[COURT OF APPEAL]

CROSSLAND (INSPECTOR OF TAXES) v. HAWKINS.

Revenue - Income tax - Settlement - Infant children, on - Series of transactions by parent to avoid surtax on large earnings - Subsequent settlement on children by grandfather - Payment of incomes for children out of dividends from company formed to exploit parent's services - Whether series of transactions not contemporaneous with settlement an "arrangement" - Whether funds for purpose of the settlement provided indirectly by parent - Whether children's income income of parent for tax purposes - Income Tax Act, 1952 (15 & 16 Geo. 6 & 1 Eliz. 2, c. 10), ss. 397 (1) (2), 403.

Revenue - Case stated - Conclusion of mixed fact and law - Conclusion unreasonable - Right of appellate court to interfere.

An actor, whose services had a high market value, claimed, on behalf of his three infant children, repayment of allowances on small incomes paid for their benefit by the trustees of a settlement made by their maternal grandfather out of his own moneys on March 3, 1955. The inspector of taxes opposed the claim on the ground that a series of transactions preceding and following the settlement in date constituted an "arrangement" and therefore a settlement within the meaning of section 403 of the Income Tax Act, 1952,¹ that the father was the "settlor" within that section, and accordingly that the incomes in question fell to be treated, under section 397 (1) of the Act,¹ as the income of the father for tax

1 Income Tax Act, 1952, s. 397: "(1) Where, by virtue or in consequence of any settlement to which this Chapter applies and during the life of the settlor, any income is paid to or for the benefit of a child of the settlor in any year of assessment, the income shall, if at the commencement of that year the child was an infant and unmarried, be treated for all the purposes of this Act as the income of the settlor for that year and not as the income of any other person. (2) This Chapter applies to every settlement, wheresoever it was made or entered into, and whether it was made or entered into before or after the passing of this Act, except a settlement made or entered into before the 22nd

purposes. The commissioners found that on December 4, 1954, a limited company, of which the father was a director but not a shareholder, was formed with a nominal capital of £100, two shares only being issued to the subscribers to the memorandum, and later transferred to the father's wife and his accountant; that on December 10, 1954, the father agreed to serve the company as an actor in films for a modest weekly salary and expenses; that on March 3, 1955, the maternal grandfather of the children settled £100 of his own moneys on them, trustees being appointed to the settlement; that on March 31, 1955, the trustees used the trust funds to acquire the 98 unissued shares in the company; that in 1956, the company received £25,000 for the father's services as an actor in a film production, and paid him the agreed weekly salary for each week of service; and that on October 18, 1956, the company declared an interim dividend of £500 free of tax, which the trustees distributed for the benefit of the children.

The commissioners, having heard evidence, found that the father was aware that steps were being taken to put into effect proposals of the accountants and solicitors but that he was not consulted with regard to them, and was not present at any meeting when the settlement was discussed and made. They concluded that (i) there was no arrangement to which section 397 of the Income Tax Act, 1952, should apply, and (ii) the father was not a settlor within the meaning of section 403; and they allowed the claim. The trial judge affirmed that decision. On appeal by the Crown:-

Held, allowing the appeal, (1) that there was a sufficient unity about the series of transactions, namely, the formation of the company, the service agreement, and the deed of settlement, although it followed at a later date, to constitute an "arrangement" and therefore a "settlement" within section 403 of the Act of 1952; that in relation to that settlement the father was the "settlor" within the same section, having indirectly provided funds for the purpose of that settlement; and that accordingly, the income in question fell, under section 397, to be treated as the income of the settlor and not as that of the children. Nothing in the language of section 397 required that the whole of the eventual arrangement should be in contemplation from the outset; and where a series of transactions took place within one year of assessment, with the ultimate object of securing money free from the burden of surtax, the fact that the final step to secure that result, namely, the deed of settlement, was decided on at a later date, was not sufficient to

day of April, 1936, which immediately before that date was irrevocable."

S. 403: "In this Chapter - ... 'settlement' includes any disposition trust, covenant, agreement, arrangement or transfer of assets; 'settlor,' in relation to a settlement, includes any person by whom the settlement was made or entered into directly or indirectly, and in particular (but without prejudice to the generality of the preceding words of this definition) includes any person who has provided or undertaken to provide funds directly or indirectly for the purpose of the settlement, or has made with any other person a reciprocal arrangement for that other person to make or enter into the settlement; ..."

rob the scheme of the necessary unity to justify its being called an "arrangement."

