“ Having served their purpose they cancel each other out and disappear. At the end of the series of operations, the taxpayer’s financial position was precisely as it was at the beginning, except that he paid a fee, and certain expenses, to the promoter of the scheme.” 38. He also noted that it was the clear and stated intention that once started the scheme would proceed through the various steps to the end and that “the taxpayer does not have to put his hands in his pocket” given the monies required were provided by a finance house and were automatically repaid at the end of the operation. 39. Lord Wilberforce continued that their Lordships were invited to treat the transactions as a fiscal nullity not producing either a gain or a loss and that counsel described that approach as “revolutionary”
“While obliging the court to accept documents or transactions, found to be genuine, as such, it does not compel the court to look at a document or a transaction in blinkers, isolated from any context to which it properly belongs.” 42. In the same passage, he set out what I refer to as the composite approach: “ If it can be seen that a document or transaction was intended to have effect as part of a nexus or series of transactions, or as an ingredient of a wider transaction intended as a whole, there is nothing in the doctrine to prevent it being so regarded: to do so is not to prefer form to substance, or substance to form. It is the task of the court to ascertain the legal nature of any transaction to which it is sought to attach a tax or a tax consequence and if that emerges from a series or combination of transactions, intended to operate as such, it is that series or combination which may be regarded….” 43. He concluded that whether under the principle set out in Westminster or under any other authority: “ the courts are not bound to consider individually each separate step in a composite transaction intended to be carried through as a whole”. 44. Lord Wilberforce went on to state that the composite approach is particularly in point where “it is proved that there was an accepted obligation once a scheme is set in motion, to carry it through its successive steps” and may be so where (as in Ramsay itself) “there is an expectation that it will be so carried through, and no likelihood in practice that it will not”
“To force the courts to adopt, in relation to closely integrated situations, a step by step, dissecting, approach which the parties themselves may have negated, would be a denial rather than an affirmation of the true judicial process. In each case the facts must be established, and a legal analysis made: legislation cannot be required or even be desirable to enable the courts to arrive at a conclusion which corresponds with the parties’ own intentions.” 46. As Lord Reed later put it in UBS , it is plain that Lord Wilberforce was saying not only that the purposive approach to statutory construction, which was orthodox in other areas, extended to tax law but also “equally significantly…that the analysis of the facts depended on that purposive construction of the statute”. 47. Having noted, at page 182, that capital gains tax was “created to operate in the real world, not that of make-belief”
“ First, there must be a pre-ordained series of transactions; or, if one likes, one single composite transaction. This composite transaction may or may not include the achievement of a legitimate commercial (ie business) end. The composite transaction does, in the instant case….It did not in Ramsay . Secondly, there must be steps inserted which have no commercial (business) purpose apart from the avoidance of a liability to tax - not 'no business effect' . If those two ingredients exist, the inserted steps are to be disregarded for fiscal purposes. The court must then look at the end result. Precisely how the end result will be taxed will depend on the terms of the taxing statute sought to be applied. In the instant case the inserted step was the introduction of [IoM] as a buyer from the [taxpayers] and as a seller to [the third party]. That inserted step had no business purpose apart from the deferment of tax, although it had a business effect….” 53. However, as set out in detail below, in the later cases the House of Lords and the Supreme Court have been at pains to clarify that the view of the composite approach as a new jurisprudence governed by special rules of its own is a misconception. They have set out clearly that (a) Ramsay itself does not set out any such special principle and (b) in Furniss and the other relevant cases, the courts were not laying down any such special principle or interpreting Ramsay as doing so. 54. In Carreras the taxpayer transferred shares in one company to another company in return for an unsecured, non-transferable and non-interest bearing debenture which was redeemed only two weeks after the share transfer. It was held that, on a purposive construction of the relevant stamp tax provisions, the transaction was not an exchange of shares in one company for debentures of another company such that it did not attract stamp tax; rather it was the exchange of shares for money. 55. Lord Hoffmann, who gave judgment for the Privy Council said, at [7], that if it was permissible to take a wider view and to treat the terms of the debenture and its redemption as part of the relevant transaction then the debenture was “only a formal step, having no apparent commercial purpose or significance”, in a transaction by which the shares in the company were exchanged for money. 56. He continued, at [8], that whether the statute is concerned with a single step or a broader view of the acts of the parties depends upon the construction of the language in its context. He thought that sometimes the conclusion that the statute is concerned with the character of a particular act is inescapable (as in MacNiven ). However, since Ramsay : “the courts have tended to assume that revenue statutes, in particular, are concerned with the characterisation of the entirety of transactions which have a commercial unity rather than the individual steps into which such transactions may be divided. This approach does not deny the existence or legality of the individual steps but may deprive them of significance for the purposes of the characterisation required by the statute…” 57. He considered that there were no reasons why Parliament should have contemplated a narrower definition of the transaction which has to be considered in this context. 58. He noted, at [15], that counsel for the taxpayer submitted that a factual inquiry into what constituted the relevant transaction for the purposes of the relevant provision would give rise to uncertainty. He seemed to accept that if the representative of Carreras had “handed the share certificates over the desk in exchange for the debenture and the representative of Caribbean had then handed it back in exchange for a cheque, it would be hard to say that the relevant transaction should not be characterised as an exchange of shares for money”
“the redemption was not merely contemplated (the redemption of any debenture may be said to be contemplated) but intended by the parties as an integral part of the transaction, separated from the exchange by as short a time as was thought to be decent in the circumstances. The absence of security and interest reinforces this inference. No other explanation has been offered.” 60. He continued that in any case: “ it is inherent in the process of construction that one will have to decide as a question of fact whether a given act was or was not a part of the transaction contemplated by the statute. In practice, any uncertainty is likely to be confined to transactions into which steps have been inserted without any commercial purpose. Such uncertainty is something which the architects of such schemes have to accept.”
