Arctic Systems Section 660 case: second day
The second day started where the first left off – with barrister Malcolm Gammie (MG) continuing to set out his case for the appellants, Geoff Jones (GJ) and his wife Diana (DJ), in front of the two lady Special Commissioners Dr Nuala Brice (DB) and Miss JM Powell (JP).
MG continued until lunchtime when the Revenue’s barrister Rupert Baldry (RB) took over. Despite the importance of the case I have to admit that today’s proceedings were largely pretty boring! This was due to a combination of the detailed but dry nature of the discussions, the manner of the barristers and the total lack of any real input from either of the two commissioners!
The Commissioners
Past cases I have attended at the Special Commissioners or the High Court have featured Commissioners and Judges who have been generally active in questioning and exploring points. That has both helped to clarify what the issues are that are being explored and has helped to create some feel for how the judge or commissioner was approaching the matter.
Both Dr Brice and Miss Powell appear to be taking the blotting paper approach – absorbing everything but giving back very little! In two days they have barely asked a couple of questions between them and have hardly made any more comments. But they do differ.
Dr Brice is the ‘headmistress’ – late 50’s, efficient, hair tightly pulled back, gold rim glasses, black suit and white blouse. Severe but kindly – not someone to stand for silliness from a class of girls but sympathetic when someone hurts themselves. She is clearly very focussed. She follows every point assiduously. When the barrister refers her to some document she clearly reads every word and nods encouragingly to show she is taking the point in. Throughout two hot days I’ve not seen her yawn or look distracted!
Miss Powell seems much younger perhaps early 40’s – shoulder length mousy blond hair immaculately styled – slightly Julie Christie-ish. Carefully dressed in grey slacks and black top with a discreet gold necklace – smart but clearly very feminine, a lady whose work may be dry and technical but could have hidden interests!
The academics
Both the barristers are softly spoken, understated, academic characters. MG is probably in his mid 50’s and presents in a dry, rather laidback style. He comes across as a very experienced academic, a professor, who is taking the Commissioners through a master class in an obscure legal point. The second day, as the first, he spent much of the time reading out extracts of past cases mainly reinforcing his main point that Parliament did not envisage the legislation being applied in this way. His style suggests that what he is arguing is really self evident and beyond any reasonable challenge.
If Gammie is the experienced professor, RB is the younger lecturer. Perhaps in his late 30’s, not quite so experienced, but trying to match the professor in style. He spoke for the afternoon and has another 45 minutes or so to do on Wednesday before MG responds. They expect the case to conclude by lunchtime.
The arguments
Readers must excuse the above discursion into the personalities but after a long day in a hot room I’m really not too sure where we have got to in the case! It seems to have been a slow day full of extracts from cases all making slightly different points.
MG spent the morning going over the key cases of Hawkins and Mills again. He has tried to show that in those two cases, which also involved personal service companies, the companies were not essential (the film stars could have worked without using their service company) but had been inserted so as to provide the mechanism by which income could be switched from one tax payer to another.
This is in contrast to ASL where he argues that the company was necessary to enable GJ to be able to obtain work. A point he has not addressed and which RB has not (as yet) made anything of is whether, in the scheme of things, it was “necessary” for DJ to be a shareholder?
MG went on to repeat his argument of yesterday that Parliament did not envisage these sorts of company arrangements being included within the settlements legislation. In his view setting up a company for valid commercial reasons and deciding to take some income as salary and leave some behind as profit (to distribute or not as the case may be) was not an arrangement that resulted in a settlement.
MG cited various other cases that had something to say on issues such as what is a settlement, who is a settlor and what is the settled property? As he stressed, the issue was not whether the dividends received by DJ were more than she deserved for her input to the business, but whether the shares that she held were a settlement? In his view acquiring shares in a company when it was set up was not a settlement.
MG drew attention to the fact that, when Parliament considered the introduction of separate taxation in 1989, it had had the opportunity to amend the legislation to make it clear whether setting up a company under joint ownership could be regarded as a settlement if they used salaries and dividends to switch income from one spouse to another. Parliament had not done so and, when questioned, the then Chancellor had also confirmed that a spouse who was a sleeping partner in a partnership could benefit from sharing partnership profits. If this was the case MG questioned how being a shareholder in a company like ASL could be a settlement.
