Like so much anti-avoidance legislation, the settlements provisions in ITTOIA 2005 Part 5 Chapter 5 are famously wide in scope.
ITTOIA 2005 s 624 provides that income which arises under a settlement is taxed on the settlor if the settlor retains an interest in the settlement. A ‘settlement’, for these purposes, ‘includes any disposition, trust, covenant, agreement, arrangement or transfer of assets (except that it does not include a charitable loan arrangement)’ (ITTOIA 2005 s 620). For good measure, s 620 continues: ‘A person is treated for the purposes of this Chapter as having made a settlement if the person has made or entered into the settlement directly or indirectly.’
Together with the fact that a settlor ‘has an interest’ in any property from which he or she can benefit, the numerous circumstances in which these provisions need to be borne in mind are clear.
The first lesson to be drawn from Clipperton v HMRC [2021] UK FTT 12 (TC) is that advisers overlook the ITTOIA settlement provisions at their peril. (I have recently made a High Court application to set aside a trust holding structure for an international business because the advisers at the time when it was set up had overlooked these same provisions. Ultimately, this provided a successful result for the client, but it caused the client quite a shock when the issue first came to light and has generated questions of professional negligence along the way.)
Looking at the width of the ITTOIA settlement provisions, the FTT in Clipperton was not minded to limit the scope of the word ‘arrangement’. The FTT recorded (at para 222):
‘it could be said that the “arrangement” in fact comprised all of the relevant steps involved in the planning given that all steps were clearly identified and planned from the outset and they were implemented within a short period of time … In the words of Lord Walker in [Jones v Garnett [2007] 1 WLR 2030] the entire structure was plainly “a definite scheme, the essential heads of which could have been put down in numbered paragraphs on half a sheet of notepaper”’.
Of course, it remains the case that any particular set of facts will need closely to be analysed and an ‘arrangement’ should never be assumed. There must be ‘sufficient unity’ between the various steps (see para 211 of Clipperton, applying Jones v Garnett and Crossland v Hawkins (1961) 39 TC 493). But the circumstances where the absence of an ‘arrangement’ will be a complete defence, especially where (as in Clipperton) the context is a ‘definite scheme’ or, to use less emotive language, a pre-planned series of transactions, are likely to be few – at least in HMRC’s eyes.
There is, however, at least one important restriction placed on the ITTOIA settlement provisions by binding judicial precedent, which Clipperton has applied with robust certainty. The higher authorities construe predecessor transactions but the rule is still applicable. In the words of the FTT in Clipperton, ‘the statutory definition of the terms “settlement” and “settlor” was the same or very similar to that’ now found in ITTOIA.
That key restriction is this. Building on Chamberlain v IRC (1943) 25 TC 317 and Bulmer v IRC (1967) 44 TC 1, the House of Lords held in IRC v Plummer (1979) 54 TC 1 that a settlement can only be made where there is an ‘element of bounty’ in its creation.
The phrase is a little old fashioned, but the principle is clear. According to Clipperton (at para 228):
‘However, broadly framed as the settlements code is, the courts have been clear and consistent in their view that, on a purposive approach to the construction of the rules, they are intended to subject a person to income tax, as the “settlor” of a “settlement”, only where, under the relevant “arrangement”, that person is involved in the provision of an “element of bounty” to another person.’
The facts in Clipperton were as follows:
Applying the requirement for ‘bounty’ to these facts, the FTT in Clipperton continued (at para 228):
‘the appellants did not (whether directly or indirectly) provide to any material extent such an “element of bounty” under the plan. In causing the various steps involved in the plan to occur in their capacity as directors of the relevant companies, the appellants did not intend to and, the planning did not in fact, confer any material benefit on any other person. The sole purpose of the plan was for the vast majority of the relevant funds which [A Co] paid to [B Co] to be received by the appellants themselves, as duly happened. Under the plan, the appellants simply went from potentially having the ability to access those funds as the owners and managers of [A Co], to receiving the bulk of those funds directly into their own hands. Whilst a small amount of the funds were paid to a charity … that was simply the price which the appellants were prepared to pay for the receipt of the rest of the funds, so they thought, as tax free sums.’
As a result, the ITTOIA settlement provisions did not apply.