“ .. Courts are entitled to look at a pre-arranged tax avoidance scheme as a whole. It matters not whether the parties’ intention to proceed with a scheme through all its stages takes the form of a contractual obligation or is expressed only as an expectation without contractual force”. (2) That does not mean that transactions or relevant steps are to be treated as “shams” nor does it require going “behind a transaction for some supposed underlying substance”
“For instance, if the scheme has the apparently magical result of creating a loss without the taxpayer suffering any financial detriment, is this artificial loss a loss within the meaning of the relevant statutory provision ?” 63. Lord Nicholls, therefore, specifically endorsed the composite approach. He then referred with approval, at [6], to the comments of Lord Steyn and Lord Cooke of Thorndon in Inland Revenue Commissioners v McGuckian[1997] 1 WLR 991 (“ McGuckian ”) at 1000 and 1005 respectively that this approach (as he had described it, including the composite approach) “is an exemplification of the established purposive approach to the interpretation of statutes” and “an application to taxing Acts of the general approach to statutory interpretation whereby, in determining the natural meaning of particular expressions in their context, weight is given to the purpose and spirit of the legislation”. 64. At [7], he cautioned that the observations on the Ramsay approach in some later decisions should be read in the context of the particular statutory provisions and sets of facts under consideration and that they: “cannot be understood as laying down factual pre-requisites which must exist before the court may apply the purposive, Ramsay approach to the interpretation of a taxing statute. That would be to misunderstand the nature of the decision in Ramsay .” 65. Whilst he “readily accepted”, at [8], that the factual situation described by Lord Brightman in Furniss is one where, typically, the Ramsay approach will be “a valuable aid” which may well often have the effect he set out, it really is just an aid and: “This is not an area for absolutes. The paramount question always is one of interpretation of the particular statutory provision and its application to the facts of the case. Further, as I have sought to explain, Ramsay did not introduce a new legal principle. It would be wrong, therefore, to set bounds to the circumstances in which the Ramsay approach may be appropriate and helpful. The need to consider a document or transaction in its proper context, and the need to adopt a purposive approach when construing taxation legislation, are principles of general application. Where this leads depends upon the particular set of facts and the particular statute ….” (Emphasis added.)
“The point to hold onto is that something may be real for one purpose but not for another”
“If the statutory language is construed as referring to a commercial concept, then it follows that steps which have no commercial purpose but which have been artificially inserted for tax purposes into a composite transaction will not affect the answer to the statutory question. When Lord Brightman said that the inserted steps are to be "disregarded for fiscal purposes", I think that he meant that they should be disregarded for the purpose of applying the relevant fiscal concept.” 71. He emphasised at [49] that this formulation “is not a principle of construction” but is “rather a “statement of the consequences of giving a commercial construction to a fiscal concept”
“to have regard to the purpose of a particular provision and interpret its language, so far as possible, in a way which best gives effect to that purpose ”. 78. He noted that until Ramsay , however, revenue statutes were “remarkably resistant to the new non-formalist methods of interpretation”
“ tax is generally imposed by reference to economic activities or transactions which exist, as Lord Wilberforce said, "in the real world".” (2) The second is that: “ a good deal of intellectual effort is devoted to structuring transactions in a form which will have the same or nearly the same economic effect as a taxable transaction but which it is hoped will fall outside the terms of the taxing statute. It is characteristic of these composite transactions that they will include elements which have been inserted without any business or commercial purpose but are intended to have the effect of removing the transaction from the scope of the charge.”
“ It elides the two steps which are necessary in the application of any statutory provision: first, to decide, on a purposive construction, exactly what transaction will answer to the statutory description and secondly, to decide whether the transaction in question does so. As Ribeiro PJ said in [ Arrowtown at [35]] [see [26] above] ….”
