Analysis of new Revenue guidance

Independent practitioner and Section 660 expert, Simon Sweetman, gives his views on the Revenue's latest Section 660 guidance, following the Arctic Systems case.

Simon Sweetman writes:

It is not easy to comment on the Inland Revenue guidelines: they are more specific than advice offered previously, but they say nothing new technically. They do cast some light on the Inland Revenue's thinking and they emphasise their view that the situation that is not caught is where shares in a company with a substantial (whatever that means) capital base are given to a spouse. In that context S.660A(6) is a protection because the shares are more than a right to income.

This seems to me seriously problematic. Whatever Parliament may have meant when it introduced independent taxation, it seems most unlikely that the purpose of the legislation was to draw a line at this point (and of course at this stage we do not know where that line is drawn - what is "substantial"?).

Actual outright gifts to someone not a spouse are not protected by this subsection, but in that case the Revenue has to show that the benefit can in some sense return to the giver. I saw a case recently where a director had given shares to his adult daughter. That might well have escaped - but the dividend was then paid into his bank account!

Where does this go from here?

We will have a hearing of Jones v Garnett (Arctic Systems) in the High Court. If the Revenue win there, that may well be the end of it for this case, as it seems unlikely that the funds will be there for the Court of Appeal. If the Revenue lose, they will appeal (and might in that context decide that they would fund the Jones's). But the decision may be important because some of the conclusions that Dr Brice (one of the Special Commissioners) came to are not exactly the same as those argued by the Revenue.

She said (among other things)

• That the content of the settlement was the share itself
  
• That it mattered that Geoff Jones was a director and Diana was not
  
• That it mattered that the articles compelled Diana Jones to offer her share back to Geoff Jones first if she wished to sell it

As I read the Revenue guidance, they disagree with the first point and would be unhappy if anything turned on the other two. It will be interesting to see how these points are argued in the High Court.

It has been suggested that the Inland Revenue believes there can be a settlement in some years but not in others: they must intend to mean that the settlement exists from (apparently) the first decision to pay an "uncommercial" dividend (an odd concept this - the commerciality of such a decision normally just means a decision as to whether the business wishes to distribute the profit), but that there is not income arising to the settlement in every year so there would not be tax return entries every year.

In my view there may be a flaw in Dr Brice's reasoning in that the facts of the case make it clear that the setting up of the company was very much a joint venture, but the argument then proceeds as if every decision thereafter was Geoff Jones' alone.

Simon Sweetman