The second lesson for advisers is therefore that the ITTOIA settlement provisions should not apply – even if the FTT discerns a tax avoidance scheme – where the result of the arrangements viewed realistically is not to provide bounty but only to benefit the settlor himself.
A third lesson creeps in here, too, or tries to. The purposive approach to construction is extended by the FTT to permit it to ignore the benefit conferred on charities altogether. This worked in the taxpayers’ favour, but as an approach it is dubious. How far could it go? Clearly, for example, in the inheritance tax context, one should not ignore charitable bequests even if they were inserted merely to achieve a lower rate of tax on the residuary estate under IHTA 1984 Sch 1A.
And so, to Ramsay. Thirty years on, it might be time to stop regarding it as a doctrine of its own and to accept simply that tax statutes, as all others, need to be applied purposively. In the Hong Kong case of Collector of Stamp Revenue v Arrowtown Assets Ltd [2003] HKCFA 46, Ribeiro PJ formulated the concept as: ‘a general rule of statutory construction and an unblinkered approach to the analysis of the facts. The ultimate question is whether the relevant statutory provisions, construed purposively, were intended to apply to the transaction, viewed realistically.’
The Supreme Court liked this expression, but it has sounded a note of caution, commenting in UBS AG v HMRC [2016] STC 934:
‘it might be said that transactions must always be viewed realistically, if the alternative is to view them unrealistically. The point is that the facts must be analysed in the light of the statutory provision being applied. If a fact is of no relevance to the application of the statute, then it can be disregarded for that purpose. If, as in Ramsay, the relevant fact is the overall economic outcome of a series of commercially linked transactions, then that is the fact upon which it is necessary to focus. If, on the other hand, the legislation requires the court to focus on a specific transaction, as in MacNiven v Westmoreland Investments Ltd [2001] UKHL 6 and Barclays Mercantile Business Finance Ltd v Mawson [2004] UKHL 51, then other transactions, although related, are unlikely to have any bearing on its application.’
In Clipperton, the FTT applied this as follows (at para 127):
‘viewed in their entirety, the purpose and effect of the arrangements was to enable the appellants to receive the bulk of the £200,000 which B Co used to subscribe for an additional A share in A Co as a return on their shares ... The fact that the appellants/shareholders did not receive the sums direct ... but through a series of steps designed solely with the intention that they would not be subject to income tax on the sums does not detract from the nature of the receipt in their hands.’
This gave HMRC its victory. The income was simply reclassified as dividend income in the taxpayers’ hands.
Lesson four is therefore to beware of seeking to apply a mechanistic application of tax statutes, except where the legislation specifically requires it. There is a word of caution to be sounded here, however. The ‘real world’ effect of a transaction is not always black and white. A different tribunal might have decided that, being unable to pierce the corporate veil (see below), the FTT’s analysis in this case went too far.
The final three lessons from Clipperton can be more briefly stated.
Lesson five is drawn from how the FTT applied the rules set out by the Supreme Court in Prest v Petrodel Resources Ltd & others [2013] UKSC 34 on the circumstances in which it is permissible to pierce a corporate veil. In Prest, the Lord Sumption (at para 34) said: ‘the corporate veil may be pierced only to prevent the abuse of corporate legal personality. It may be an abuse of the separate legal personality of a company to use it to evade the law or to frustrate its enforcement.’
HMRC quite often seeks to elide one corporate personality with another, or with that of the shareholders. However, absent specific legislation permitting them to do so (such as the settlement provisions in ITTOIA 2005) or the particular circumstances set out by the Supreme Court, this is not permissible.
Lesson six is drawn from the FTT’s approach to the explanatory notes published with ITTOIA 2005: these are an aid to construction, but nothing more.
Finally, Clipperton reminds us that one FTT decision is not more than persuasive authority on future tribunals. Similar circumstances to those in Clipperton were differently decided in Dunsby v HMRC [2020] UKFTT 271 (TC), where the FTT held that the settlement provisions did apply. Which approach is to be preferred is a question for a superior court. The seventh lesson, therefore, is that taxpayers should seek separate advice on the strengths of their own cases before deciding that they will necessarily be treated identically to the decision of an existing FTT decision. The follower notice regime has had limited success in dealing with this issue in HMRC’s favour because so many FTT decisions are reliant on their specific facts or particular documents.
