(6) Arctic: Full judgment

The full text of the judgment giving victory to Arctic Systems in the Court of Appeal Section 660 case is now available.

Interest extracts are:

Need for caution

Para 108: 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.

Summary of conclusion

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

(a) there was no outright gift of the share from Mr Jones to Mrs Jones, but if there had been,

(b) 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.

The full judgment is available here.