(2) That on the facts of this case the father indirectly provided funds for the deed of settlement, regarded alone, despite the finding that he did not concern himself with some of the steps in the legal machinery, for a taxpayer did not avoid the incidence of section 397 by giving carte blanche to his solicitors and accountants to effect a scheme for the benefit of his family and refusing to concern himself with its precise form.

(3) That the court was entitled to reject the conclusion of the commissioners that there was here no "arrangement" and that the father was not a "settlor" within section 403, for that conclusion was a mixed finding of law and fact; and if it were a finding of fact it could not be regarded as reasonable.

Decision of Danckwerts J. reversed.

APPEAL from Danckwerts J. on a case stated by the Commissioners for the General Purposes of the Income Tax.

A taxpayer, John Edward Hawkins ("Jack Hawkins") an actor, claimed repayment of income tax on behalf of his three minor children, under Schedule 6 of the Income Tax Act, 1952, for personal allowances for the year of assessment ending April 5, 1957. The inspector of taxes opposed the claim. At a meeting of the commissioners to consider the claim the taxpayer, his father-in-law, Horace George Beadle, and his accountant, John Clement Yeates, gave evidence. The following facts were proved or admitted at the meeting: (a) a company was formed on December 3, 1954, under the Companies Act, 1948, in the name of "Roehampton Productions Ltd.," with a capital of £100 divided into 100 shares of £1 each, of which two shares were issued to the subscribers to the memorandum of association [clerks in the office of the taxpayer's solicitors], from whom they were subsequently transferred as to one share jointly to the taxpayer's wife, Doreen Mary Hawkins, and John Clement Yeates, chartered accountant, and as to the other share to Yeates; (b) the taxpayer was not at any time a shareholder in the company, although he was a director; (c) on December 10, 1954, a service agreement was made between the taxpayer and the company, by which the taxpayer agreed to render to the company his services on the terms and conditions therein contained; (d) by a settlement dated March 3, 1955, and made between the taxpayer's father-in-law, Beadle, of the one part, and the taxpayer's wife and accountant as trustees, of the other part, the sum of £100 was settled by Beadle out of his own moneys for the benefit of his grandchildren and the remoter issue. The taxpayer did not supply Beadle with

any moneys for that purpose. (e) By a deed of appointment of even date with the settlement expressed to be supplemental to the settlement and made by the trustees, they revocably appropriated the trust property from the date of the settlement in trust for such of the children as should attain the age of 25 in equal shares. (f) The trustees used the funds of the settlement to subscribe on March 31, 1955, for the 98 unissued shares of the company. (g) During the year to April 30, 1957, the taxpayer acted in a film "Fortune is a Woman," the company receiving £25,000 for providing the taxpayer's services. The company paid the taxpayer £900 for 12 weeks' work at the rate of £75 per week made up as to £50 per week salary plus £25 per week for expenses. (h) On October 18, 1956, the company declared and paid an interim dividend for the year to April 30, 1957, of £500 free of tax, which the trustees allocated and paid for the benefit of the children after deduction of tax as follows: (i) Nicholas, £225 3s. 9d.; (ii) Andrew, £153 19s. 11d.; (iii) Caroline, £104 13s.

The tax suffered in respect of that dividend was the subject of the repayment claim in the appeal. (i) The taxpayer was under contract to J. Arthur Rank Productions Ltd. and to a company called Westmead Productions Ltd. to act for those companies, but those contracts were not exclusive and left the taxpayer free to enter into the contract which he did with the company. (j) The taxpayer was aware that steps were being taken to put into effect proposals of the accountants and solicitors, but he was not consulted with regard to them. He was not present at any meeting when the matter of the settlement was discussed or when the deed of settlement was made.

It was contended for the inspector of taxes: (a) that the following events, namely, (i) the formation of the company on December 3, 1954; (ii) the service agreement of December 10, 1954; (iii) the settlement of March 3, 1955; and (iv) the acquisition by the trustees on March 31, 1955, of the shares in the company together formed an "arrangement" within the meaning of section 403 of the Income Tax Act, 1952, and thus a "settlement" within the same section; and (b) that in relation to the aforesaid "settlement" the taxpayer was the "settlor" within the meaning of section 403 as being either the person by whom such "settlement" was made or entered into directly or indirectly, or as being the person who had provided funds directly or indirectly for the purpose of such settlement; (c) that, accordingly, under section 397 of the Act of 1952 the income in

question fell to be treated as the income of the taxpayer; and (d) the repayment claimed should be refused.