Like so much anti-avoidance legislation, the settlements provisions in ITTOIA 2005 Part 5 Chapter 5 are famously wide in scope.
ITTOIA 2005 s 624 provides that income which arises under a settlement is taxed on the settlor if the settlor retains an interest in the settlement. A ‘settlement’, for these purposes, ‘includes any disposition, trust, covenant, agreement, arrangement or transfer of assets (except that it does not include a charitable loan arrangement)’ (ITTOIA 2005 s 620). For good measure, s 620 continues: ‘A person is treated for the purposes of this Chapter as having made a settlement if the person has made or entered into the settlement directly or indirectly.’
Together with the fact that a settlor ‘has an interest’ in any property from which he or she can benefit, the numerous circumstances in which these provisions need to be borne in mind are clear.
The first lesson to be drawn from Clipperton v HMRC [2021] UK FTT 12 (TC) is that advisers overlook the ITTOIA settlement provisions at their peril. (I have recently made a High Court application to set aside a trust holding structure for an international business because the advisers at the time when it was set up had overlooked these same provisions. Ultimately, this provided a successful result for the client, but it caused the client quite a shock when the issue first came to light and has generated questions of professional negligence along the way.)
Looking at the width of the ITTOIA settlement provisions, the FTT in Clipperton was not minded to limit the scope of the word ‘arrangement’. The FTT recorded (at para 222):
‘it could be said that the “arrangement” in fact comprised all of the relevant steps involved in the planning given that all steps were clearly identified and planned from the outset and they were implemented within a short period of time … In the words of Lord Walker in [Jones v Garnett [2007] 1 WLR 2030] the entire structure was plainly “a definite scheme, the essential heads of which could have been put down in numbered paragraphs on half a sheet of notepaper”’.
Of course, it remains the case that any particular set of facts will need closely to be analysed and an ‘arrangement’ should never be assumed. There must be ‘sufficient unity’ between the various steps (see para 211 of Clipperton, applying Jones v Garnett and Crossland v Hawkins (1961) 39 TC 493). But the circumstances where the absence of an ‘arrangement’ will be a complete defence, especially where (as in Clipperton) the context is a ‘definite scheme’ or, to use less emotive language, a pre-planned series of transactions, are likely to be few – at least in HMRC’s eyes.
There is, however, at least one important restriction placed on the ITTOIA settlement provisions by binding judicial precedent, which Clipperton has applied with robust certainty. The higher authorities construe predecessor transactions but the rule is still applicable. In the words of the FTT in Clipperton, ‘the statutory definition of the terms “settlement” and “settlor” was the same or very similar to that’ now found in ITTOIA.
That key restriction is this. Building on Chamberlain v IRC (1943) 25 TC 317 and Bulmer v IRC (1967) 44 TC 1, the House of Lords held in IRC v Plummer (1979) 54 TC 1 that a settlement can only be made where there is an ‘element of bounty’ in its creation.
The phrase is a little old fashioned, but the principle is clear. According to Clipperton (at para 228):
‘However, broadly framed as the settlements code is, the courts have been clear and consistent in their view that, on a purposive approach to the construction of the rules, they are intended to subject a person to income tax, as the “settlor” of a “settlement”, only where, under the relevant “arrangement”, that person is involved in the provision of an “element of bounty” to another person.’
The facts in Clipperton were as follows:
Applying the requirement for ‘bounty’ to these facts, the FTT in Clipperton continued (at para 228):
‘the appellants did not (whether directly or indirectly) provide to any material extent such an “element of bounty” under the plan. In causing the various steps involved in the plan to occur in their capacity as directors of the relevant companies, the appellants did not intend to and, the planning did not in fact, confer any material benefit on any other person. The sole purpose of the plan was for the vast majority of the relevant funds which [A Co] paid to [B Co] to be received by the appellants themselves, as duly happened. Under the plan, the appellants simply went from potentially having the ability to access those funds as the owners and managers of [A Co], to receiving the bulk of those funds directly into their own hands. Whilst a small amount of the funds were paid to a charity … that was simply the price which the appellants were prepared to pay for the receipt of the rest of the funds, so they thought, as tax free sums.’
As a result, the ITTOIA settlement provisions did not apply.
