Case Report: Donovan  TC 03188
 UKFTT 048 (TC)
Judge Jennifer Blewitt, Ruth Watts Davies
Decision released 6 January 2014
Settlement – Income arising under a settlement where settlor retains interest – appellants owning bulk shares in company – appellants waiving right to receive dividends – appellants’ wives receiving significant dividend payments –appeals dismissed.
The First-tier Tribunal dismissed the taxpayers’ appeals, ruling that the appellants’ dividend waivers in favour of their wives constituted a settlement for income tax purposes. The Tribunal also held that discovery assessments raised by HMRC were valid.
The appellants are directors and shareholders of Victory Fire Limited (the company) and the appellants’ wives are also shareholders. In 2009 the company declared an interim dividend of £3,200 per ordinary share in respect of the accounting period ended 31 March 2010. On the same date, the appellants signed deeds of dividend waiver, waiving entitlement to the interim dividend arising on their entire holding of ordinary shares in the company from that date for the period of one day. On the same day, the appellants’ wives were issued with dividend vouchers showing payments of £32,000 and a 10 per cent tax credit of £3,555.55. On 8 April 2009, the company declared an interim dividend of £825 per ordinary share in respect of the accounting period ended 31 March 2010. On the same date, the appellants’ wives signed deeds of dividend waiver, waiving entitlement to the interim dividend arising on their entire holding of ordinary shares in the company from that date for a period of one day. On the same day, the appellants were issued with dividend vouchers showing a dividend payment of £33,000 and a 10 per cent tax credit of £3,666.66.
HMRC submitted that the intention of the dividend waivers was to allow higher dividends to be paid to the appellants’ wives than their respective shareholdings entitled and lower dividends to be received by the appellants to take advantage of the wives’ unused basic rate band of tax. HMRC also contended that both the appellants’ dividend waivers and the consequent payment of dividends to their wives constituted an ‘arrangement’ in accordance with s. 620 ITTOIA 2005 and that as it was the appellants who waived the dividends, it was the appellants who were the settlors.
The appellants’ contended that the reason for executing the dividend waiver was to maintain reserves and cash balances in order to fund the purchase of the company’s own freehold property. They submitted that the appellants’ wives paid £1 each for the allotted shares and that although no monies were exchanged the accounts were altered to reflect this position. In such circumstances the shares constituted a gift and therefore fell within the exception in s. 626 ITTOIA 2005.
The First-tier Tribunal, dismissing the appeals, found that on the balance of probabilities the intention of the dividend waivers by the appellants was to bring about a near equalisation of the appellants’ and their wives’ dividend income thereby reducing their aggregate liability to income tax. If the intention had been to maintain reserves and cash balances this could have been achieved by other means such as voting a lower dividend per share. However, the Tribunal following the guidance in Jones (Jones v Garnett  BTC 476) concluded that irrespective of whether or not there was an intention to avoid tax, an arrangement, and therefore a settlement, clearly existed. There was no evidence to support the assertion that the share allotments were ‘gifts’ and therefore the exception could not be applied to this case.
On the issue of the discovery assessments, the Tribunal did not accept the appellants’ argument that the lack of a witness giving oral evidence for HMRC made its case in any way deficient. The statutory test, whether information was available upon which a hypothetical officer could reasonably have been expected to be aware of the insufficiency of the appellants’ self-assessment, would not have been altered by live evidence. HMRC concluded that there was not sufficient evidence available to HMRC at that time and were satisfied that the discovery assessments were valid.
It was not surprising that the Tribunal found in favour of HMRC in this case. There was no evidence to support the appellants’ assertion that there was a commercial purpose to the dividend waivers, and even if the assertion was correct, there still existed a ‘plan’ in the minds of the appellants which supported HMRC’s argument that an arrangement, and therefore a settlement, existed. The appellants’ argument that the waivers constituted outright gifts had not been raised prior to the hearings and the appellants’ representative only became aware of the argument when HMRC outlined its position on the issue. In the absence of any evidence to support this fact, the Tribunal could not be satisfied that the exception could be applied in this case.