Not only did Parliament not address this issue in 1989 they had not done so when the Settlements legislation was amended in 1995 or again when self-assessment was introduced later. In MG’s view this scenario was not covered in the legislation because Parliament never envisaged that setting up a company together could be a settlement.
One surprise for me is that we have had two days on this case and, as yet, no one has even mentioned the issue of whether ordinary shares can be said to be “wholly or substantially” a right to income – which is one of the conditions under which an outright gift from one spouse to another is not exempted from Section 660A.
This seems to be a crucial issue but was not raised by MG, even when he briefly discussed the recent case on the settlements legislation – Young v Pearce (1996) – where two wives were granted preference shares in a company. This had been found to be a settlement because preference shares are wholly or substantially a right to income. On this case, however, MG decided to say little leaving it to the Revenue’s counsel to deal with. I have to assume that MG expects to address the wholly or substantially income issue in response to the Revenue’s arguments.
RB opened the Revenue’s case by outlining their view that the “arrangement” in the case of the Jones’s and ASL was an arrangement that fell within the settlements legislation. The Revenue was not saying that this was an “arrangement” therefore it was a settlement. They were firmly of the view that the arrangements constituted a settlement within the meaning of the legislation.
In RB’s view section 660A was aimed squarely at arrangements that transferred income between family members so as to provide a bounty that enabled tax to be avoided. This was because family situations provided more scope for income to be diverted. The fact that most cases to date involved settlements on children rather between spouses merely reflected the fact that separate taxation itself was relatively new.
The fact that GJ had been told by his accountants that setting up the company with his wife holding shares was “standard practice” was precisely because of the perceived tax advantages.
In RB’s view in order to establish what of the many “arrangements” might fall within Section 660A you had first to identify a settlement and then see if it involved a bounty. If it did then it fell within section 660A. Section 660A could apply even if there was an underlying commercial rational behind the arrangements – such as the reasons for setting up the company.
RB briefly reviewed many of the cases that MG had referred to and argued that there was little difference between these and the Jones’. He concluded the day by reminding the Commissioners that GJ, by virtue of being the sole director and by virtue of his power, as set out in the articles, of being able to veto any share transfer, is able to control ASL absolutely. He also mentioned briefly that ASL was not like a “normal” company – it had virtually no capital and assets. Clearly he will try to argue that the settlements legislation is not so wide-ranging as MG would have us believe because many husband and wife businesses (“normal businesses”) would be able to argue that their shares had a capital value.
It appears from this and comments RB made yesterday that the Revenue will attempt to argue that personal service companies, in particular, are a separate category that can be challenged under these regulations. It seems that Section 660A is seen as a backup to IR35 – if the Revenue cannot get you under one they will try for the other.
Conclusions
It’s still too soon to know how this case will go, especially as the Commissioners are providing so little feedback in terms of comments or questions.
MG seems to have adopted a risky strategy of trying to shoot the Revenue down with a single bullet aimed at the fundamental issue of whether Parliament ever intended the legislation to apply to husband and wife companies that were set up for normal commercial reasons. This has the advantage that if it is successful it will make it very clear what the acceptable parameters are for such companies.
However I see two risks in this approach. If successful it would be fairly straightforward for the Government to amend Section 660A to change the rules and bring those companies they want to target (personal service companies?) into the frame. So victory could be short-lived.
The other risk depends on what MG hopes to cover in his response to the Revenue’s case. Rather than using a single rifle bullet to destroy a vital organ there might be greater chances of success in using a shotgun approach that hits several key points, even if any one wound by itself might not be fatal.
It would be possible to lose the argument on whether Parliament intended the legislation to encompass husband and wife companies and still win the case on issues like:
· Whether ordinary shares are ever just a right to income?
· Whether it is right to differentiate between businesses that have high capital requirements and those that do not?
· How do you determine what is a commercial salary and how do tax payers know whether they will be caught or not?
These need to be explored. Only the latter point has been touched on albeit briefly. If MG does not fully address these points tomorrow and the case is lost then we might have lost a vital opportunity.