have any significant income. The appellant and Mrs Jones operate a joint bank account. The appellant has always worked in the information technology field. Until 1992 he was in continuous employment and worked for a number of different public companies. He was made redundant on a Friday in 1992."

In paragraphs 10 and 11 the Special Commissioners recounted the decision of Mr and Mrs Jones to start a business together. Thus when Mr Jones was made redundant:

"He and Mrs Jones discussed the advantages and disadvantages of his working as a consultant for a number of different clients rather than being the employee of one company and they decided to start an information technology business together. The following week the appellant wrote out his curriculum vitae and sent it to potential clients. The week after that he obtained an offer of work as a consultant. However, it was necessary to form a limited company to offer the consulting services because information technology agencies and their potential clients will only deal with limited companies and the appellant could not contract direct with either the agencies or the clients."

Though not recorded in the Special Commissioners decision I did not understand it to be disputed that the requirements of potential clients that the services should be provided through a limited company was based on the administrative and other problems which can arise under contracts with individuals.

The Company had been incorporated on 5th August 1992 by agents with a share capital of £1000 divided into 1000 shares of £1 each. Article 20 of its articles of association conferred on the directors a discretion whether or not to register a transfer. As the Special Commissioners found in paragraphs 11, 13 and 14:

"11...the appellant and Mrs Jones approached a firm of accountants (the first accountants) who arranged for them to buy an off-the-shelf limited company. As the appellant had no experience of owning or managing a company Mrs Jones agreed to handle all the financial and administrative requirements of the company and to act as its company secretary."

"13. On 11 August 1992 the appellant and Mrs Jones acquired the company. Waterlow Nominees Ltd sold and transferred its share to the appellant and resigned as director, the appellant being appointed sole director in its place. On the same day Waterlow Secretaries Ltd sold its share to Mrs Jones and resigned as company secretary, Mrs Jones being appointed in its place. Each of Mr and Mrs Jones paid £1 each for their share. Mrs Jones was not appointed a director on the advice of the first accountants (and no explanation for this advice was given in evidence) but the appellant would have been happy if she had been so appointed. There have been no subsequent changes in the issued share capital, shareholdings or officers of the company. The principal activity of the company, as stated in its financial statements, is the provision of computer consultancy services. We accept the evidence of the appellant that he would not, under art 20, decline to register the transfer of Mrs Jones' share; as far as he was concerned, she could do what she wanted with her share.

14. The acquisition by each of the appellant and Mrs Jones of one share was recommended by the first accountants who advised them that that was the standard method of working for similar companies. The first accountants also advised that it was normal for husbands and wives to own the shares in this way as the entitlement to dividends depended upon the ownership of the shares. The appellant understood that if dividends were paid to his wife the overall tax payable would be less than it would be if all the dividends were to be paid to him."

The Special Commissioners then considered how the Company was operated. They recorded that:

"15. At all material times the company's business has been the provision of computer consultancy services. The company has not engaged in any other business. The computer consultancy services are performed by the appellant. The company has employed no one other than the appellant and Mrs Jones in her capacity as company secretary.

16. The company conducts its business by contracting with specialist agencies to make the appellant's services as a computer consultant available to those agencies and through them to their clients for specified periods of time. In the period from 3 January 1996 to 30 June 2000 the company contracted to provide computer consultancy services to three agencies and through them to four clients. The appellant worked for one client at a time. The charges to be made by the company were fixed after arm's length negotiations between the appellant and the agency.

17. Mrs Jones undertook all the book-keeping work, liaised with accountants and the bank, organised business insurance, prepared the value added tax returns and paid the tax; and did the company's invoicing. She signed off the company's accounts in her capacity as company secretary. She discussed with the appellant new contracts and contract renewals and took calls from agencies to arrange appointments for interviews. She sent out the appellant's CV as necessary. She worked on average about four or five hours each week on company business.

18. Neither the appellant nor Mrs Jones had a formal written contract of employment with the company. There were no formal board meetings. The appellant and Mrs Jones discussed business matters regularly but informally. As the shareholders of the company the appellant and Mrs Jones agreed that the company would pay them salaries which would meet their basic needs and that any profits would be distributed as dividends. Of course, it was the appellant as director who would decide whether to declare the dividends."

In paragraphs 19 to 25 the Special Commissioners described the Company's financial arrangements. They set out the figures of turnover, remuneration to Mr and Mrs Jones, net profits, corporation tax and dividends. With regard to the remuneration they record (paras 20 and 24) that:

"20. In each year the company paid a salary to each of the appellant and Mrs Jones and accounted for income tax under the PAYE Regulations. The amounts of the salary were suggested by the first accountants..."

24. In the years 2000–2001 and 2001–2002 the appellant thought that he was affected by the IR35 legislation. Accordingly in those years he received a salary of £41,500 but no dividends and Mrs Jones received neither a salary nor dividends. From 2001–2003 the appellant took a salary of £8,400 per annum and Mrs Jones a salary of £3,600 per annum."

The decision of the Special Commissioners

As I have already indicated, the Special Commissioners disagreed on the issue whether s.660A(1) applied so that the dividend paid to Mrs Jones in the year 1999/2000 should be treated as the income of Mr Jones. The presiding commissioner Dr Brice answered that question in the affirmative. She broke down the issue into seven questions, namely:
1. Was there a settlement?
2. Was there any element of bounty?
3. Was the appellant a settlor?
4. Was there any property comprised in the settlement?
5. Was the dividend income paid to Mrs Jones income arising under the settlement?
6. Was the arrangement an outright gift?
7. Did Parliament, when introducing independent taxation for married persons, intend arrangements such as these to be statutory settlements?