For the taxpayer it was contended: (a) that the settlement under which his children derived the income in question was the written settlement of March 3, 1955, and the settlor in relation to that settlement was Beadle; (b) the taxpayer was not party to any arrangement in connection with the settlement, nor did he provide or undertake to provide funds for the purpose thereof, and he was not a settlor in relation thereto within the meaning of section 403 or section 397 of the Act of 1952; (c) accordingly, the taxpayer as the guardian of the children was entitled to repayment of the personal allowances due to the three children.

Annexed to and forming part of the case were the following documents, some of which are referred to in the judgments of the Court of Appeal: memorandum and articles of association of Westmead Productions Ltd.; service agreement with Westmead Productions Ltd.; memorandum and articles of association of Roehampton Productions Ltd.; service agreement with Roehampton Productions Ltd.; settlement dated March 3, 1955; deed of appointment dated March 3, 1955; accounts of Roehampton Productions Ltd. for the two years to April 30, 1957.

The commissioners, after considering the evidence submitted and reviewing the arguments, unanimously allowed the claims and gave their decision as follows: (1) there was no arrangement to which section 397 of the Income Tax Act, 1952, should apply, and (2) the taxpayer was not a settlor within the meaning of section 403 of the Act. They accordingly ordered that the allowances - small income relief and personal allowances - claimed be allowed.

The inspector of taxes appealed, the question of law being whether on the facts stated and a proper construction of sections 397 and 403 of the Act of 1952, the taxpayer was entitled to repayment of the allowances claimed in respect of the payments made by the trustees for the year of assessment 1956-57.

On appeal, Danckwerts J. on November 14, 1960, affirmed the decision of the commissioners in favour of the taxpayer, holding that the taxpayer could not be regarded as having provided the funds for the settlement of March 31, 1955, since he was not the settlor of that settlement, had contributed nothing to it, and that as it came later than the formation of the company and the services agreement of December 1954, those transactions could not be read into the settlement. Moreover, the trial judge

took the view that paragraph (j) of the stated case was a finding that there was no comprehensive arrangement at the outset of which the deed of settlement formed part. He concluded that the taxpayer was not a party in any way to any scheme under which a company was to be formed, a contract would be made with the company for his services, and then a settlement would be made which would involve benefits from the first transactions for his children: and he, accordingly, dismissed the appeal of the Crown. The Crown appealed.

B. L. Bathurst Q.C., E. Blanshard Stamp and Alan Orr for the Crown. The settlement of March 3, 1955, is clearly a settlement to which section 397 of the Act of 1952 applies, and the main question is whether the taxpayer was the "settlor" in relation to that settlement, having regard to the wide terms of the definition of "settlor" in section 403, as including any person who has provided funds "indirectly" "for the purpose of the settlement." The court may look at the surrounding circumstances and trace the funds to their original source, namely, the service agreement entered into, on December 10, 1954, with a company which could not at that date have paid the taxpayer any salary, and under which the taxpayer agreed to give his services at a fraction of their market value to that company. Those circumstances lead to the conclusion that the father provided the funds indirectly for the purpose of the settlement. In Copeman v. Coleman² there was no "settlement" outside the company arrangements, but the court held that the father was the settlor who had provided funds indirectly for the artificial "settlement" which the Crown had to show. The task is easier here, for there is an admitted settlement.

Alternatively, the various transactions themselves constituted a settlement to which section 397 applies, since by definition in section 403 "settlement" includes "any ... arrangement": see, on the meaning of "arrangement," Inland Revenue Commissioners v. Payne, per Lord Greene M.R.³; Inland Revenue Commissioners v. Morton, per Lord Fleming⁴; Inland Revenue Commissioners v. Prince-Smith, per Macnaghten J.,⁵ and Newton v. Commissioner of Taxation of the Commonwealth of Australia.⁶

2 [1939] 2 K.B. 484; [1939] 3 All E.R. 224.

3 (1940) 23 T.C. 610, 626, C.A.

4 1941 S.C. 467, 476.

5 [1943] 1 All E.R. 434, 437.

6 [1958] A.C. 450, 465; [1958] 3 W.L.R. 195; [1958] 2 All E.R. 759, P.C.

In Chamberlain v. Inland Revenue Commissioners Lord Macmillan⁷ took a narrower view of "arrangement," but it is distinguishable on the facts.

The taxpayer here provided the funds when he acted for the third party and earned the money which went to the company at a time when he knew that all the issued shares in the company were in the hands of the trustees. The income of the children originated from the taxpayer either because it was income from the valuable service agreement which he made with the company or because it was income provided indirectly by his employers. In either case it must be treated as the taxpayer's income under section 397. See also section 401 of the Act, dealing with the case where there are two settlors, and enacted after the decision in Lord Herbert v. Inland Revenue Commissioners.⁸ Here there are two settlors, the grandfather and the taxpayer, but under section 401 (1) only the father is liable for the income tax.