“ Since the decision of this House in [Ramsay] it has been accepted that the language of a taxing statute will often have to be given a wide practical meaning of this sort which allows (and indeed requires) the Court to have regard to the whole of a series of transactions which were intended to have a commercial unity . Indeed, it is conceded by SPI that the Court is not confined to looking at the Citibank option in isolation. If the scheme amounted in practice to a single transaction, the Court should look at the scheme as a whole. [Counsel] for SPI, accepted before the Special Commissioners that if there was “no genuine commercial possibility” of the two options not being exercised together, then the scheme must fail.” (Emphasis added.)
“If the chance of the price movement occurring was similar to an outsider winning a horse race we consider that this, while it is small, is not so small that there is no reasonable or practical likelihood of its occurring; outsiders do sometimes win horse races.” 88. Lord Nicholls noted, at [21], that the test of “no practical likelihood” derived from the speech of Lord Oliver of Aylmerton in Craven v White [1989] A C 398, at p 514. However, he thought there was a distinction between that case and Scottish Provident . In Craven v White “important parts of what was claimed by the Revenue to be a single composite scheme did not exist at the relevant date” (see Lord Oliver (at p 498)); there was an uncertainty about “whether the alleged composite transaction would proceed to completion which arose, not from the terms of the alleged composite transaction itself, but from the fact that, at the relevant date, no composite transaction had yet been put together” (see [22]). On the other hand, in Scottish Provident : “…the uncertainty arises from the fact that the parties have carefully chosen to fix the strike price for the [option granted to SPI] at a level which gives rise to an outside chance that the option will not be exercised. There was no commercial reason for choosing a strike price of 90. From the point of view of the money passing (or rather, not passing), the scheme could just as well have fixed it at 80 and achieved the same tax saving by reducing the Citibank strike price to 60. It would all have come out in the wash. Thus the contingency upon which SPI rely for saying that there was no composite transaction was a part of that composite transaction; chosen not for any commercial reason but solely to enable SPI to claim that there was no composite transaction. It is true that it created a real commercial risk, but the odds were favourable enough to make it a risk which the parties were willing to accept in the interests of the scheme.” 89. At [23] Lord Nicholls held that it would “ destroy the value of the Ramsay principle of construing provisions” such as those in issue as referring to the effect of composite transactions : “if their composite effect had to be disregarded simply because the parties had deliberately included a commercially irrelevant contingency, creating an acceptable risk that the scheme might not work as planned. We would be back in the world of artificial tax schemes, now equipped with anti -Ramsay devices. The composite effect of such a scheme should be considered as it was intended to operate and without regard to the possibility that, contrary to the intention and expectations of the parties, it might not work as planned.”
“the courts treated every element of a composite transaction which had an individual legal identity (such as a payment of money, transfer of property, or creation of a debt) as having its own separate tax consequences, whatever might be the terms of the statute” (citing Lord Steyn in McGuickan at p 999).” 92. He continued, at [62], that the significance of the Ramsay case was “to do away with both those features”
“First, it extended to tax cases the purposive approach to statutory construction which was orthodox in other areas of the law. Secondly, and equally significantly, it established that the analysis of the facts depended on that purposive construction of the statute . Thus, in Ramsay itself, the terms “loss” and “gain”, as used in capital gains tax legislation, were purposively construed as referring to losses and gains having a commercial reality. Since the facts concerned a composite transaction forming a commercial unity, with the consequence that the commercial significance of what had occurred could only be determined by considering the transaction as a whole, the statute was construed as referring to the effect of that composite transaction…..” (Emphasis added.)
“Where an enactment is of that character, and a transaction, or an element of a composite transaction, has no purpose other than tax avoidance, it can usually be said, as Carnwath LJ stated, that “to allow tax treatment to be governed by transactions which have no real world purpose of any kind is inconsistent with that fundamental characteristic”
“ the court considered the overall effect of the composite transaction, and concluded that, on the true construction of the relevant statute, the elements which had been inserted without any purpose other than tax avoidance were of no significance. But it all depends on the construction of the provision in question. Some enactments, properly construed, confer relief from taxation even where the transaction in question forms part of a wider arrangement undertaken solely for the purpose of obtaining the relief. The point is illustrated by the decisions in [ MacNiven] and [ BMBF ] itself.” (Emphasis added.)
“In the first place, the approach described in [ BMBF ] and the earlier cases in this line of authority has nothing to do with the concept of a sham, as explained in Snook. On the contrary, as Lord Steyn observed in McGuckian at p 1001, tax avoidance is the spur to executing genuine documents and entering into genuine arrangements. Secondly, it might be said that transactions must always be viewed realistically, if the alternative is to view them unrealistically. The point is that the facts must be analysed in the light of the statutory provision being applied. If a fact is of no relevance to the application of the statute, then it can be disregarded for that purpose. If, as in Ramsay, the relevant fact is the overall economic outcome of a series of commercially linked transactions, then that is the fact upon which it is necessary to focus. If, on the other hand, the legislation requires the court to focus on a specific transaction, as in MacNiven and [BMBF], then other transactions, although related, are unlikely to have any bearing on its application .” (Emphasis added.)