She dealt with the first question in paragraphs 41 to 57. After considering CIR v Payne (1940) 23 TC 610 she said (para 47):

"From that authority I derive the principle that, in considering whether there is an 'arrangement' for the purposes of the settlements legislation, one has to consider whether what was done, in whole or in part, was a definite scheme to bring about a desired result. On the facts we have found I conclude that the whole of what was done in this appeal, including the purchase of the company by both the appellant and Mrs Jones, the provision of the appellant's consultancy services to clients through the company, the payment of the modest salaries, and the declaration by the appellant of the dividends was a definite scheme the intention of which was to ensure that part of the profits of the company, derived from the work of the appellant, was paid to Mrs Jones in the form of dividends with a consequent saving of income tax. It is relevant that the appellant was the sole director of the company and so had the sole right to declare dividends. His control over the amount distributed as dividends was illustrated in 2000–2001 and 2001–2002 when no dividends were declared. Mr Gammie sought to distinguish Payne on the grounds that the purpose of the arrangement in that appeal was tax avoidance and that the covenant had no business purpose. I find that the purpose of the arrangements in this appeal was to reduce tax because the appellant understood that dividends paid to his wife would reduce the tax payable by him. (I deal the business purpose below within the discussion of the question as to whether there was any element of bounty.)"

She then considered Crossland v Hawkins (1960) 39 TC 493 and held (para 50) that:

"[on] the facts of the present appeal I am of the view that there was 'a sufficient unity' about the whole arrangements entered into by the appellant and Mrs Jones to justify the arrangements together being called an arrangement for the purposes of s 660A. The ultimate object was to reduce the tax burden of the appellant. The facts in Hawkins may be distinguished from the facts in this appeal because in Hawkins the service contract was entered into with the company before the shares were acquired by the trustees whereas in this appeal her share was acquired by Mrs Jones before the appellant entered into any contract with an agency or a client. However, I see that as a distinction without a difference because in Hawkins, although there was a service contract, there was no certainty that any work would result."

She then dealt with Mills v Commissioners of Inland Revenue (1974) 49 TC 367. She rejected the submission of counsel for Mr Jones that that case was distinguishable because in this case the use of a company was a commercial necessity. She said (para 54):

"I accept that in this appeal the appellant had to offer his services through a service company but there was no compulsion on him to operate through a service company jointly owned by his wife and he did not have to declare dividends and thus donate half the dividends to Mrs Jones."

She concluded in paragraph 57:

"In the light of the authorities I conclude that, in this appeal, the purchase of the shares in the company, the entering by the appellant into the informal arrangement with the company that he would offer his services to clients through the company, and his subsequent decisions to declare dividends amounted to an arrangement within the meaning of s.660G and so was a settlement within the meaning of s.660A."

She then turned to the second question, namely whether there was an element of bounty. She recognised that, strictly, it was part of the first question. She referred to the previous case law. Her conclusion on this question, as expressed in paragraph 61, was:

"I have already concluded that the purchase of the shares in the company, the entering by the appellant into the unwritten service arrangement with the company to provide his services to clients through the company, and his intention to make subsequent decisions as sole director to declare dividends, amounted to an arrangement within the meaning of s.660G. I am also of the view that there was an element of bounty in those arrangements primarily at the time of the allocation of the shares with the intention of declaring dividends in the future. The allocation of the shares was in the gift of the appellant; if he had wished to acquire both shares he could have done so and Mrs Jones would not have objected nor would she have refused to carry out the work she did for the company. Also, although the appellant was not bound to draw a market salary from the company his decision not to do so and instead to declare a dividend in some years was an act of bounty in those years. I accept that some of the steps in the arrangement were commercial but, taken as a whole, the appellant was worse off after them because he was no longer entitled to receive all the profits of the company which were derived from his work. I accept that the appellant had to offer his services through a company but there was no compulsion on him to operate through a service company jointly owned by his wife and he did not have to donate half the profits to Mrs Jones by means of dividends. Indeed, in two years the appellant, as sole director, did not declare any dividends."

In paragraph 63 Dr Brice dealt with a particular argument of counsel for Mr Jones. She added:

"The reality of the arrangements was that Mrs Jones was remunerated for her efforts by her salary. (I accept that there was no element of bounty in her salary and for that reason that part of the arrangements does not constitute a settlement.) Apart from that, the profits of the company out of which the dividends were paid were earned as result of the efforts of the appellant in providing his consultancy services to the clients of the company. The result of the totality of the arrangements was that the appellant did effectively give away a part of those profits. The whole of the arrangements were entered into to enable Mrs Jones to share the results of the work of the appellant."

Dr Brice then considered the third and fourth of the questions she had posed. There is no dispute that if there was an element of bounty and therefore a settlement then Mr Jones was the settlor and the share in the Company registered in the name of Mrs Jones was property comprised in it. Accordingly it is unnecessary to note the detail of Dr Brice's analysis. But I should refer to her conclusion set out in paragraph 72 that:

"..the share in the company owned by Mrs Jones was the settled property. Her holding of the share was part of the arrangement which constituted the statutory settlement and she held the share through the bounty of the appellant."