The second lesson for advisers is therefore that the ITTOIA settlement provisions should not apply – even if the FTT discerns a tax avoidance scheme – where the result of the arrangements viewed realistically is not to provide bounty but only to benefit the settlor himself.
A third lesson creeps in here, too, or tries to. The purposive approach to construction is extended by the FTT to permit it to ignore the benefit conferred on charities altogether. This worked in the taxpayers’ favour, but as an approach it is dubious. How far could it go? Clearly, for example, in the inheritance tax context, one should not ignore charitable bequests even if they were inserted merely to achieve a lower rate of tax on the residuary estate under IHTA 1984 Sch 1A.
And so, to Ramsay. Thirty years on, it might be time to stop regarding it as a doctrine of its own and to accept simply that tax statutes, as all others, need to be applied purposively. In the Hong Kong case of Collector of Stamp Revenue v Arrowtown Assets Ltd [2003] HKCFA 46, Ribeiro PJ formulated the concept as: ‘a general rule of statutory construction and an unblinkered approach to the analysis of the facts. The ultimate question is whether the relevant statutory provisions, construed purposively, were intended to apply to the transaction, viewed realistically.’
The Supreme Court liked this expression, but it has sounded a note of caution, commenting in UBS AG v HMRC [2016] STC 934:
‘it might be said that transactions must always be viewed realistically, if the alternative is to view them unrealistically. The point is that the facts must be analysed in the light of the statutory provision being applied. If a fact is of no relevance to the application of the statute, then it can be disregarded for that purpose. If, as in Ramsay, the relevant fact is the overall economic outcome of a series of commercially linked transactions, then that is the fact upon which it is necessary to focus. If, on the other hand, the legislation requires the court to focus on a specific transaction, as in MacNiven v Westmoreland Investments Ltd [2001] UKHL 6 and Barclays Mercantile Business Finance Ltd v Mawson [2004] UKHL 51, then other transactions, although related, are unlikely to have any bearing on its application.’
In Clipperton, the FTT applied this as follows (at para 127):
‘viewed in their entirety, the purpose and effect of the arrangements was to enable the appellants to receive the bulk of the £200,000 which B Co used to subscribe for an additional A share in A Co as a return on their shares ... The fact that the appellants/shareholders did not receive the sums direct ... but through a series of steps designed solely with the intention that they would not be subject to income tax on the sums does not detract from the nature of the receipt in their hands.’
This gave HMRC its victory. The income was simply reclassified as dividend income in the taxpayers’ hands.
Lesson four is therefore to beware of seeking to apply a mechanistic application of tax statutes, except where the legislation specifically requires it. There is a word of caution to be sounded here, however. The ‘real world’ effect of a transaction is not always black and white. A different tribunal might have decided that, being unable to pierce the corporate veil (see below), the FTT’s analysis in this case went too far.
The final three lessons from Clipperton can be more briefly stated.
Lesson five is drawn from how the FTT applied the rules set out by the Supreme Court in Prest v Petrodel Resources Ltd & others [2013] UKSC 34 on the circumstances in which it is permissible to pierce a corporate veil. In Prest, the Lord Sumption (at para 34) said: ‘the corporate veil may be pierced only to prevent the abuse of corporate legal personality. It may be an abuse of the separate legal personality of a company to use it to evade the law or to frustrate its enforcement.’
HMRC quite often seeks to elide one corporate personality with another, or with that of the shareholders. However, absent specific legislation permitting them to do so (such as the settlement provisions in ITTOIA 2005) or the particular circumstances set out by the Supreme Court, this is not permissible.
Lesson six is drawn from the FTT’s approach to the explanatory notes published with ITTOIA 2005: these are an aid to construction, but nothing more.
Finally, Clipperton reminds us that one FTT decision is not more than persuasive authority on future tribunals. Similar circumstances to those in Clipperton were differently decided in Dunsby v HMRC [2020] UKFTT 271 (TC), where the FTT held that the settlement provisions did apply. Which approach is to be preferred is a question for a superior court. The seventh lesson, therefore, is that taxpayers should seek separate advice on the strengths of their own cases before deciding that they will necessarily be treated identically to the decision of an existing FTT decision. The follower notice regime has had limited success in dealing with this issue in HMRC’s favour because so many FTT decisions are reliant on their specific facts or particular documents.