“No distribution which is chargeable under Schedule F shall be chargeable under any other provision of the Income Tax Acts”
“i. income tax is only one tax, and the different Schedules do no more than to provide the method of computation charge and assessment peculiar to the Schedule to which the income is allocated; ii. the Schedules are mutually exclusive, each Schedule is dominant over its own subject matter and provides a complete code for the class of income which falls within that Schedule; iii. the same source of income cannot be taxed twice.”
“ The court should not be seduced by the form in which the payments (that is as dividends declared in respect of the shares in [the company]) reached the employees. It should focus on the character of the receipt in the hands of the recipients.”
“ Whether the statute is concerned with a single step or a broader view of the acts of the parties depends upon the construction of the language in its context ”
“ PA decided that its employees should receive a bonus, Mourant identified which of the employees, from the list provided by PA, should receive a bonus and those employees received a bonus. That, to adopt the dismissive terms of Special Commissioner de Voil in DTE, was the beginning and end of the matter. It is, in my view, the beginning and end of these appeals.”
“ Subject to very limited exceptions, most of which are statutory, a company is a legal entity distinct from its shareholders. It has rights and liabilities of its own which are distinct from those of its shareholders. Its property is its own, and not that of its shareholders. In Salomon v A Salomon and Co Ltd[1897] AC 22 , the House of Lords held that these principles applied as much to a company that was wholly owned and controlled by one man as to any other company. In Macaura v Northern Assurance Co Ltd[1925] AC 619 , the House of Lords held that the sole owner and controller of a company did not even have an insurable interest in property of the company, although economically he was liable to suffer by its destruction. Lord Buckmaster, at pp 626-627 said: "no shareholder has any right to any item of property owned by the company, for he has no legal or equitable interest therein. He is entitled to a share in the profits while the company continues to carry on business and a share in the distribution of the surplus assets when the company is wound up." In Lonrho Ltd v Shell Petroleum Co Ltd[1980] 1 WLR 627 the House of Lords held that documents of a subsidiary were not in the "power" of its parent company for the purposes of disclosure in litigation, simply by virtue of the latter's ownership and control of the group.” 108. In the same passage, he noted that the principles he had set out are “the starting point for the elaborate restrictions imposed by English law on a wide range of transactions which have the direct or indirect effect of distributing capital to shareholders”
“when a person is under an existing legal obligation or liability or subject to an existing legal restriction which he deliberately evades or whose enforcement he deliberately frustrates by interposing a company under his control.” 112. In those circumstances: “ The court may then pierce the corporate veil for the purpose, and only for the purpose, of depriving the company or its controller of the advantage that they would otherwise have obtained by the company's separate legal personality.” 113. However, he thought that the principle “is properly described as a limited one” for the following reasons: “…..in almost every case where the test is satisfied, the facts will in practice disclose a legal relationship between the company and its controller which will make it unnecessary to pierce the corporate veil. Like Munby J in Ben Hashem , I consider that, if it is not necessary to pierce the corporate veil, it is not appropriate to do so, because on that footing there is no public policy imperative which justifies that course. I therefore disagree with the Court of Appeal in VTB Capital who suggested otherwise at para 79. For all of these reasons, the principle has been recognised far more often than it has been applied. But the recognition of a small residual category of cases where the abuse of the corporate veil to evade or frustrate the law can be addressed only by disregarding the legal personality of the company is, I believe, consistent with authority and with long-standing principles of legal policy. ”
“The concept of a distribution......is not so closely tied to a particular form of corporate action as [a dividend], but it is still grounded in the corporate transactions that are undertaken and their effect on the capital structure of the company. This can be seen from the other detailed concepts within definition in Part 23, in particular, the concept of a repayment of capital and the requirement that the distribution is “in respect of shares” in the company.” (3) At [71] the tribunal noted that in PA Holdings , “the question was whether the amounts received by the employees, although they took the legal form of dividends, should be treated as emoluments for tax purposes” and the approach taken by tribunal and the UT “enabled them to “look beyond” the corporate form of the payments in deciding that question”
“ A limited company not in liquidation cannot lawfully return capital to its shareholders except by way of a reduction of capital approved by the court. Profits may be distributed to shareholders (normally by way of dividend) but only out of distributable profits computed in accordance with the complicated provisions of theCompanies Act 2006 (replacing similar provisions in theCompanies Act 1985 ). Whether a transaction amounts to an unlawful distribution of capital is not simply a matter of form. As Hoffmann J said in Aveling Barford Ltd v Perion Ltd[1989] BCLC 626 , 631, "Whether or not the transaction is a distribution to shareholders does not depend exclusively on what the parties choose to call it. The court looks at the substance rather than the outward appearance." Similarly, Pennycuick J observed in Ridge Securities Ltd v Inland Revenue Commissioners[1964] 1 WLR 479 , 495, "A company can only lawfully deal with its assets in furtherance of its objects. The corporators may take assets out of the company by way of dividend, or, with the leave of the court, by way of reduction of capital, or in a winding-up. They may of course acquire them for full consideration. They cannot take assets out of the company by way of voluntary distribution, however described, and if they attempt to do so, the distribution is ultra vires the company."” 133. Lord Walker explained, at [15], that the issue related to “the common law rule” which in the Court of Appeal (at [33]) Mummery LJ explained as follows: “ The common law rule devised for the protection of the creditors of a company is well settled: a distribution of a company's assets to a shareholder, except in accordance with specific statutory procedures, such as a winding up of the company, is a return of capital, which is unlawful and ultra vires the company.” 134. Lord Walker described this as “essentially a judge-made rule, almost as old as company law itself, derived from the fundamental principles embodied in the statutes by which Parliament has permitted companies to be incorporated with limited liability”