Similarly in paragraphs 73 to 75 she concluded that the dividends paid to Mrs Jones was income arising under the settlement. If the premise of a settlement is well-founded that conclusion is not disputed. In respect of question six she concluded that any gift of the share to Mrs Jones was a gift wholly or substantially of a right to income and so not within the scope of s.660A(6).

In paragraphs 84 to 94 Dr Brice carried out a valuable survey of the history of the taxation of married women. She rejected the submission that the introduction of the independent taxation of spouses effected in 1988 should lead to any revised interpretation of the settlements legislation. She concluded in paragraphs 92 and 93:

"92...I do not consider that the appellant made an outright gift to Mrs Jones. What he did was to establish a structure under which he could year by year as sole director decide whether to distribute dividends which effectively arose from his work. Such a gift was substantially a right to income and was not the unconditional transfer of an income producing asset. The gift was, of course, subject to the condition that the appellant would continue to work for the company (and there was no formal service contract) and that the appellant as sole director would declare dividends (and in two years he failed to do so when all the profits of the company were paid to him by way of salary).

93. Accordingly, I conclude that Parliament, when introducing independent taxation for married persons, intended arrangements such as these to be settlements."

The dissenting opinion of Ms Powell appears in paragraphs 95 to 141. She summarised her conclusion in paragraph 96 as:

"96...the appellant did not make a settlement under which the income from Mrs Jones' share arose. The purchase of a share and the circumstances surrounding it might amount to an arrangement that is a statutory settlement-a formal trust not being a necessary part of such an arrangement. In this case I am persuaded by the appellant's argument, presented by Mr Gammie, that whilst there may have been an arrangement involving that share, not all arrangements are statutory settlements, the arrangement has to be judged at the time the share was acquired by Mrs Jones and the arrangement at that stage lacked the requisite element of bounty. I am also persuaded that, if there had been the requisite element of bounty at the relevant stage, the logical consequence would then be that the appellant made a gift to Mrs Jones. In my view such a gift would have been outright and the provisions of s 660A(6) would prevent that gift from being a statutory settlement for the purposes of s 660A(1). And finally I do not believe that Parliament can have intended the settlement provisions to apply to a case such as this."

In paragraph 98 Ms Powell summarised the material facts as set out in paragraphs 8 to 25. In doing so she emphasised that Mr Jones operated through a limited company because the agencies would not contract with individuals, that Mrs Jones had a role to play in the company's business and that her support and willingness to undertake the role was an important factor in their decision to set up a consultancy business. She added

"To that extent it was a joint venture even though the main income of the venture derived from his activities. When salaries were drawn there was no effort to calculate whether these bore any relationship to market salaries or, indeed to the income received each year by the company; the salaries were set at a level suggested by the accountant. In several years Mrs Jones drew no salary at all despite continuing to work for the company and in those years she did not receive any dividend income because the appellant drew a much larger salary than he had done in previous years; he did this because he believed that he was obliged to do so as a result of legislation introduced at the time."

Ms Powell then considered the decisions in Payne, Hawkins and Mills. She found that the most helpful one on the issue of whether there was any settlement of Mrs Jones' share was Young v Pearce. She concluded in paragraph 118

"that when Mrs Jones acquired her share there was an arrangement that the shares would be purchased equally between them, that the appellant would be appointed as director of the company and there was an expectation that both he and Mrs Jones would work for the company at salaries which, certainly in the case of the appellant was not at a market rate, and that dividends would be declared if there were distributable profits."

Having so identified the arrangement she then considered whether it contained the requisite element of bounty. She found that Mr Jones had provided bounty 'at some stage' but went on to observe that:

"The question is when this bounty was provided since it is the arrangements of which the share acquisition is a part that must include the necessary element of bounty. And so I agree with the appellant that if the arrangement at the time of the share acquisition contained no element of bounty there could be no statutory settlement involving Mrs Jones' share. Bounty not present when the share was acquired could not create or contribute to a settlement including that share."

Ms Powell distinguished Young v Pearce on the grounds (paragraph 125) that:

"that case concerned an already established company with a profit making record so that the preference shares had a value in excess of the subscription price paid for them and it was conceded in that case that there was a gift of the shares by each husband to his wife."

In paragraphs 126-128 she set out in detail why she considered that there was no element of bounty in this case at the time Mrs Jones acquired her share. She found that, even if Mr Jones intended to provide bounty in the future he did not do so at that time, he was under no obligation to provide his services to the Company and there was no evidence that the share in the Company acquired by Mrs Jones was worth more than she paid for it.

Ms Powell considered what the position would have been if there had been an element of bounty at the time Mrs Jones acquired her share. In that event she would have held that s.660A(6) applied. She did not agree that its application would have been precluded by s.660A(6)(b).

In the event, therefore, the Special Commissioners disagreed. The conclusion was expressed in paragraph 27 in the following terms:

"Regulation 18(2) of the 1994 Regulations provides that where proceedings are before a Tribunal which comprises two Special Commissioners, in the event of an equality of votes, the Special Commissioner presiding at the hearing shall be entitled to a second or casting vote. Accordingly the final decision is that of the Special Commissioner presiding at the hearing.

It is this conclusion which prompts the casting vote point to which I have referred.