As to the odd finding of the commissioners in paragraph 2 (j) of the case, the court is not obliged to shut its eyes to reality and accept that the taxpayer did not know what the proposals were, for the court knows that he was a director of the company and therefore party to the issue of the 98 shares to the trustees. He knew what it was all about. He had a scheme put before him and told his professional advisers to get on with it; but in the absence of any contrary finding by the commissioners the court is asked to find that he did know about the scheme even though he did not know its details and technicalities. On either of the two grounds the income in question must be treated as the taxpayer's income.

R. E. Borneman Q.C. and C. N. Beattie for the taxpayer. The only motive for the transactions which took place here was to spread the load of surtax. It has long been common practice among persons with high earnings which may be short-lived to enter into agreements of the kind here in question, with companies, not with the object of making a settlement on their children but in order to minimise their own tax liability.

The Crown's attack from the outset was on what they claimed was an "arrangement," and therefore everyone who could give relevant evidence was called before the commissioners, who found that there was no "arrangement." It is conceded that if there was from the beginning a concerted plan, there is an

7 (1943) 59 T.L.R. 343, 345-346; [1943] 2 All E.R. 200, H.L.

8 [1943] K.B. 288; 59 T.L.R. 171; [1943] 1 All E.R. 336.

"arrangement," and therefore a "settlement," within section 403 and the taxpayer is a "settlor." But here, having formed the company and entered into the service agreement, this taxpayer had no further concern with the matter; and, as the trial judge found, he was in no way concerned in the settlement by his father-in-law on his children.

[UPJOHN L.J. But the court may infer from the findings that the taxpayer was the beneficial owner of the shares when the company was formed and that the solicitors' clerks to whom the two original shares were issued were his nominees?]

In the absence of any such finding in the case it cannot be assumed that the taxpayer was at any time the beneficial owner of the shares.

The commissioners' finding in paragraph 7 that there was no arrangement within section 403 to which section 397 applies is a finding of fact, and the court can only interfere with it if there was no evidence to justify that finding: see Anderson v. Inland Revenue Commissioners,⁹ and Smart v. Inland Revenue Commissioners, per Croom-Johnson J.,¹⁰ on the impropriety of filling a gap in the evidence by drawing an inference. Here all the evidence was gone into and therefore the finding in paragraph 7 cannot be impugned. All that the court can do is to send the case back for further details.

In order to succeed, the Crown must show (a) that there was an "arrangement" and (b) that the taxpayer was the settlor. When the legislature threw its net so widely, as it did in this definition of "settlor," it also indicated by the phrase "for the purpose of" - in the singular - that the court cannot look beyond the point of time when the settlement is made unless other things remain to be done. The only settlement which can be challenged under section 403 is the actual gift of the grandfather, and before it can be said that money or funds have been provided "for the purpose of" that settlement it must be shown that they were provided either prior to or contemporaneously with the settlement. "For the purpose of the settlement" means "for the purpose of being settled." Reliance is placed on the use of the past tense in section 403: "by whom the settlement was made" and "has provided," showing that the relevant date is the point of time at which the settlement is made. If funds were provided after the grandfather's settlement, that would constitute a separate "settlement"; that does not arise

9 (1933) 18 T.C. 320, 326.

10 (1949) 29 T.C. 338, 344.

here. On the admitted facts this taxpayer had provided and agreed nothing on March 3, 1955, unless it is said that there was an "arrangement." It was not until March 31, 1955, when the trustees used the trust money to buy the shares in the company, that the service agreement came into the settlement. Further, prima facie, the provision of services is not the provision of "funds"; but even if "funds" includes "services," they were not provided for the purpose of the settlement of March 3.

The authorities cited as to the meaning of "arrangement" are not challenged, but what was said by Lord Macmillan in Chamberlain v. Inland Revenue Commissioners¹¹ is support for the present submission that, before an "arrangement" can be found, there must be a "single scheme." Here there was no single unified scheme and no arrangement from beginning to end. Section 401 applies to the case where there are two settlors, but here there was only one - the grandfather - so that section 401 does not apply.

Bathurst Q.C. in reply. The commissioners' finding in paragraph 7 that there was no "arrangement" is a conclusion of law or at most of mixed fact and law and therefore the court can interfere.