“It is clear however that Slade LJ excepted from his general principle cases which he described as involving a 'fraud on creditors' (see . . .[1986] Ch 246 at 296). As an example of such a case, he cited Re Halt Garage . Counsel for the defendants said that frauds on creditors meant transactions entered into when the company was insolvent. In this case Aveling Barford was not at the relevant time insolvent. But I do not think that the phrase was intended to have such a narrow meaning. The rule that capital may not be returned to shareholders is a rule for the protection of creditors and the evasion of that rule falls within what I think Slade LJ had in mind when he spoke of a fraud on creditors. There is certainly nothing in his judgment to suggest that he disapproved of the actual decisions in Re Halt Garage or Ridge Securities . As for the transaction not being a sham, I accept that it was in law a sale. The false dressing it wore was that of a sale at arms' length or at market value. It was the fact that it was known and intended to be a sale at an undervalue which made it an unlawful distribution." 135. Whilst the focus of these cases is on whether an unlawful distribution had been made, they amply illustrate the breadth of circumstances in which, for company law purposes, there may be a distribution to a company’s shareholders. 136. Finally, I note that, in reaching my conclusion on the Ramsay argument, I have not placed any particular emphasis on the decision in PA Holdings . Like the other decisions cited in this context, that case provides guidance on the correct approach for the tribunal to adopt in construing tax legislation. However, given that a purposive approach to the construction of tax legislation requires a close examination of the particular provisions in question according to a realistic view of the particular facts, that case cannot provide the answer to the matter under consideration here, concerned as that case is with different rules and circumstances. 137. As set out in full at [98] to [105], the court in PA Holdings was primarily concerned with the application of the regime under which income tax is imposed on “earnings” albeit that, because the sums under consideration were paid as dividends, the interaction between that regime and the rules governing the taxation of dividends and distributions was in point. HMRC place particular emphasis on the finding that, in concluding that sums paid to employees as dividends on shares were “earnings” from employment, it was correct to look beyond “the form of the distributions, mere machinery, by which the intention to pay bonuses was fulfilled”
“While the formation of Staffa provided an available investment for the sums settled under the five deeds of settlement, under which the children’s provisions were actually constituted, the continuance of such investment was not essential to the continuance of the trusts under the deeds of settlement. In other words, the sums settled under these deeds were the funds provided for the purpose of the settlement…….. Staffa, though controlled by the Appellant, did not, in my opinion, hold its assets as part of the provisions settled on the children. I am of opinion that the whole assets of Staffa did not constitute the property comprised in the settlement , and that the assessment cannot stand.” (Emphasis added.)
“ It must comprise certain property which is the subject of the settlement; it must confer the income of the comprised property on others, for it is the income so given to others that is to be treated as nevertheless the income of the settlor .” (Emphasis added.)
“The trust funds were invested in shares of that company, which is quite a different matter. In point of fact, the whole assets of the company have never been settled at all so as to dedicate the whole of its income to any trust purposes.” 150. He noted that it was argued that the formation and structure of Staffa was just a part of an “arrangement” which must be looked at as a whole and, on that view, there was a settlement of Staffa’s whole assets, namely, the shares in C Ltd, which the taxpayer transferred to it. He agreed that the creation of Staffa and “its very special constitution were essential steps towards the effecting of the [taxpayer’s] object” as was the sale of the 470 shares to Staffa. However, that sale was for consideration in money or money’s worth, and resulted, amongst other things , in the taxpayer receiving preference shares in Staffa for himself, the income of which he had himself enjoyed. He queried how it could be said that the whole assets of Staffa were comprised in a settlement by the taxpayer “when he himself retains a substantial interest in the company which has never been the subject of a settlement at all?”. 151. He said that the “most attractive way of presenting”
“ It is, I think, fallacious to confuse the steps taken by the [taxpayer] with a view to effecting a settlement or arrangement with the settlement or arrangement itself. When the taxpayer created [Staffa], and sold to it his 470 shares…..he made no settlement or arrangement such as the Statute contemplates. In point of fact, he never settled any shares of [Staffa]. What he did was to settle certain sums of money, with the intention, which he was in a position to carry out, that these sums should be invested in shares of [Staffa]. It was not until he granted the trust deeds that he entered the legal stage of the settlement. All that he did previously was preparatory to making settlements. No settlement or arrangement of the nature of a settlement existed when the company was registered and the [taxpayer] sold to it his [470] shares …..As I have said, what the [taxpayer] settled was money. That money was invested, as it was intended to be, in shares of [Staffa], but I see nothing to prevent the trustees under the trust deeds from selling their shares in the company and investing the proceeds in other securities. Could it then be said that the whole of the assets of [Staffa] were “settled”? It is essential to the Crown’s case that it should make out that the whole assets of [Staffa] are comprised in a settlement or arrangement made by the [taxpayer] within the meaning of the Statute. In my opinion the Crown has failed to establish this.” (Emphasis added.)