The decision of Park J

In paragraphs 5 to 7 Park J dealt with the casting vote point. He pointed out that it was not a live issue and proceeded to consider the substantive points. In paragraphs 8 to 13 he set out the facts. In paragraphs 14 to 18 he set out the statutory provisions and summarised the opposing arguments of the Revenue and Mr Jones as to their proper application. In paragraphs 19 to 31 he described the relevant case law. In those paragraphs he considered Copeman v Coleman 22 TC 594, Butler v Wildin (1988) 61 TC 666, Young v Pearce (1996) 70 TC 331, Thomas v Marshall 34 TC 178, Crossland v Hawkins (1960) 39 TC 493, Mills v Commissioners of Inland Revenue (1974) 49 TC 367, IRC v Leiner (1964) 41 TC 589, Bulmer v IRC [1967] Ch.145 and IRC v Plummer [1980] AC 896. In paragraphs 32 to 42 Park J considered the central question whether there was an arrangement within the definition of the word "settlement" in s.660G(1). He had already indicated, in paragraph 4, that he agreed with Dr Brice on that point.

In paragraph 32 he found that if there was a settlement then Mr Jones was the settlor because, in effect, he generated the income from which the profits were made and the dividends paid. This is not in issue.

Park J then considered the reasons given by Ms Powell for concluding that there was no settlement comprising the share in the Company acquired by Mrs Jones. He disagreed for the reasons set out in paragraphs 34 to 36 of his judgment. I should quote them in full.

"34. I agree that there is a difference between a present intention to provide bounty and the actual provision of it later. But I do not accept that, if a structure is created with the intention that it shall be a means of providing bounty in future years, it is not an "arrangement" within the meaning of section 660G(1). On the facts Mr. and Mrs. Jones were guided by advice of accountants when they acquired the company. The plan, for all that it may not have been cast in stone and that there could have been changes of mind about it, was that the company would pay to them salaries only at levels which would meet their basic needs, and that any profits would be distributed as dividends. (See the decision, paragraph 18). Mr. Jones understood (and I have no doubt that Mrs. Jones understood as well) that, if dividends were paid to Mrs. Jones (and if the settlement provisions did not apply, no one having contemplated at the time that they might apply), the overall tax payable would be less than it would be if all the dividends were paid to Mr. Jones.

35. In my view the point of having one share acquired by Mrs. Jones (or at least one of the points) was that she should in future be in a position to receive dividends which, if and when she did receive them, would plainly come to her as bounty. I do not accept Miss Powell's proposition that, if a structure is established by one person with an intention that bounty will or may flow from it to another person in future, there is not at the outset an arrangement which involves an element of bounty. The word "arrangement" carries to my mind the notion that it comprehends not just the specific things which happen when the arrangement is made, but also the reason or reasons why the arrangement is being made. If a structure is being established in circumstances where one of the reasons for it is that it will or will be available to be used as a means through which bounty will or may be channelled to another person in future, that is in my view fully within what the cases contemplate as an arrangement covered by the statutory definition.

36. Miss Powell notes that, when Mrs. Jones acquired her share, Mr. Jones was not bound by a service contract to provide his services for only a low level of remuneration. Indeed, Mr. Jones never did become contractually so bound. That is true, but in my judgment it is immaterial in this context. As I have said, parts of the plan or of the intention were that Mr. Jones would draw a low salary and that dividends would be paid (half of them going to Mrs. Jones on her share, which had cost her £1). Therefore in my view those elements of the plan or of the intention were parts of "the arrangement". They are not prevented from being parts of the arrangement by the feature that they were not legally binding. In many legal documents, whether statutes or private documents, one finds the two words "agreement or arrangement" appearing in conjunction with each other. Indeed, they so appear in the definition of "settlement", with which I am concerned. ("'Settlement' includes any disposition, trust, covenant, agreement, arrangement or transfer of assets"). It is, I think, generally understood in instances where the words "agreement or arrangement" are used that "agreement" is likely to mean something which is legally binding, whereas "arrangement" is likely to mean, or at least to include, something which is planned and expected but is not legally binding. This is a further point which, in my judgment, is inconsistent with Miss Powell's proposition that an intention that a structure created now will be used to provide bounty in future is not enough to make it an "arrangement" within section 660G(1)."

Park J then considered Crossland v Hawkins (1960) 39 TC 493. He thought that it would clearly have made no difference to the result if the children had bought their shares with money given to them by Mr Hawkins father in law (paragraph 38), or if there had been no service agreement but only expectations that Jack Hawkins would be paid at a low level (paragraph 39), or if Jack Hawkins had held half the shares in the company (paragraph 40).

In relation to the application of s.660A(6) Park J also agreed with Dr Brice. But, in addition, he held that there was no outright gift at all.

Submissions on the existence of a Settlement

I will deal with the two points summarised in paragraph 5 above separately. It is not disputed that the question of whether there was a settlement within the statutory definition depends on identifying the relevant arrangement and ascertaining whether at the time it was made it involved any element of bounty.

Counsel for Mr Jones submits that the only arrangement in this case was the acquisition of the share in the Company by Mrs Jones in 1992. He contends that on the findings of the Special Commissioners that transaction involved no element of bounty because Mrs Jones gave full value for the share and the acquisition was made in the context of a decision by both Mr and Mrs Jones to set up a joint family enterprise for the purpose of which Mrs Jones provided services of substantial value.

