[HOUSE OF LORDS]

AND

[On appeal from MILLS v. INLAND REVENUE COMMISSIONERS]

Revenue - Surtax - Settlement - Company employing infant taxpayer at nominal salary - Large profits earned by providing taxpayer's services - Dividends paid to trustees of settlement of which taxpayer beneficiary - Whether taxpayer "settlor" - Whether taxpayer provided funds for "purpose" of settlement - Income Tax Act 1952 (15 & 16 Geo. 6 & 1 Eliz. 2, c. 10), ss. 405 (1), 409, 411 (2)

In 1958 the taxpayer, then aged 12, showed great promise as an actress. Walt Disney Productions Ltd. wished to secure her exclusive services for five years. Her father wanted to protect her earnings. He took advice and a number of transactions were carried out as part of a comprehensive plan. A company, S. P. Ltd., was formed in 1960, and the shares were issued to the father who transferred them to the trustees of a settlement of which the taxpayer was sole beneficiary, with gifts over in default. The taxpayer entered into a contract with S. P. Ltd. to give them her exclusive services for five years for a salary of £400 per annum. In January 1961, S. P. Ltd. agreed to make the taxpayer's services available to Walt Disney Productions for five years for very large payments in dollars to them. S. P. Ltd., as a result, made big profits which were paid in dividends to the trustees. The taxpayer was assessed to surtax for 1962-63 on the basis that she was a settlor of the settlement and that the dividends were income arising under the settlement so that under section 405 of the Income Tax Act 1952¹ the undistributed income fell to be treated as her

1 Income Tax Act 1952, s. 405 (1): see post, p. 50H.

S. 411 (2): see post, p. 51B-D.

income. The taxpayer's appeals to the special commissioners and then to Goulding J. were dismissed. The Court of Appeal having reversed his decision, the Crown appealed to the House of Lords:-

Held, allowing the appeal, that the taxpayer had provided funds f—r the "purpose" of the settlement, since the source of the dividends was money paid for her work, which, but for that arrangement, would have been received by her, but was instead diverted to the company as a mere channel of transmission to the trustees, that, accordingly she was a settlor of a settlement, within section 411 (2), of which the undistributed income fell to be assessed under section 405 (1) as her income.

Crossland v. Hawkins [1961] Ch. 537, C.A. applied.

Per curiam. "Purpose" in section 411 (2) does not connote a mental element nor need there be a motivating intention to benefit those interested under the trust (post, p. 52F-G).

Decision of the Court of Appeal [1973] Ch. 225; [1972] 3 W.L.R. 980; [1972] 3 All E.R. 977 reversed.

The following cases are referred to in their Lordships' opinions:

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

Crossland v. Hawkins [1961] Ch. 537; [1961] 3 W.L.R. 202; [1961] 2 All E.R. 812, C.A.

Inland Revenue Commissioners v. Prince-Smith (1943) 168 L.T. 406; [1943] 1 All E.R. 434.

The following additional cases were cited in argument:

Bulmer v. Inland Revenue Commissioners [1967] Ch. 145; [1966] 3 W.L.R. 672; [1966] 3 All E.R. 801.

Canadian Eagle Oil Co. Ltd. v. The King [1946] A.C. 119; [1945] 2 All E.R. 499, H.L.(E.).

Chamberlain v. Inland Revenue Commissioners (1943) 59 T.L.R. 343; [1943] 2 All E.R. 200, H.L.(E.).

De Francesco v. Barnum (1889) 43 Ch.D. 165; (1890) 45 Ch.D. 430.

F. S. Securities Ltd. v. Inland Revenue Commissioners [1965] A.C. 631; [1964] 1 W.L.R. 742; [1964] 2 All E.R. 691, H.L.(E.).

Herbert (Lord) v. Inland Revenue Commissioners [1943] K.B. 288; [1943] 1 All E.R. 336.

Howard de Walden (Lord) v. Inland Revenue Commissioners [1942] 1 K.B. 389; [1942] 1 All E.R. 287, C.A.