“ If a man enters into a contract to buy 1,000 shares in a company with a view to settling 500 of them on his daughter and does so settle the 500 shares by deed, it may well be that…the settlement can be described as consisting of the contract and the deed together. But the property comprised in the settlement is the 500 shares settled by the deed and not the whole of the 1,000 shares. The mere fact that the contract to buy 1,000 shares was a part of the arrangement for settling 500 of them, is no conceivable justification for saying that the property comprised in the settlement included the other 500, even though the settlement be regarded as consisting of the whole arrangement. And yet that in substance is what has been said by the Special Commissioners and the Court of Appeal in the present case.” 153. He said, at page 334, that it was quite plain that the forming of Staffa, the sale to it of the shares in C Ltd and the application of the£3,500 in subscribing for 350 ordinary shares in Staffa, were all so many steps taken or caused to be taken by the taxpayer for the purpose of making some provision for his children out of the interest that he possessed in C Ltd while retaining control over both that company and over Staffa. But: “ the forming of Staffa and the sale to it of the Appellant’s 470 shares…were capable of serving, and may well have been intended to serve, in the future other purposes as well. If, for instance, the Appellant had in his mind the possibility at a later date of issuing and settling on his brothers and sisters further shares in Staffa, whether preference or ordinary, the forming of Staffa and the sale to it of the 470 shares would have been steps taken to effect this purpose also, and could be treated as forming part of such subsequent settlement. Although, therefore, it may be possible to say…that on 10th March, 1936, there came into existence a compound settlement in the form of an arrangement consisting of the forming of Staffa, the agreement for the sale to it of the 470 shares…the trust deed of that date and the subscription by the trustees of 350 ordinary shares, the property comprised in that settlement consisted of nothing but the last mentioned shares. It did not and could not consist of the whole of the assets of Staffa, or even the 470 shares…that Staffa held, any more than a subsequent settlement such as I have mentioned would or could have done. The Appellant had an interest in all such assets as the holder of preference shares, and the holders of any subsequently issued preference shares and of all ordinary shares whenever they might have been issued would also be interested in such assets regardless of the date of their issue and of the date of any settlement of which they might be the subject matter.” 154. At page 335 he said that once the March trust was made he could find “nothing that even remotely suggests that at that time it was in the contemplation of the Appellant to settle further Staffa shares upon his children; and had it not been for the Finance Act of 1936 I do not suppose that any such further settlement would in fact have taken place”
“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….., or an arrangement in the nature of a disposition…I am also of opinion that the Respondent was a settlor…I am unable to see how the word 'indirectly' can be limited in the way which is suggested so as to exclude the settlements which are made through the interposition of a company.” (Emphasis added).
“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 can 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 a meaning.” 158. He noted that the 1970 Act included a number of provisions relating to “settlements” which were enacted at different times, the general effect of which was to cause income of which a person has disposed in various ways to be treated, in spite of the disposition, as the income of the disposer (as enacted in successive Acts from 1922 onwards “with increasing severity”). Having set out a short summary of the provisions he noted all of them had “a common character” in that they were: “ 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?” (Emphasis added.)
“……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 XVI. I would compare with this the reasons of this House in Thomas v. Marshall[1953] AC 543 . In that case the contention was that the word “settlement” did not extend to an outright gift. Their Lordships rejected this, holding that the intention was clearly to enlarge the meaning of settlement so as to include gifts. Enlargement in one direction and restriction in another are both part of a balanced process of judicial interpretation directed towards implementing but not exceeding the general legislative purpose. My Lords, there cannot be any doubt that in this case no element of bounty existed. The Special Commissioners indeed said that they regarded the transaction as a bona fide commercial transaction without any element of bounty. The taxpayer therefore succeeds on this point .” 161. Lord Fraser noted that the contract in question was not “a settlement in the ordinary sense of that word”, but it was an agreement and it was therefore within “the extended meaning of settlement if the extended meaning is read literally”
“ have therefore recognised that some limit must be placed on the width of the words, and the need for some limit was accepted by both parties to this appeal. The limit must be fixed by some rule capable of general application. I do not think it is enough for the Court simply to decide the case on the view that Parliament could never have intended this transaction to escape taxation; a decision on that ground would approach too closely to arbitrariness.” 162. He noted that the Crown argued that the relevant definition applied to all transactions that did not have a bona fide commercial reason, and that it applied to the present transaction, the sole reason for which was to avoid tax. The taxpayer contended that the definition applied only to transactions which included an element of bounty. He said that in many cases the two contentions might lead to the same result, but not in the present case. In his view, the true rule is that: “ the definition applies only where there is an element of bounty . One reason is that the commercial transaction test seems to go too far; many transactions which would be generally regarded as perfectly legitimate forms of investment are entered into solely, or at least predominantly, for tax reasons, and I think it would be wrong to suggest that they might be taxable for that reason alone. But the main reason in favour of the bounty test is that the word “settlement”, even allowing for its extended definition…… seems to me to be used throughout Part XVI of the Act with a flavour of donation or bounty . I agree with the observations of my noble and learned friend Lord Wilberforce that the various provisions in Part XVI, to which he has referred, have a common characteristic of bounty. I would add that the same characteristic seems to apply to the first three exceptions to s 457(1) itself….” (Emphasis added.)