He submits that it is not legitimate to extend the arrangement, as the Revenue seek to do, by reference to opportunities to which it might, but would not necessarily, give rise in the future. He contends that the arrangement cannot be enlarged to include the decisions in later years as to whether to pay any and if so what dividends because any such arrangement would be open-ended and lack the requisite 'unity'. How, he asks rhetorically, can there be an arrangement which for five years is not a settlement because there is no element of bounty yet in the sixth year becomes a settlement because a dividend is declared which entitles Mrs Jones to a sum in excess of any value she contributed to the enterprise in that year? And if the necessary element of bounty is to be found in that excess how is it to be measured?

Counsel for Mr Jones submitted that all the decided cases are distinguishable either because of the nature of the arrangement or because of the existence of an element of bounty not to be found in this case. In particular, in both Crossland v Hawkins (1960) 39 TC 493 and Mills v Commissioners of Inland Revenue (1974) 49 TC 367 the existence of the service agreements by which Jack Hawkins and Hayley Mills were bound to render their acting services as the company required at a salary which was plainly well below the fees each of them could command at the time it was entered into clearly involved an element of bounty at the time the arrangement was made. Similarly in Butler v Wildin (1988) 61 TC 666 at the date the shares were acquired the development opportunity had been identified and was subsequently exploited at no risk to the children of the settlors.

Counsel for Mr Jones insists that the fact that Mr and Mrs Jones may have appreciated that the structure they were setting up might lend itself in the future to some tax mitigation is irrelevant to the existence of an element of bounty, see per Pennycuick J in Bulmer v IRC [1967] 1 Ch. 145, 166D and per Lords Wilberforce and Fraser of Tullybelton in IRC v Plummer [1980] AC 896, 913 E-F and 928 C-E. Nor, he submits, can it constitute a part of the arrangement.

Counsel for the Inland Revenue contends that Mr Jones entered into an arrangement, correctly identified by Park J, which involved an element of bounty and was, in consequence a settlement for the purposes of s.660A(1). He submits that the income arising under that settlement are the dividends declared from time to time on the share of Mrs Jones, that such share is the property comprised in the settlement and, subject to the application of s.660A(6), Mr Jones has an interest in that share, as provided by s.660A(2), because it belongs to Mrs Jones.

He submits that the relevant arrangement was correctly identified by Park J in paragraph 44 of his judgment as comprising four elements, namely (1) the acquisition of one share in the Company by Mrs Jones for £1, (2) Mr Jones serving the company as an employee, (3) an expectation that Mr Jones would draw only a modest salary and (4) an intention that the profits would be paid out as dividends. He submits that such a conclusion is consistent with all the decided cases, in particular Crossland v Hawkins (1960) 39 TC 493 and Mills v Commissioners of Inland Revenue (1974) 49 TC 367.

Counsel for the Revenue contends that such an arrangement as a whole does contain an element of bounty as in Butler v Wildin (1988) 61 TC 666. He suggests that there is no reason to exclude from consideration the intention of Mr Jones that the arrangement should be used in the future to confer bounty on Mrs Jones because an arrangement may be or include elements which are planned and expected but not legally binding.

Conclusion on the existence of a Settlement

Before the de-aggregation for tax purposes of the income of a married woman from that of her husband effected in 1990 this case could not have arisen because the income of Mrs Jones would have been aggregated with that of Mr Jones whether or not there was a settlement. It is also somewhat remarkable that this case could not have arisen after 1990 if Mr and Mrs Jones had lived together without being married. The provisions of s.660A(2) may appear anachronistic but they were not amended in 1989 or subsequently and must be given full effect. But that consideration does not, I think, require the court to ignore the increasing tendency for married couples to be involved in the business of each other on a commercial non-bounteous basis. Such involvement may take the form of a partnership or a company in which each own shares. Though one spouse may generate the income of the firm or company, the services of the other may be just as commercially important in providing the essential administrative, accounting, support and backup services.

The key word in the statutory definition of settlement is "arrangement". The ordinary meaning of that word is very extensive. It is defined in the Shorter Oxford English Dictionary as "a structure or combination of things for a purpose" and in the New Shorter Oxford English Dictionary as "a number of objects arranged or combined in a particular way".

In the context of this case it must be possible to identify income arising from the arrangement and the property comprised in the arrangement for otherwise the terms of s.660A(1) cannot be satisfied. In addition the arrangement must contain an element of bounty. In that context it is necessary fully to heed the warning of Lord Roskill in Chinn v Hochstrasser [1981] AC 533, 555 which I have quoted in paragraph 18 above. The pointers to the existence of bounty have been variously described as "a taxpayer gives away a portion of his income, or of his assets", "a flavour of donation" or "the recipient benefits without any assumption by him of any correlative obligation".

In this case there can be no doubt but that the arrangement was or included the acquisition by Mrs Jones of her share in the Company. Equally there can be no doubt that that acquisition on its own was for full value in the context of a joint business venture to which both parties made substantial and valuable contributions. If the arrangement is confined to such acquisition then I would agree with counsel for Mr Jones that it cannot constitute a settlement for the purposes of s.660G(1).