Inland Revenue Commissioners v. Brebner [1967] 2 A.C. 18; [1967] 2 W.L.R. 1001; [1967] 1 All E.R. 779, H.L.(Sc.).

Inland Revenue Commissioners v. Clifforia Investments Ltd. [1963] 1 W.L.R. 396; [1963] 1 All E.R. 159.

Inland Revenue Commissioners v. Leiner (1964) 41 T.C. 589.

Inland Revenue Commissioners v. Wachtel [1971] Ch. 573; [1970] 3 W.L.R. 857; [1971] 1 All E.R. 271.

Macklin, Ex parte (1755) 2 Ves.Sen. 675.

Ransom v. Higgs [1973] 1 W.L.R. 1180; [1972] 2 All E.R. 817; [1973] 2 All E.R. 657, Megarry J. and C.A.

St. Aubyn v. Attorney-General [1952] A.C. 15; [1951] 2 All E.R. 473, H.L.(E.).

Thomas v. Marshall [1953] A.C. 543; [1953] 2 W.L.R. 944; [1953] 1 All E.R. 1102, H.L.(E.).

Yates v. Starkey [1951] Ch. 465; [1951] 1 All E.R. 732, C.A.

APPEAL from the Court of Appeal.

This was an appeal from a decision of the Court of Appeal (Lord Denning M.R. and Buckley L.J., Orr L.J. dissenting) given on October 17, 1972, by which the court allowed an appeal by the taxpayer, Hayley Catherine Rose Vivien Mills (the respondent in the House of Lords) from a decision of Goulding J. He had dismissed an appeal by the taxpayer from a decision of the special commissioners, who had dismissed appeals by the taxpayer against assessments of surtax to the years 1962-63, 1963-64 and 1964-65.

There were two questions at issue in this appeal:

(1) The first question was whether the taxpayer was the settlor or one of two settlors, within the meaning of section 411 (2) of the Income Tax Act 1952, of a settlement made in May 1960 for the benefit of the taxpayer, either on the footing that the settlement consisted of a deed of settlement dated May 18, 1960 (the "formal settlement"), made by her father, L. E. W. Mills, or on the footing that the settlement consisted of an arrangement (the "statutory settlement") consisting of the formal settlement, the incorporation of a company, the issue of the shares in the company to her father, his transfer of those shares to the trustees of the formal settlement, and the making of a service agreement whereby the taxpayer became an employee of the company for modest remuneration.

(2) The second question arose only if it were held, in favour of the appellants, the Commissioners of Inland Revenue, that the taxpayer was such a settlor. On the assumption (which was common ground between the parties) that the taxpayer's father was also a settlor in relation to the settlement, the question arose whether the income of the trustees, consisting largely of dividends paid to them by the company, ranked as "income originating from" the father as settlor or as "income originating from" the taxpayer as settlor, within the meaning of section 409 (6) of the Act.

The assessments to surtax had been made on the respondent in reliance on the provisions of section 405 of the Income Tax Act 1952. The section was contained in Chapter 3 of Part XVIII of the Act, which was entitled "Special provisions for taxation of settlors etc. in respect of settled or transferred income" and contained a number of provisions, many of them of a complex nature, designed to prevent (inter alia) the avoidance of tax by means of transactions, whereby income was transferred to trustees with no surtax liability or to other persons whose surtax liability was smaller than that of the settlor. The provisions of Chapter 3 were concerned with revocable settlements where the settlor retains an interest.

The facts are set out in the opinion of Viscount Dilhorne.

John Vinelott Q.C., Patrick Medd Q.C. and P.L. Gibson for the Crown. The main question is whether the income was provided directly or indirectly by the taxpayer for the purposes of the settlement.

Section 409 of the Act of 1952 deals with the application of Chapter 3 to settlements where there is more than one settlor. Reliance is placed on the definition of settlor in section 411 (2).