“Mr Hawkins was not going to make a present of his services, less£50 a week, to two clerks…who on the face of things were, at the beginning, the only shareholders in the company. At some time he would want to have the money which had escaped surtax for himself…or to bestow it on others whom he wished to benefit, for example, his family. Otherwise the whole operation was pointless. 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 .” (Emphasis added.)
“ I think 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 on later, does not seem to me to rob the scheme of the necessary unity to justify it being called an 'arrangement'.”
“An alternative way of looking at the matter would be this: Here the repayment claim is made in the year 1956-57. In that year the arrangement is complete, and that is enough. It would be irrelevant that it came into being by instalments in the year 1954-55. The Revenue looks at the facts of the year being taxed or for which repayment of tax is being sought, and asks in this year 'Is it true to say that there is a settlement of the kind mentioned in the section, and in this year is it true to say that the settlor has provided funds for the purpose of the settlement?'” (3) He also considered HMRC’s argument that the actor provided funds for the “settlement” constituted by the trust deed regarded alone and was, therefore, a “settlor” in relation to it. He noted that this argument was rejected in the High Court on the basis that the actor could not be regarded as providing funds for a “settlement” of which he was not the “settlor” and to which he contributed nothing, unless somehow the formation of the company and the service agreement could be read into the “settlement”: (a) The High Court declined to do that because the deed of settlement came later in date and on the basis that there was a finding that there was no comprehensive arrangement at the outset of which the deed of settlement formed part. (b) The relevant finding was that the actor “was aware that steps were being taken to put into effect proposals of the accountants and solicitors, but he was not consulted with regard to them. He was not present at any meeting when the matter of the settlement was discussed, or when the deed of settlement was made”. (c) The judge in the High Court said that, therefore, the actor “was not a party in any way to any scheme under which a company was to be formed, a contract to be made with the company for his services and then a settlement to be made which would involve benefits, from the first transaction, for his children. He was quite obviously, not a party in any way, and that seems to me a most material factor in this case”. (4) Donovan LJ said that he could not go that length. He noted that: (a) It was conceded that the proposals of the accountants and solicitors included the deed of settlement so that the actor “was aware of this item in the proposals and that steps were being taken to put it into effect, albeit that he may not have been consulted when the terms of the settlement were discussed or the settlement signed.” (b) Even if the matter stopped there, he had little difficulty in holding that when the dividend was ultimately declared it came from funds indirectly provided by the actor for the purposes of the deed of settlement. (c) However, in his view, the matter did not stop there because, when the actor agreed to give his services to the company for a fraction of the reward the company would get, the shareholders were either the clerks or his wife and accountant: (i) If the clerks were the shareholders at that time, the irresistible inference was that they were mere nominees for the actor. On that analysis, when he later transferred or concurred in the issue of the shares to the trustees so that they became the only shareholders, he was in fact concurring that the equity in the company should pass from him to them. When eventually there was a profit and a distribution “the result of all that has gone before is that he has provided funds indirectly for the purposes of this settlement”. (ii ) If, however, his wife and accountant were the shareholders at that time, then the idea of this family settlement was in mind at the outset and by this agreement, the actor was taking steps to see that the trustees would eventually get funds and, when that event happened, it was he who indirectly provided the money. He rejected the view that the word purpose indicated that the legislature had in mind only those cases where the provision of funds or the undertaking to provide them were contemporaneous with the settlement. 167. Peace LJ reached the same conclusion noting, at page 553, that the clear inference from the statement of facts is that proposals had been made by Mr Hawkins’ accountants and solicitors and that he was aware that steps were being made to carry them out, but that the fact that he was not consulted about the details of the settlement and was not present when the deed was made had a bearing on the result. However, in his view, “that fact was irrelevant”
“The proposals were clearly proposals for achieving the result that has been achieved, namely, a family settlement financed by dividends produced by Hawkins' contract to sell his services to the company at an inadequate and uncommercial rate. Had the proposals been of any other nature the case must inevitably have so stated. The foundation of those proposals was his earning power and they needed not merely his assent but his active participation. He personally entered into the contract to serve for an inadequate remuneration, he was himself a director of the company when the shares were allotted to the trustees, when the large profit was made by the company's use of the contract, and when the dividend was declared. And above all he himself created the source of the company's profit by acting in the film "Fortune is a Woman". The mere fact that he 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 section 397 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. Nor can he avoid liability by merely giving his solicitors carte blanche to effect