A summary of the High Court decision handed down this week in Jones v Garnett has been published by the Incorporated Council of Law Reporting.

The summary, written by barrister Harriet Dutton, is reproduced below.

The ICAEW's Tax Faculty has published its initial reaction to the decision.

It would appear that the judgment will show a "resounding win for HMRC - with some rather unhelpful comments about husband and wife tax planning," the faculty said.

A lot of the faculty's members will "read the report and still be unsure what side of the line their clients fall" because the case seems "unlikely to provide real clarity on whether you [are] a 'good tax planner' or an unacceptable tax avoider in relation to the advice given to your clients".

The faculty's note to members added: "The case is likely to refer to market salaries needing to be paid to the active spouse and other rather meaningless phrases that won't help our members identify whether they have problems with their clients or not.

"We need to know how HMRC will use this case, the parameters it will use and the guidance it will give to its staff. We also need to clarify the question of going back to earlier years.

"We will be keeping members informed on any progress and will issue updated guidance as it becomes possible."

Summary of the High Court decision, published by the Incorporated Council of Law Reporting.

REVENUE – Tax avoidance – Income tax – Settlement – Liability of settlor – IT consultant - Company acquired by consultant and his wife – Company paying dividends to wife – Whether arrangements a "settlement" - Whether dividends deemed income of "settlor" - Income and Corporation Taxes Act 1988, s 660A(1), (6), 660G (2), as inserted by Finance Act 1995, s 74 and Sched 17, Pt 1

Jones v Garnett (Inspector of Taxes)
Ch D (Park J): 27 April 2005

Arrangements by an IT specialist to carry on business through a company acquired by him and his wife and from which they received dividends ranked as a "settlement" for the purposes of s 660 A(1) and G(1) of the Income and Corporation Taxes Act 1988 thus imposing income tax liability on him as the "settlor" on dividend payments to his wife in respect of a share owned by her in the company. Section 660A(6) could not apply to exclude the arrangements as being an "outright gift" by him to his wife.

Park J so held, delivering a reserved judgment, upholding a determination by special commissioners in September 2004, rejecting in principle an appeal by the taxpayer, Geoff Jones, against a notice of assessment to income tax for the year 1999–2000.

The effect of the provisions in s 660A(1) and G(2) of the Income and Corporation Taxes Act 1988 was that if income from property arises under a "settlement", which term was widely defined to include an "arrangement", and the "settlor" had an interest in the property the income is treated for income tax purposes as the income of the settlor and not as the income of the person whose income it actually was. Further the settlor was to be treated for this purpose as having an interest in the property in various situations, one of which was where income from the property might become payable to his or her spouse.

PARK J said that the taxpayer, an information technology specialist, and his wife each owned one share in a company which earned profits by providing the taxpayer's personal services to clients. He drew a comparatively small salary so that the company earned profits, distributed as dividends. His wife, the company secretary, received half.

The Revenue contended that the structure was an "arrangement" within the settlement provisions; that the taxpayer was the settlor; and that the dividends paid to his wife had to be treated as his income for tax purposes.

Further, the Revenue said, the case was not taken out of the statutory provisions by an exclusion for an outright gift by one spouse to the other. Whether that corporate structure was an "arrangement" was one critical issue. The other was whether the structure was taken out of the concept of "settlement" in s 660A(1) by s 660A(6) as being an "outright gift" by the taxpayer to his wife.

A number of authorities explored the ambit of the settlement provisions, Crossland v Hawkins [1961] Ch 537 being important and effectively covering the instant case, notwithstanding some factual differences. The House of Lords' decision in Inland Revenue Comrs v Plummer [1980] AC 896 definitively settled that there had to be some element of bounty for an arrangement to be within the statutory provisions.

The dividends paid to the taxpayer's wife on her share in the company were, as the commissioners' held, income arising under an "arrangement" of the sort identified by the authorities. In the circumstances if there was an arrangement and thus a settlement, doubtless the taxpayer was the settlor of it.

Accordingly, s 660A(6) apart, the Revenue's claims for tax were correctly made. Section 660A(6) excluded from the settlement reference in s 660A(1) "an outright gift by one spouse to the other of property from which income arises".

But what constituted the "settlement" here was not an "outright gift" at all. Far more was comprised in the arrangements than could be covered by that expression. Moreover the taxpayer did not give to his wife her share: she had purchase it for £1.

Section 660A(6) did not take the case out of the charging scope of section 660A(1). The commissioners' decision had attracted the attention of professional tax advisers, causing much consternation. But apprehensions that almost every case of a husband and wife company would be affected were greatly exaggerated.

If a husband and wife set up a joint company and ran it together, it did not follow that the husband was going to be taxed on the wife's dividends. It was also an important feature of the case that the taxpayer provided funds directly or indirectly for the purposes of the settlement by working for the company in return for a salary far below his true earning power.

It would be harder for the Revenue to establish that there was a settlement of which a husband was a "settlor" if he was paid the going rate for employees carrying out the sort of work which he did. There was nothing practically novel or alarming in the decision: it was a simple application of well-established principles. Applying those principles the appeal failed.

Appearances:
Malcom Gammie QC (Nelsons, Nottingham) for the taxpayer;
Rupert Baldry (Solicitor of Inland Revenue) for the Revenue.

Reported by: Harriet Dutton, barrister

Andrew Goodall
Editor, TaxZone

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