I would accept, as Dr Brice did, that the arrangement also included the corporate set-up whereunder Mr Jones held the other share and was the sole director. Thus he controlled the Company both at board and, through the chairman's casting vote, shareholder level. This seems to me to be the necessary consequence of cases such as CIR v Payne (1940) 23 TC 610. Such a corporate set-up gave him the ability to confer benefit, but, of itself, did not do so. Accordingly, in my view, this addition makes no difference because the corporate set-up was no more 'bounteous' than the acquisition by Mrs Jones of her share.

The 'bounty' on which the Revenue necessarily rely is that provided subsequently and in fact by the combination of the demand and charge-out rate for the services of Mr Jones, the salary in fact paid to Mr Jones, the other commitments of the Company and the dividend subsequently declared and paid by the Company to Mrs Jones. All these additional elements depended on the will of Mr Jones or wholly extraneous factors. He did not commit himself to working for the Company at any particular rate of salary or at all. His charge-out rate necessarily depended on the demand for his services and the going market rate. Whether any and if so what profits were made depended not only on the difference between Mr Jones' charge-out rate and salary but the level of the Company's overheads and other commitments. If the Company made profits whether to declare any and if so what dividend was a matter for Mr Jones as the sole director and controlling shareholder.

For my part, I do not think that these elements can be included in the 'arrangement'. They did not form any part of a structure of things or combination of objects; their uncertainty and fluidity is the converse of an arrangement. It is not that they were not legally enforceable, they were not settled at all. No doubt Mr and Mrs Jones hoped for the best but it cannot be said that they had arranged it. Without these elements there was no element of bounty and no settlement within the statutory definition.

In my view all the previous cases are distinguishable on one ground or another. In Crossland v Hawkins (1960) 39 TC 493 and Mills v Commissioners of Inland Revenue (1974) 49 TC 367 Jack Hawkins and Hayley Mills had committed themselves to working for the company at a salary substantially less than the going rate for their services. The agreements by which they did so were part of the arrangement and the source of the bounty. The arrangement of which the agreements formed part had a 'unity' and probability which in this case is lacking. The beneficiaries under the actual settlements made in those cases contributed nothing.

In Butler v Wildin (1988) 61 TC 666 Vinelott J appears to have considered that acquisition of the shares by the brothers' children, the agreement with British Rail and the development of the land were all part of one arrangement. The children contributed nothing, by contrast they were presented with a profitable development opportunity at no risk to themselves.

In Copeman v Coleman (1939) 22 TC 594 the company paid a tax free preferential dividend of four times the amount paid up on the issue of the preference shares two weeks before the dividend was declared. The creation and issue of the preference shares and the declaration and payment of the dividend were plainly all part of a single arrangement in which there was both unity and bounty.

In CIR v Payne (1940) 23 TC 610 the corporate structure of the company which was the beneficiary under the covenant was necessarily part of the arrangement for the creation of the covenant. The covenant had no business purpose whatever. The element of bounty was clear. Similarly in Young v Pearce (1996) 70 TC 331 the creation and allotment of the preference shares were clearly parts of an arrangement and the element of bounty was conceded.

Thus, save for the expectation to which Ms Powell referred in paragraph 118 of her decision, which I have quoted in paragraph 51 above, I am in substantial agreement with her as to the composition of the arrangement in this case and the lack of any element of bounty therein. By contrast I respectfully disagree with both Dr Brice and Park J.

In paragraph 47 of her decision quoted in paragraph 40 above Dr Brice concluded that the relevant arrangement included

"the payment of the modest salaries, and the declaration by the appellant of the dividends".

Later in the same passage she found that

"the purpose of the arrangements in this appeal was to reduce tax because the appellant understood that dividends paid to his wife would reduce the tax payable by him".

In paragraph 50, quoted in paragraph 41 above she said

"The ultimate object was to reduce the tax burden of the appellant."

In the absence of any service agreement between the Company and Mr Jones I am unable to accept that the payment of modest salaries to Mr Jones was any part of the arrangement. Similarly the declaration of the dividends was not arranged in advance; it was dependent on the trading fortunes of the Company. Further, as counsel for Mr Jones submitted, and, as I accept, the fact that the structure being set up might lend itself in the future to some tax mitigation is irrelevant to the existence of an element of bounty, see per Pennycuick J in Bulmer v IRC [1967] 1 Ch. 145, 166D and per Lords Wilberforce and Fraser of Tullybelton in IRC v Plummer [1980] AC 896, 913 E-F and 928 C-E.

In paragraphs 61 and 63 quoted in paragraphs 44 and 45 above Dr Brice found that Mr Jones "was worse off after them" [sc.the arrangements] and effectively gave away part of the profits of the company earned as a result of his work for the company. It can now be seen with the benefit of hindsight that that occurred but it could not be predicated in 1992 that it would happen. And, in so far as it did, the efforts of Mrs Jones must have contributed to the success of the Company.

Park J agreed with the determination of Dr Brice and disagreed with that of Ms Powell. He gave three reasons. The first, set out in paragraph 34, quoted in paragraph 59 above is that if a structure is created with the intention to provide bounty then that is sufficient to provide the requisite element of bounty. But this assumes that the satisfaction of all the conditions necessary for that intention to be fulfilled are part of the arrangement. For the reasons I have already given I do not think that they were.