Prima facie the taxpayer provided funds indirectly for the purposes of the settlement. The Act is objective. The taxpayer knew that her money

was being syphoned to trustees for her benefit, but, even if she did not know, it did not matter, since motive and intention are irrelevant. To further the purposes of a settlement one does not need to have volition. If the taxpayer agrees to give services for remuneration which is paid to someone else, she provides that sum, so she indirectly provided the remuneration which Walt Disney Productions Ltd. paid to Sussex Productions Ltd. She provided the funds, since she provided someone else with services which that person could exploit.

All depends on the terms of the second contract dated January 13, 1961. The contract of service with Sussex dated May 18, 1960, might have been regarded in itself as an ordinary commercial transaction. If the taxpayer's services earned the profit, she provided the profit. If the transaction was an ordinary commercial transaction it is implicitly excluded by section 411 (2).

If a person provides services to X on terms that X pays Y he is providing a fund just as much as if he first contracted with X and then assigned his remuneration to Y. The taxpayer entered into an agreement with Sussex the effect of which was to require her to act for Disney. It was intended by the taxpayer that she should contract to serve Disney and the interposition of the agreement with Sussex was intended to syphon the profits into Sussex. By signing the agreement of January 13, 1961, between Disney and Sussex the taxpayer was put into direct contractual relation with Disney. Under the original agreement for service dated May 18, 1960, between the taxpayer and Sussex it would have been open to Sussex to procure the taxpayer's services to Disney without her entering into any contract with Disney at all. But she did become bound contractually to Disney to provide services directly to them. They were to control her services and give her instructions and she agreed to carry them out. Thereafter Sussex could not have countermanded an order to her from Disney, because she had agreed to serve Disney. Without the second agreement Disney could have given Sussex instructions and Sussex could have given the taxpayer instructions.

Suppose X owns all the 1,000 shares in a company which is about to make a very large profit and is minded to direct half that profit into a settlement for the benefit of his children. He makes a settlement of property not including any of those shares and then sells 100 shares for full value to the trustees. Then he amends the company's articles so as to make the 100 shares entitled to 50 per cent. of the profits. X has provided that fund indirectly because the money did not come from him but from the profits of the company.

The relevant sections are widely drafted to catch people who may put money into settlements. To fall within the enactment tax must be avoided by putting assets into a settlement in such a way that the money can still come back to the person who provided it.

One applies section 409 to each settlor in turn. There is no conflict because the same income may be said to have originated from two people. Since the net of the legislation is cast widely there is a theoretical possibility of the same income being taxed twice which must be left to the discretion of the Revenue.

The questions which arise are: (1) Is the taxpayer a person who has

provided funds directly or indirectly? (2) If yes, is she a person who has provided funds for the purpose of the settlement? If yes, is the income arising under the settlement income which originated from her within section 409 (6)?

The commissioners found that the arrangement which constituted a settlement within section 411 (2) included the formation of the company.

At common law a contract on disposition of property by an infant is voidable but not void. To this there are exceptions. (1) A contract for necessaries is valid and binding and that includes a contract for services which is not prejudicial to the infant. A contract may be voidable on the ground that the infant is incapable of making an informed judgment. (2) Another exception to the general rule is that a contract which is necessarily prejudicial to an infant is not voidable but void, e.g., a service agreement which imposes an unreasonable burden on him: De Francesco v. Barnum (1889) 43 Ch.D. 165; (1890) 45 Ch.D. 430. The plea of non est factum would depend on the circumstances of the particular case. There is no rule of law in England that an infant is incapable of making a contract at any age, though it may be that, if a boy of four purported to enter into a complex legal transaction, he could successfully plead non est factum when he was of full age on the ground that it was not his act at all. The age of discretion has nothing to do with contractual capacity. It has not been suggested that a girl of 14 cannot enter into a contract.