HOLROYD PEARCE L.J. I will ask Donovan L.J. to give the first judgment.

DONOVAN L.J. The heavy incidence of surtax on large incomes has for some time led artistes and others in the world of entertainment to adopt the device of forming a limited company which they control, and giving the company, by means of a service agreement, the right to their services. In return, the company pays the artiste some modest salary. The company then hires the artiste out to whomsoever requires his services, and itself obtains the consideration for them.

From its profits, the company must distribute a reasonable dividend, if it is to avoid surtax on the whole of its profits - see section 245 of the Income Tax Act, 1952 - but it is allowed to make such reserves as are required for the maintenance and development of the business; and where the business depends on the fortunes of a particular artiste, these reserves may be considerable.

In this way, surtax on the whole of the artiste's earnings is reduced to surtax on the salary he gets from the company, plus

11 59 T.L.R. 343, 345-346.

such dividend as is distributed to him; and when eventually the company is wound up, the accumulated reserves of past years will come to him as capital.

All this is perfectly legitimate, and indeed in the case of persons whose high earnings may be short-lived, understandable. Hawkins, the taxpayer, adopted such a scheme in May of 1954, using a company called Westmead Productions Ltd., with a nominal capital of £100. The present appeal is not concerned with that scheme, but it may be useful to bear its existence in mind. The service agreement in that case was to last for five years only from April 1954 and was confined to the services Hawkins was to render in the making of three productions, being stage plays or films.

On December 3 - the same year - 1954, there being presumably additional engagements in prospect, the scheme was repeated, this time with a new company called Roehampton Productions Ltd. Again the capital of the company was a nominal capital of £100, and at first two shares alone were issued to the subscribers in the memorandum of association, who were, it would seem, clerks in the office of the taxpayer's solicitors. The business which the company was to carry on included the purchase and sale of real and personal property of all kinds, and in particular copyrights; the business of theatre and cinema proprietors and managers; the making, production and exploitation of motion pictures; the making of engagements with artistes and others; and the assignment of their services.

The service agreement with Hawkins followed within a few days, on December 10, 1954. It was declared to be subject to Hawkins' existing engagements with Rank Productions Ltd. and with the company Westmead Productions Ltd., to which I have already referred. By the present agreement, the company agreed to engage Hawkins, and he agreed to serve it as an actor or writer in two stage or film productions during three years from December 10, 1954. It was provided, among other things, that the company could - with Hawkins' approval, which he was not unreasonably to withhold - assign or lend his services to a third party. The company was to pay Hawkins £50 a week and expenses during each week that he rendered services. Hawkins was to be entitled to refuse to render any service which he reasonably thought would be detrimental to his reputation. The agreement is exhibited to the case, and I need not abstract it further.

So far the familiar pattern was followed: The company, and

not Hawkins, would receive the enviable salary for his work as an artiste, and all Hawkins would get would be £50 a week, at least until the company was wound up, and thus surtax would be reduced.

Mr. Borneman has strenuously contended before us that in the beginning nothing more was intended as a surtax-saving operation. In particular, the settlement, which followed after an interval of about three months of the shares of this company, was not contemplated from the beginning, as the Crown in one part of its argument asked us to infer. There is no express finding in the case stated on this point; indeed, the case is not very fully or happily stated at all, but one conclusion is obvious and not, I think, disputed. Hawkins was not going to make a present of his services, less £50 a week, to two clerks in his solicitor's office, who on the face of things were at the beginning the only shareholders in the company. At some time he would want to have the money which had escaped surtax for himself, for example, in a liquidation of the company, or to bestow it on others whom he wished to benefit, for example, his family. Otherwise, the whole operation was pointless.

I will accept for the moment the proposition that the family settlement which followed was not decided upon at the outset; but what is important, I think, is that the eventual enjoyment by some individual or individuals of the money which had escaped surtax must have been in contemplation at the outset. Otherwise, as I say, the scheme had no rational purpose.

The subsequent events were these: At some time not specified in the case, but which I think must have been before March 31, 1955, the two solicitor's clerks transferred their shares, one to the taxpayer's wife and the taxpayer's accountant, to be held jointly, and one to the accountant himself. On March 3, 1955, one Beadle, who is the grandfather of the taxpayer's children, made a settlement of £100 of his own money for their benefit. The taxpayer's wife and his accountant were the trustees. The trustees were to stand possessed of the trust fund upon trust to pay the income to, or apply it for the benefit of, the children of the taxpayer and Mrs. Hawkins, in such proportions as they thought fit. At the end of a trust period defined in the settlement, the capital was to go to such of these children as were then living, in equal shares, with certain contingent remainders over. Notwithstanding these provisions, the trustees were empowered to appoint by deed all or any part of the trust property to any one or more

of the beneficiaries under the settlement, either absolutely or contingently.