The second reason explained on paragraph 35, quoted on paragraph 59 above, is much the same as the first. No doubt the acquisition by Mrs Jones of her share would enable her to receive dividends in the future. But it did not follow that Mrs Jones would receive any dividend; nor, if she did, that each and every dividend received by her constituted an element of bounty. That would all depend on the future trading of the Company and the contribution made by Mrs Jones. The structure did not guarantee any profits. The fact that a profit and a dividend may result is not in my view enough, nor do I think it is contemplated by the decided cases. On a more pedantic note the definition of arrangement contained in the Shorter Oxford English Dictionary, quoted in paragraph 71 above refers to the "purpose" of the structure or combination without including such purpose in the "things" so constructed or combined.

The third reason given by Park J is in paragraph 36 quoted in paragraph 59 above. It is much the same as the second. If, as I would hold, the intention is not a part of the arrangement then it matters not that no one can compel its achievement. Intention alone cannot be an arrangement or part of an arrangement though it may provide the requisite element of bounty.

In the last mentioned paragraph and again in paragraph 39 of his judgment Park J suggests that it would have made no difference to the result in Crossland v Hawkins (1960) 39 TC 493 if there had been no service agreement, but merely an expectation that Jack Hawkins would work for the company at a modest salary. I do not agree. The service agreement was an integral part of the arrangement. In its absence it could not have been predicated when the arrangement was made that there would be any profits or dividends. In any event there is the further distinction that the children contributed nothing to the venture but Mrs Jones did.

For all these reasons I conclude that there was no settlement as defined in this case. Consequently s.660A(1) could not apply to the dividend received by Mrs Jones and the assessment under appeal should be discharged. On this view the question set out in paragraph 5(b) does not arise. But in case the other members of the court do not agree with me and/or this case goes further I should deal with it. In the event I can do so quite shortly.

Submissions and conclusion on the proper interpretation and application of s.660A(6)

I have set out the terms of the subsection in paragraph 7 above. The two issues are

(a) whether, if there is a settlement because there is an element of bounty, there is

"an outright gift by one spouse to the other of property from which the income arises"

and

(b) whether

"the property given is wholly or substantially a right to income".

Dr Brice and Park J answered question (b) in the affirmative. Park J answered question (a) in the negative. Logically, as Park J noted, question (a) comes first. Accordingly I shall deal with it first.

In paragraph 44 of his judgment Park J said

"In my judgment that which constituted the "settlement" here was not an "outright gift" at all. The "settlement" was an arrangement which included the following elements: the acquisition by Mrs. Jones of one share in Arctic Systems Limited for £1; Mr. Jones serving the company as an employee; an expectation that he would draw only a modest salary; and an intention that profits would be paid out as dividends. There was far more comprised in that arrangement than would be covered by the expression "an outright gift". Indeed, the arrangement did not even include an element which could, even taken in isolation, be regarded as an outright gift. Mr. Jones did not give to Mrs. Jones her share. On the findings of the Special Commissioners she purchased it from the company formation agents, and paid for it with her own money. The money was, of course, only £1, but it remains the case that she got her share because she bought it, not because her husband gave it to her."

Counsel for Mr Jones submits that the judge was wrong to think that the subject matter of the relevant gift is determined by the nature of the arrangement. He suggests that if there is any element of bounty then it gives rise to the conclusion that Mrs Jones did not pay enough for her share so that, to that extent, there was an outright gift to the extent of the undervalue.

The problem with this argument is that it assumes that Mr Jones is right in his submissions as to what constituted the arrangement and whether there was any bounty. If he is wrong, and it is only in that event that the point arises, then I agree with both the reasoning and conclusion of Park J. It is true that the subsection is apt to give rise to a number of anomalies but that does not affect its construction and application in this respect.

Question (b) was dealt with by Dr Brice in paragraphs 79 to 82 of the Special Commissioners determination. In essence she equated Mrs Jones' one ordinary share in this case with the preference shares in Young v Pearce (1966) 70 TC 331. She concluded in paragraph 82

"..it is my view that, in this appeal the property given to Mrs Jones was wholly or substantially a right to income because her share only entitled her to a dividend if the appellant, who was the sole director, decided to distribute profits in any year. As a result of s 660A(6)(b) the gift was not an outright gift for the purposes of that section."

In paragraph 46 of his judgment Park J said

"Dr. Brice..... said that, if one has to look through the share to what was really given, it was the income stream in the form of the annual dividends paid on the shares. I can see the force of that analysis. Personally, I would conclude that the reasons why subsection (6) does not apply are those which I have explained in the previous few paragraphs. But alternatively, or in addition, I would adopt Dr. Brice's reason, based on the words "substantially a right to income" in sub-paragraph (b) of the subsection."

This is disputed by counsel for Mr Jones. He contends that if the sub-section otherwise applies then it is not excluded by paragraph (6)(b). He suggests that the property given is the share held by Mrs Jones, that as an item of property it has exactly the same rights as the share held by Mr Jones and those rights are more than just a right to income. Counsel for the Revenue accepts that normally an ordinary share would not fall within this paragraph. He submits that in this case it does because of the nature of the arrangement and the fact that the only right of substance in this case is the right to the income stream constituted by the dividends paid out of the profits derived from the services of Mr Jones.

On this point, if it arose, I would accept the submissions for Mr Jones. Each share carries a right to share in dividends duly declared. In addition each share carries the right to share in the distribution of assets in the event of a members' winding up and the right to vote at general meetings of the Company. The rights attaching to the ordinary shares in the Company are unaffected by the alleged arrangement. Nor in my view are they qualified by the common condition that the declaration of a dividend depends on the existence of available profits or reserves and the exercise of a power conferred on persons other than the holder of the share.

