Mr Justice Park hearing the appeal, with Mr Malcolm Gammie for Mr Jones and Mr Rupert Baldry for the Inland Revenue.
This is the case of a computer consultant and his wife, who have apparently fallen foul of semi-dormant settlement legislation in S660A .
By jointly owning their company, they have been able to take lower than market rate salaries, and share the company’s profits, thus enjoying the ensuing tax advantages jointly.
The Inland Revenue has objected to this, because Mr Jones is the main source of the company’s income. The Revenue are hoping to make the settlement legislation in S660A bite on the Joneses and if they succeed, over a hundred thousand other husbands and wives in business may fall victim to discovery assessments.
The case was taken to the Special Commissioners, where controversially, the chairman of the two commissioners, Dr Brice used her casting vote to vote twice, and overruled the other commissioner, Miss Powell, who disagreed, almost point for point on every issue concerning the case.
Mr Malcolm Gammie opened for the taxpayers and up for consideration was the matter of the casting vote of Dr Brice at the Special Commissioners’ Hearing:
- Did she exercise her vote properly?
- Should she have exercised her vote in the favour of the defendant (Mr Jones)?
- Did she reach a correct decision on the settlement?
He could find little authority as to how a tribunal chairman should use a casting vote in law as the Special Commissioners Jurisdiction Procedure Regulations give few details and his suggestion was that a casting vote should be exercised in the best interests of persons affected by the vote, and should apply as follows:
- If the Inland Revenue was seeking to bring a taxpayer into the scope of tax, a casting vote should find for the taxpayer, conversely,
- If the taxpayer was seeking to claim a relief, the casting vote should be in favour of the Inland Revenue.
Mr Justice Park was perplexed as to why he should not refer this back to Dr Brice for re-consideration, under the terms of a judicial review. Mr Gammie replied that:
- It was important for proceedings that this situation with the Special Commissioners should be resolved, and this was an opportunity where some guidance could be gained for the future.
- Neither party were keen on a judicial review in this case, and,
- There were not the funds available to deal with one as well.
Mr Gammie felt that neither Special Commissioner had given reasons as to why they had applied the casting vote as if it gave Dr Brice two votes.
Turning to what everyone regards as the more interesting side of the case, that concerning S660A, Mr Gammie commenced to look into the question as to whether there was a settlement, was there any bounty in existence, and did parliament really mean S660A to apply to husbands and wives in business together, in any case?
Mr Baldry commenced for the Inland Revenue with a run through the procedural aspects. This was to show why, in the Revenue’s view, the Special Commissioners had applied the second or casting vote correctly. The Revenue’s main points were as follows:
- Were the dividends paid to Mrs Jones income arising from an arrangement under the settlement provisions?
- Was that arrangement covered by the exemption in S660A?
He continued to look at the authorities on settlements, arrangements and dispositions, and then to go through Mr Gammie’s case, with that of Miss Powell’s judgement.
In asking questions directed by Mr Justice Park it became very clear that the Revenue were interested in this case because of the nature of the business –a personal service company. Mr Baldry would not be drawn as to the fate of other types of husband and wife business in conjunction with the settlements provisions if the Revenue wins this case.
It is fair to say that all observers realise that this is yet another attack on personal service companies.
It is very easy to go round and round in complete circles over this case, and this is precisely why the Special Commissioners could not agree, and why Mr Justice Park is going to have quite a difficult time in preparing a judgement.
He thinks it unlikely that he will be able to reach any conclusions for at least four weeks.
Editors note (Feb 2012):
The original settlements legislation dates back to the 1930s and was subsequently updated first in 1988, when it became the more familiar Section 660. It was changed again in 2005 when it was updated and rewritten into its current form as Section 624 of the Income Tax (Trading and Other Income) Act (ITTOIA) 2005. See more information on the current settlements legislation.