On the same day, namely, March 3, 1955, the trustees exercised this power and appointed the trust property and its income to such of the three children of Hawkins as should attain 25, and if more than one, in equal shares, absolutely. The trustees of this settlement then used £98 of this £100 in subscribing for the ninety-eight unissued shares of Roehampton Productions Ltd., which were issued to them on March 31, 1955. They thus became the sole owners of the equity in this company, which had the prospect of receiving large sums under the service agreement with Hawkins. The other shareholder was the accountant with his one share.

That prospect of dividend did not, however, mature for some time, during which the trustees got nothing on their shares, but at some time during the year 1956, the company received £25,000 for the lending or assigning of Hawkins' services to somebody, to act in a film called "Fortune is a Woman." Then, on October 18, 1956, the company declared a dividend of £500 free of tax which went to the trustees of the settlement. They, in turn, applied the bulk of this for the benefit of the taxpayer's three infant children as follows: Nicholas, £225; Andrew, £153; Caroline, £104.

In due course, repayment claims were submitted to the Inland Revenue by the taxpayer as the children's guardian, claiming back tax deducted at source from this dividend, to the extent that the children were entitled to small income relief and personal allowances. The inspector of taxes opposed the claim. The general commissioners on appeal by the taxpayer allowed it; and their decision has been upheld by the judge.

The Crown says that the income so received or enjoyed by the children under the deed of settlement is deemed to be the taxpayer's income by virtue of section 397 of the Income Tax Act, 1952. This reproduces section 21 of the Finance Act, 1936, by which the growing habit of saving surtax by settling capital or income on one's children was checked. Subsections (1) and (2) of section 397 are as follows: [His Lordship read section 397 (1) and (2) and the relevant parts of section 403, the definition section, and continued:] The true construction of the word "arrangement" in that definition is not in dispute. It will be found in the cases

cited to us, which I will mention, but need not in the circumstances read. They are: Copeman. v. Coleman²; Inland Revenue Commissioners v. Prince-Smith²; Inland Revenue Commissioners v. Payne³; and Hood Barrs v. Inland Revenue Commissioners.⁴ The argument for the Crown is first of all this: Here there is a settlement in the ordinary sense of the word, namely, the deed of settlement of March 3, 1955. Hawkins did provide money for the purpose of that settlement, the means of such provision being the service agreement producing money for the company, and the company in turn distributing part of the money to the trustees. Alternatively it is said that the formation of a company, the service agreement and the deed of settlement together form an arrangement within the terms of section 403, and so are a settlement for the purposes of section 397. For that settlement, likewise, Hawkins provided funds and is therefore a settlor.

It will be convenient to deal with this alternative argument, first, because it was the only argument advanced to the general commissioners, and, secondly, because Mr. Borneman agrees that if there is such an arrangement here, then the taxpayer was a settlor within the definition, and must fail in this appeal.

What he argues in opposition to the Crown's argument is this: To constitute an "arrangement" for this purpose, the whole of it must be in contemplation at the outset. Here it was not, and he prays in aid what the commissioners say in paragraph 7 of the case stated, after hearing all the evidence, namely - again I quote - that "there was no arrangement to which section 397 should apply." Therefore Hawkins did not provide funds for any such "arrangement," for when he agreed to sell his services to the company, the deed of settlement was not in being, nor, so far as the evidence goes - says Mr. Borneman - in contemplation.

After careful consideration, I am unable to accept these propositions. In the first place, I do not think that the language of section 397 requires that the whole of the eventual arrangement must be in contemplation from the very outset. Confining oneself for the moment to the facts of this case, and remembering that income tax is an annual tax, one finds the whole "arrangement" conceived and in being in the one income tax year, 1954-55. The company is formed, the service agreement executed, and the deed of settlement made, all in this one year. But even were it otherwise, I think there is sufficient unity about the whole matter to justify it being called an arrangement for this

1 [1939] 2 K.B. 484; [1939] 3 All E.R. 224.

2 [1943] 1 All E.R. 434.

3 (1940) 23 T.C. 610, C.A.