The Casting Vote point

I turn then to the outstanding application of Mr Jones for permission to appeal on the casting vote point. I have summarised the point in paragraph 4 above. As this is would be a second appeal Mr Jones has to establish not only a real prospect of success (CPR 52.3(6)) but also that if permission were granted the appeal would raise an important point of principle or practice (CPR 52.13(2)).

In my view Mr Jones is unable to satisfy either provision for the reason given by both Park J and Lloyd LJ. This is for the simple reason that once the relevant court is seised of the point of substance this procedural point loses all materiality. It is for this reason that I dismissed this application.

Summary of Conclusions

Accordingly for the reasons I have given I conclude that:
1. the dividends paid to Mrs Jones on her share in the Company were not income arising under a settlement as defined in s.660G(1);
2. if contrary to my view such share was property comprised in a settlement as so defined, s.660A(6) did not disapply s.660A(1) because
  1. there was no outright gift of the share from Mr Jones to Mrs Jones, but if there had been,
  2. the share was not substantially a right to income.
3. the appeal on the casting vote point does not raise any important point of principle or practice, nor does it have any real prospect of success.
Accordingly I would allow the appeal and dismiss the application.

Lord Justice Keene

I agree, and I seek to add only a few words on the first issue, namely whether there was here a "settlement" within section 660 G (1) as interpreted in the case law. There seems little doubt that those matters which constitute the arrangement and hence the settlement must be identifiable by a particular point in time, as opposed to there being something which may or may not turn out to be a settlement if certain future events happen : see Butler v. Wildin (1988) 61 TC 666 at 678 B. In the present case the Inland Revenue accepts that approach, but relies upon the expectation existing at the time of the acquisition of the shares by the appellant and Mrs Jones that the appellant would draw a salary less than his market value. That expectation was found by the Special Commissioners to have existed at that time.

Initially I found that argument a persuasive one. However, upon reflection it seems to me that on the facts of this case one would, if accepting that argument, be seeking to include within the scope of the arrangement matters which were at the relevant date too speculative and uncertain. Neither the appellant nor Mrs Jones had any specified salary for their work for the company, whether legally binding or not. What they eventually drew by way of salary seems to have depended on how well the company performed and on other factors, and in the event there were years when Mrs Jones drew no salary at all, enjoying no remuneration for her work as an employee. On his side the appellant was not obliged to work for the company at less than the market rate, and it seems that in the years 2000 – 2001 and 2001 – 2002 he decided to take a full salary. What happened in practice was therefore dependent on subsequent decisions made by the appellant as the sole director. It is difficult to regard such a Protean state of affairs as capable of being part of an arrangement in the sense used in the legislation. Furthermore, for the same reasons the element of bounty also was too speculative when viewed as at the date of the alleged settlement.

I have read in draft the judgment of Carnwath LJ, and agree that for a commercial venture such as existed in the present case to be brought within the scope of the settlement provisions would represent an unjustified extension of their scope.

Lord Justice Carnwath

I agree. I add two observations of my own.

First, the history of these provisions creates its own difficulties. The court's task is not of statutory interpretation in the conventional sense, but of the interpretation of a "judicial gloss" on a statute; and the term fixed upon by our predecessors – "bounty" – is neither precise nor particularly familiar.

Secondly, most of the authorities pre-dated the introduction by the 1988 Act of separate taxation for spouses. The specific references to spouses in section 660A show that arrangements between spouses are potentially within its scope, but the legislative purpose is not easy to discern. Like Park J, and the Chancellor, I find it odd that in this context spouses are still treated by section 660A(2) as sharing the same interest, notwithstanding their separate treatment for other income tax purposes.

Equally curious is the fact that the exception created by subsection (6) is confined to "outright gifts". In argument there was discussion of how the section would apply to differing types of "outright" transfer between husband and wife of an income-bearing asset, such as a rented property. We considered three forms of transfer: a sale at market value, a sale at an under-value, and a gift. There was common ground as to the treatment of the first and last: the first is outside the settlement provisions because there is no "bounty"; the last is exempted by subsection (6) as an "outright gift". But what of the second? Mr Baldry, for the Revenue, said that this also would be exempted by subsection (6). Applying a "purposive" construction, as I understood him, any outright transfer of a bounteous nature could be regarded as "gift", to the extent of the bounty. It is unnecessary to decide whether this is right; at first blush it seems more like playing with language than interpreting it.

The lack of a clearly ascertainable legislative purpose underlines the need for caution in extending the concept of settlement beyond the scope of existing jurisprudence. The Revenue's position in this case seems to me a significant extension. For the first time, they seek to apply the concept to what has been found to be a normal commercial transaction between two adults, to which each is making a substantial commercial contribution, albeit not of the same economic value. Such a difference, by itself, is not enough to my mind to take the arrangement into the realm of "bounty", as it has been understood in the existing cases. If the legislature wishes such an arrangement to be brought within a special regime for tax purposes, clearer language is necessary to achieve it.

	GEOFFREY PETER JONES	Appellant
	- and -
	MICHAEL VINCENT GARNETT (HM INSPECTOR OF TAXES)	Respondent