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Loneliness of long-distance Gunner

In my article of three weeks ago (which I wrote in happier times – I

had not yet spent a miserable Saturday afternoon at the Reebok

Stadium and a predictably disappointing Sunday watching on TV as

Sperz rolled over against the Mancs) I looked at the worrying reports

of increased Inland Revenue antagonism towards the payment of

dividends to shareholders in private companies who do not work full

time in the business and who are related to shareholders who do work

full time in the business – the most obvious example being

non-working spouses.

The basis of the Revenue&#39s argument is understood to be that there

could have been a settlement of income and so the spousal exemption

from the anti-avoidance provisions would not apply. If the argument

is successful, then the dividends received by the non-worker would be

assessed on the working shareholder, in other words, the settlor. The

argument could also be used to assess partnership income, that is,

share of profit, accruing to a non-working or undercontributing

partner on the full-time working partner.

All very worrying and all very relevant to anyone advising private

businesses on tax and financial planning. But there&#39s more.

In its latest Tax Bulletin, the Inland Revenue gives some very useful

additional guidance to its thinking on the important subject of the

application of the settlements legislation in sections 660A-660G ICTA


The Tax Bulletin is quite comprehensive and provides:

•Helpful clarification on what could be caught and

•Some welcome reassurance on what will not be caught.

Nevertheless, it reinforces the fact that there are circumstances

where the settlements legislation can apply to husband/wife

businesses, incorporated or unincorporated.

The Tax Bulletin (an excellent publication) starts by stating that,

in general, “the settlements legislation can apply where an

individual enters into an arrangement to divert income to someone

else and in the process tax is saved. So long as those arrangements


•Bounteous or

•Not commercial or

•Not at arm&#39s length or

•In the case of a gift between spouses, wholly or substantially

a right to income.”

So how does the legislation apply to non-trust situations?

A very small percentage of the enquiries currently undertaken by the

Revenue each year involve the settlements legislation and non-trust

situations. However, the Revenue does seek tax, interest and

penalties in appropriate cases. It is not possible to provide a

definitive list of the issues the Revenue looks for when deciding

which cases to take up for enquiry but some of the factors that it is

looking for might include:

•Main earner drawing a low salary, leading to enhanced profits

from which dividends can be paid to shareholders who are friends or

family members.

•Disproportionately big returns on capital investments.

•Differing classes of shares, enabling dividends to be paid only

to shareholders paying lower rates of tax.

•Dividends being waived so that higher dividends can be paid to

shareholders paying lower rates of tax.

•Income being transferred from the person making most of the

profits of a business to a friend or family member who pays tax at a

lower rate.

There are a wide range of arrangements that can potentially be caught

by the settlements legislation which do not involve a trust. Each

case will depend on the facts but some of the most common situations

which are seen by the Revenue are:

•Shares subscribed at par that carry only restricted rights.

•Shares given away that carry only restricted rights.

•Shares subscribed at par in a company by someone else where the

income of the company derives mainly from a single employee.

•A share in a partnership gifted or transferred below value.

•Dividend waivers.

•Situations where dividends are paid only on certain classes of shares.

•Dividends paid to the settlor&#39s minor children.

This list is by no means definitive of situations to which the

settlements legislation can be applied.

So, let us look at some examples of situations where, according to

the Tax Bulletin, the legislation (in the Revenue&#39s opinion) could

apply. The Tax Bulletin gives plenty of examples. Here are a few of

them which I believe will be helpful to readers.

Issued shares with restricted rights

An engineering company has 100 ordinary £1 shares. Mr A and Mr B

own 50 ordinary shares each. They create a new class of B shares

which carry no voting rights and no assets in a winding-up.

They issue 50 B shares to each of their wives. Dividends voted on

those B shares would be treated as the income of Mr A and Mr B rather

than their wives as the B dividends are from shares that are wholly

or substantially a right to income and so not exempted from section

660A by section 660A(6).

This example is based on the High Court case of Young

Pearce; Young

Scrutton [1996] STC 743.

I will continue this article next week, by which time the Premiership

will have been decided, if it hasn&#39t been before then.


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