4 [1946] 2 All E.R. 768; 27 T.C. 385, C.A.

purpose, because, as I have said, the ultimate object is to secure for somebody money free from what would otherwise be the burden or the full burden of surtax. Merely because the final step to secure this objective is left unresolved at the outset, and decided on later, does not seem to me to rob the scheme of the necessary unity to justify it being called an "arrangement." Particularly is this so in a case such as the present, when one recalls certain other features of it. Thus, Hawkins, though not on the register of members, was a director of the company. He entered into this contract for services for a consideration which is a fraction in value of what he gives to the company in return. He, as a director, has to agree to the issue of the 98 shares to the trustees: he as a director has to agree to the interim dividend of £500, free of tax, being paid on this £100 of capital.

Bearing in mind the ultimate object of securing money free from the burden - or the full burden - of surtax, can it matter for present purposes that the precise way of securing this result was not decided upon at the very outset? I think not. An alternative way of looking at the matter would be this: Here the repayment claim is made in the year 1956-57. In that year the arrangement is complete, and that is enough. It would be irrelevant that it came into being by instalments in the year 1954-55. The Revenue looks at the facts of the year being taxed or for which repayment of tax is being sought, and asks in this year "Is it true to say that there is a settlement of the kind mentioned in the section, and in this year is it true to say that the settlor has provided funds for the purpose of the settlement?"

Naturally, the finding of the commissioners in paragraph 7 of the case stated is much relied on, but it is by no means a clear finding of fact that no "arrangement" existed. I construe it as a finding that the various steps taken did not constitute an arrangement within the meaning of section 397 - which at the very least would be a mixed question of fact and law. In any event, on the facts, I do not think a finding of "no arrangement" could be regarded as reasonable.

That is strictly enough to conclude the present case, for it is conceded that if there be an arrangement within the meaning of section 397, then Hawkins did indirectly provide funds for the purpose of the settlement constituted by such arrangement, and that accordingly the dividend must be regarded as his income and not that of his children. I would say a word or two, however, regarding the first argument of the Crown, namely, that Hawkins provided funds for the settlement constituted by the deed of March 3, 1955, regarded alone, and is therefore a settlor in

relation to it. This seems to have been the primary argument before Danckwerts J., and he rejected it, taking the view that Hawkins could not be regarded as providing funds for a settlement of which he was not the settlor, and to which he contributed nothing, unless somehow the formation of the company and the service agreement could be read into the settlement. This he declined to do, because the deed of settlement came later in date, and because he took the view that paragraph (2) (j) of the stated case was a finding that there was no comprehensive arrangement at the outset of which the deed of settlement formed part. The finding is as follows: "The [taxpayer] was aware that steps were being taken to put into effect proposals of the accountants and solicitors, but he was not consulted with regard to them. He was not present at any meeting when the matter of the settlement was discussed or when the deed of settlement was made." The judge then comments on that in this way: "Consequently, he was not a party in any way to any scheme under which a company was to be formed, a contract to be made with the company for his services and then a settlement to be made which would involve benefits from the first transaction for his children. He was quite obviously not a party in any way, and that seems to me a most material factor in the case."

I regret I cannot go that length. Mr. Borneman, when asked what the "proposals" of the accountants and solicitors were, conceded that they included this deed of settlement. The taxpayer therefore was aware of this item in the proposals, and that steps were being taken to put it into effect, albeit that he may not have been consulted when the terms of the settlement were discussed, or the settlement signed. Even if the matter stopped there I should in those circumstances have little difficulty in holding that when the dividend was ultimately declared it came from funds indirectly provided by Hawkins for the purpose of the deed of settlement.

The matter, however, does not stop there. On December 10, 1954, when Hawkins agreed to give his services to the company for a fraction of the reward the company would get by lending him to some theatrical or film producer, the two shareholders in the company were either the two solicitor's clerks, or Mrs. Hawkins and the accountant jointly as to one share and the accountant as to the other. If it were the two solicitor's clerks, the irresistible inference from the facts is that they were mere nominees for Hawkins. It can hardly be imagined that they were

free to exploit the service agreement for their own individual benefit. If, therefore, the beneficial ownership of the shares was in Hawkins, then when he later transferred or concurred in transferring, or concurred in the issue of, shares to the trustees of the deed of settlement, so that they became the only shareholders, he was in fact concurring that the equity in the company should pass from him to them; and when eventually there is a fund of profit derived from Hawkins' services and a distribution of part of it to the trustees, again I see no difficulty in holding that the result of all that has gone before is that he has provided funds indirectly for the purposes of this settlement.

If, however, at the date of the service agreement, the two persons who afterwards became trustees of the settlement were the shareholders, then two conclusions would seem to me to follow, (1) that the idea of this family settlement was in mind at the outset, and (2) that by this agreement Hawkins was taking steps to see that the trustees would eventually get funds. When that event happened, it was he who indirectly provided the money.

