“(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...”
“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.”
“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.”
“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.”
“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.”
“..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.”
“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].”
“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.”
“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].”
“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.”
“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.”
“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.”
“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”.”
“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.”
“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”.”
“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.”
“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.”
“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.”
“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.”
“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.”
“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. On11 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.”
“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 from3 January 1996 to30 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.”
“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.”
“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.)”
“[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.”
“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.”
“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.”
“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.”
“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.”
“..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.”
“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.”
“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.”
“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.”
“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.”