Analysis
Mr Mark Dunsby participated in a tax avoidance scheme devised and promoted by De Sales Promotions Ltd. As part of the scheme, in March 2013, Mr Dunsby had a company, of which he was sole shareholder and director, issue a non-voting share to a non-resident individual, Mrs Fiona Gower. Mrs Gower established a trust and settled the share in the trust, with the benefit of any dividends being for Mr Dunsby, and Mr Dunsby’s company paid £200,000 as a dividend in respect of the settled share. As a result of the scheme, Mr Dunsby received £195,400. HMRC issued a closure notice dated 31 March 2017, bringing the £195,400 into account as taxable income. Mr Dunsby appealed against such amendment.
The issues for consideration were whether income tax was chargeable on the £195,400 under s383 of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA), on the £200,000 under s619 of the ITTOIA or on the £200,000 under the transfer of assets abroad regime under Chapter 2 of Part 13 of the Income Tax Act 2007 (ITA). At first instance, the First-tier Tribunal decided that s383 did not apply but that the £200,000 was taxable under s619 or under the transfer of assets abroad regime. Mr Dunsby appealed to the Upper Tribunal and HMRC also sought to challenge the decision on s383.
Held:
- 1) It was appropriate to waive the requirement for HMRC to apply to the FTT for permission to appeal in respect of the issue under s383. This issue was considered in accordance with relief from sanction principles. In this matter, previous authority had indicated that an application for permission to appeal was not required in the circumstances and the point was only raised two weeks before the hearing. Further, Mr Dunsby had prepared fully in respect of the issue under s383 and, if HMRC was successful, this would have the result of reducing the taxable income to £195,400. Given the waiver, it was unnecessary to decide whether HMRC required permission to appeal.
- 2) In respect of the issue under s383, on the face of the transactions, Mr Dunsby was a person receiving or entitled to the distribution for the purpose of s385 of the ITTOIA. It was not required that the taxable person be the holder of the shares on which the distribution is made. Accordingly, the £195,400 was taxable income under s383.
- 3) In respect of the scope of the settlement of the subject share, without stating an exhaustive test, a relevant question was whether the act of settlement, narrowly defined, had an economic logic that was freestanding and severable from the preparatory steps leading to the settlement. Here, the creation of the trust by Mrs Gower and the settlement of the subject share on such trust had no independent economic logic and the settlement could only sensibly be defined by reference to the sequence of transactions that constituted the overall scheme. It followed that Mr Dunsby was the settlor and, if HMRC had not succeeded on s383, the £200,000 would be taxable income under s619.
- 4) Even if the settlement were narrowly defined, the settlor would be Mr Dunsby and not Mrs Gower. Mr Dunsby was the effective settlor and Mrs Gower was effectively only an agent or nominee of Mr Dunsby.
- 5) If Mrs Gower were a settlor, the £200,000 would still be taxable income pursuant to s645 of the ITTOIA. Section 645 did not address a situation of multiple settlors but instead addressed a situation of mixed property. Here, Mr Dunsby, not Mrs Gower, had indirectly provided the property.
- 6) In respect of the transfer of assets abroad regime, Condition B of s721 of the ITA asks whether income would be chargeable to income tax if (in the counterfactual case) it had belonged to the taxpayer and had been received by them in the UK. Therefore, even if Mrs Gower were the settlor, the £200,000 would nevertheless be taxable.
Continue reading "Dunsby v HMRC [2022] WTLR 81"