It remains only to notice one other point in Mr. Borneman's argument, namely, that the use of the word "purpose" in section 403 of the Act in the singular shows that the legislature had in mind only those cases where the provision of funds or the undertaking to provide them was contemporaneous with the settlement.

I have said enough, I think, to make it clear that I cannot accept this argument which I think is altogether too refined. The statute seems to me to use the word "purpose" and "purposes" indiscriminately: see, for example, section 401 (3) (a).

For those reasons I think that this appeal should be allowed.

HOLROYD PEARCE L.J. I agree with my Lord. It is clear that the sequence of events in question was intended to lessen the incidence of surtax. The natural inference from that sequence of events is that an arrangement was made which would come within section 397 as interpreted by the definitions in section 403. It is argued that that natural inference was on the evidence found to be wrong, but in my judgment all the facts point to the conclusion that it is correct.

Are we then bound to uphold the bald conclusion (unsupported by reasons) that "there was no arrangement to which section 397 of the Income Tax Act, 1952, should apply and the [taxpayer] was not a settlor within the meaning of section 403 of the said Act"? That conclusion is not a finding of fact. It is a mixed

finding of law and fact, and is thereby more easily assailable. For an error in such a mixed finding need not be due to any element of unreason such as is necessary to justify an interference with a pure finding of fact. An error may well have arisen from a mistake of law in the application of two complicated sections to a not uncomplicated sequence of events.

The only guidance that one can obtain from the statement of facts seems to confirm that it was a mistaken view of the law that led to the mixed conclusion of law and fact. Paragraph 2 (j) says "The [taxpayer] was aware that steps were being taken to put into effect proposals of the accountants and solicitors but he was not consulted with regard to them. He was not present at any meeting when the matter of the settlement was discussed or when the deed of settlement was made." The clear inference is that proposals had been made by his accountants and solicitors and that he was aware that steps were being made to carry them out, but that the fact that he was not consulted about the details of the settlement and was not present when the deed was made had a bearing on the result. In truth that fact was irrelevant. The proposals were clearly proposals for achieving the result that has been achieved, namely, a family settlement financed by dividends produced by Hawkins' contract to sell his services to the company at an inadequate and uncommercial rate. Had the proposals been of any other nature the case must inevitably have so stated. The foundation of those proposals was his earning power and they needed not merely his assent but his active participation. He personally entered into the contract to serve for an inadequate remuneration, he was himself a director of the company when the shares were allotted to the trustees, when the large profit was made by the company's use of the contract, and when the dividend was declared. And above all he himself created the source of the company's profit by acting in the film "Fortune is a Woman."

The mere fact that he did not concern himself with some of the "steps" in the legal machinery involved does not make it any the less his arrangement within the section. A man does not avoid the incidence of section 397 by merely being absent from and leaving to his solicitors and accountants certain parts of the legal machinery if he is aware of the proposals for an "arrangement" or a settlement and actively forwards them by personally carrying out and assisting in the vital parts in which his performance and co-operation are necessary. Nor can he avoid liability by merely giving his solicitors carte blanche to effect some

scheme for the benefit of his family and refusing to concern himself with its precise form.

The commissioners would appear by the wording of the case to have been unaware of this principle, and in my judgment it must have been this error that led them to a wrong conclusion.

It is contended that the proposals which the taxpayer was intending to forward were directed to some different avoidance of surtax and that he did not have in mind this precise settlement. With all respect to the judge, who held a contrary view, I cannot agree that that fact, if proved, could have the effect of taking this arrangement out of section 397, since the taxpayer was actively carrying out personally some of the steps necessary to the arrangement and his solicitors and accountant were acting in the other steps; but in any event such a contention was not made out on the facts and there is nothing in the case to suggest it.

Moreover, in my judgment, even if the commissioners conclusion was one of fact alone, the observations of Lord Simonds and Lord Radcliffe in Edwards (Inspector of Taxes) v. Bairstow⁵ apply, and I would hold that the only reasonable conclusion from the facts in the case is that there was an arrangement to which section 397 applies and that the taxpayer was the settlor within section 403.

UPJOHN L.J. I agree with both the judgments that have been delivered and do not desire to add anything.

Solicitors: Solicitor, Inland Revenue; J. D. Langton & Passmore.

M. M. H.

5 [1956] A.C. 14, 29, 34; [1955] 3 W.L.R. 410; [1955] 3 All E.R. 48, H.L.