some scheme for the benefit of his family and refusing to concern himself with its precise form.” 168. Wildin concerned the same provision as was in point in Hawkins (as then included in a later act). In that case: (1) In 1980 two brothers started negotiations with British Rail to acquire a long lease of some land which they thought presented a profitable investment opportunity. (2) They acquired a shelf company with an authorised share capital of£100 and allotted 19 shares to each of their two children which the children each paid for out of money in a savings account. (3) The brothers then arranged for the company to acquire the lease and undertake the development as financed by a bank loan guaranteed by the brothers. (4) Following the completion of the development in 1982, in 1985 the company made a profit and paid the children a dividend. (5) The question was whether the dividend should be treated as income of the brothers. HMRC argued that by incorporating the company and allotting shares to the children which they could have allotted to themselves, by adopting the whole risk of the venture for the benefit of the children, by giving their personal guarantees to the bank and acting as directors without any remuneration, the brothers entered into an arrangement which had elements of bounty and provided funds directly or indirectly for the purpose of the arrangement. 169. Vinelott J decided, at pages 683 and 684, that the brothers were parties to an “arrangement” and that the dividends were paid to the children in consequence of that “arrangement”: “The taxpayer together arranged for shares in the company to be allotted to the four older children; and they arranged for 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 throughout 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.” 170. He continued to note that it has long been recognised that the definition of a “settlement” is so wide that some limitation to its scope must be implied referring to Copeman v Coleman . He said that the starting point must be to identify the “arrangement”
“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 risk that the development would not prove profitable and might result in loss was taken by the brothers.” 171. He concluded that “the taxpayers were the architects of an “arrangement” within the relevant definition by virtue or in consequence of which the dividends in question were paid to the four older children”. 172. As noted in the late case of Jones , there was no guarantee that dividends would be paid. Vinelott J said, at page 685: “The future of the company depended on the maintenance of a sufficient surplus over the rent payable to British Rail to meet the interest on the bank borrowing; a modest decline in the profit rental or a modest increase in the rate of interest might have had a catastrophic effect on the ability of the company to continue to service its debt…...”
“ It made sense only on the basis that the two adults were married to each other. If Mrs Jones had been a stranger offering her services as a bookkeeper, it would have been a most abnormal transaction. It would not have been an arrangement into which Mr Jones would ever have entered with someone with whom he was dealing at arms’ length. It was only "natural love and affection" which provided the consideration for the benefit he intended to confer upon his wife. That is sufficient to provide the necessary "element of bounty".”
“Normally (there may be exceptions) the arrangement is to be identified by the constituent parts or components of the legal structure designed for a purpose, and not by what is done (sometimes months or even years later) in using the structure for its intended purpose.” 193. At [54] he said that he did not accept the revenue’s argument that the arrangement entered into by Mr and Mrs Jones included, but was larger than (and so different from) the establishment of the original corporate set-up under which each had half of the issued share capital of the company. He noted that there was no written service agreement between the company and Mr Jones comparable to the service agreement between company and the actor. The establishment of the corporate set-up, together with the common intention that Mr and Mrs Jones would use it to minimise tax in accordance with their accountants' advice, was the essential “arrangement”
“The fact that the company had no legally enforceable right to require Mr Jones to work for it, either at all or at a reduced level of pay, does not mean that that was not something that the company and its shareholders expected to happen, and which therefore gave the shares value. As Lord Hoffmann pointed out in argument, valuation of an asset……..is very often based, at least to some extent, on profits which may be hoped or expected to be realised, but to which the owner of the asset has no present legal right.”
“that would open the door to a different approach. That approach would involve considering what transpired each year, when it was decided how much of the company’s gross profit should be attributable to Mr and Mrs Jones’ respective wages, and how much should be distributed by way of dividend…….when Mr Jones, as the sole director of the company, decides each year how to apportion the gross income of the company, I find it very hard to see why that should not be capable of being an arrangement within [the relevant provision], if it has been excluded from consideration as part of the arrangement when the shares were acquired by Mr and Mrs Jones. On that basis, I find it also very hard to see why Mr Jones decision each year not to take anything like a full salary, thereby increasing substantially the dividend payable to his wife, does not involve an element of bounty. Neither [counsel] was prepared to adopt this approach. Although it appears to me to be logically attractive, it would be inconvenient in practice, in that it would be difficult to administer, and it might well produce unfair, even arbitrary, results. However, the fact that it is not adopted by either party, seems to me rather to support the Revenue on the first issue.”