Kevin Miller writes:
The most pertinent sections to read are paras 62 onwards where Lord Justice Carnworth's judgement addresses the two key issues of :
- Was there a settlement as defined by section 660G(1)?
- If there was, was it exempted by the outright gift provisions under S660A(6)?
No settlement
The appeal court conclusion re (1) was that there was no settlement as defined. Mrs Jones acquired her share at full cost when the company was set up. The Court rejected the Revenue's contention that the settlement included all the 'arrangements' that followed the setting up of the company - namely Mr Jones working for a below market salary and sharing the resulting profits with his wife by way of dividends that rewarded her excessively for the work she did.
The Court rejected the view that these arrangements constituted a bounty bestowed by Mr Jones on Mrs Jones. There were no service contracts in place between the company and Mr Jones that made it certain there would be profits in the future. Lord justice Keene says in his comments (paragraph 102) that "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"
Exemption
Re issue (2) the Court also concludes that even if the arrangements were a settlement for the purposes of S660A then the exemption in s660A(6) - for outright gifts between spouses that are not wholly or substantially a right to income - would have applied.
The Court rejected the Revenue's argument that (a) the shares had not been gifted they had been bought and (b) the gift was more than the shares but the whole arrangement . The Court agreed with the Jones' argument that the 'gift' was the right to acquire the shares and the shares in question being ordinary shares were far more than a right to income. Again Lord Justice Keen notes in para 107 that there were three possible scenarios - a sale between spouses at market value, a sale at under value and an outright gift. He considered anomalous that options 1 and 3 would be exempted by the exclusion but 2 would be caught.
In para 108 Lord Justice Keen states that there is a "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...... If the legislature wishes such an arrangement to be brought within a special regime for tax purposes, clearer language is necessary to achieve it".
Rebuke
Overall this judgement is quite a rebuke for HMRC and the Government. It fully justifies the concerns that tax professionals and tax bodies have expressed over the last two years about the HMRC interpretation of S660A.
I suspect that rather than appealing to the House of Lords the Government will amend the legislation if they decide to press on with their application of the settlement legislation to these situations.
Kevin Miller
Ernst and Young
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Susie Hughes © Shout99.com 2005
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