At common law a father had an absolute right to the custody of his infant child but habeas corpus would not be granted if the child was out of his custody and, having reached the age of discretion, expressed a wish not to return. But if the infant was under the age of discretion the court would not inquire into his wishes. The Abduction Act 1557 (4 & 5 Ph. & M., c. 8) made it an offence to "take away maidens that be inheritors, being within the age of 16 years." At common law the age of marriage was 12 for a girl and 14 for a boy. This derived from the common law. A person over the age of 14 is presumed to have a degree of reason sufficient to make him responsible for his crimes: see Halsbury's Laws of England,3rd ed., vol. 21 (1957), p. 151, para. 336.

The taxpayer's father acted on her behalf in the sense that he was her intermediary and acted in her interests in creating an apparatus from which she could operate by entering into the service agreement.

The taxpayer provided funds directly or indirectly: see Copeman v. Coleman [1939] 2 K.B. 484, 493-494 and Inland Revenue Commissioners v. Prince-Smith (1943) 168 L.T. 406.

The taxpayer provided funds for the purpose of the settlement. She provided the source of the funds when she entered into the service agreement with Sussex and when she entered into the two agreements directing her virtually certain earnings to the company the shares of which were held in trust for her. She became the settlor when she entered into the service agreement with Sussex or, alternatively, with Disney. In signing the vital document, the service agreement, she took the essential step, informing the whole scheme with life.

Did she know the purpose of all this? She knew all that she needed to know. She knew as much as most settlors know even when they are

of full age. No one in Chancery practice would try to explain to a young lady of 18 all the complications of a family settlement to which she is a necessary party. It would have been different if the taxpayer had been six years old; then non est factum could have been pleaded. But there was nothing in the evidence to show that she had not reached an age when she could understand what she was doing. There is no presumption in English law that a child of 14 is to be deemed incapable of making a contract: see Ex parte Macklin (1755) 2 Ves.Sen. 675.

It is not necessary for the court to enter into purpose or motive. The purpose here was to make the funds available to the settlement. The word "purpose" is ambiguous in that it may mean "motive," but in this case it has nothing to do with motive. It is not a question of psychological intention. If one puts money into a settlement one provides it, even if one does not know what the purposes of the settlement are. Under this Act one is required to find whether the taxpayer provided money for the settlement, not to inquire into her state of mind. There is no need for her to have some particular motive or intention: see Crossland v. Hawkins [1961] Ch. 537.

As to question (3), income directly or indirectly provided by the taxpayer must be treated as originating from her by virtue of section 409 (6) (c), which, together with section 409 (2) limits the application of section 409 (1).

St. Aubyn v. Attorney-General [1952] A.C. 15, cited by Lord Denning M.R. in the Court of Appeal, is very different from the present case: see Thomas v. Marshall [1953] A.C. 543, 556 and Yates v. Starkey [1951] Ch. 465, 483.

Under the arrangement that the dividends should go through the company and into the hands of the trustees of the settlement the company was never more than a conduit pipe. If it is found objectively as a fact that, looking at the transaction the money has left A and come into the hands of trustees for the person who has provided the funds the case falls within section 411 (2). This taxpayer intended the money to be dealt with according to the terms of the settlement. Starting with sections 405, 406 and 407 dealing with the circumstances in which surtax is to be charged there is no reason to construe section 411, the definition section, narrowly.

The commerciality of a transaction is one way of demonstrating that it is outside this group of charging sections. There may be other ways of establishing this, but that is the one way which so far has emerged from the decided cases: Copeman v. Coleman [1939] 2 K.B. 484; Bulmer v. Inland Revenue Commissioners [1967] Ch. 148. In the case of a family settlement a member of the family who had some property connected with the family might sell it to the trustees for full market value and they might later sell it at a profit. That would be an example of a commercial transaction.

This taxpayer provided funds indirectly for the settlement and section 409 (6) (c) automatically applies. The provision was indirect because of the interposition of the company. She provided the funds when she entered into the service agreement. Even if at the first stage she did not know what her services were worth she knew when she approved the Disney contract.

If the taxpayer had been assessed under Case II of Schedule D the income tax payable by her would have been larger than that payable by the company. There is authority to the effect that the fact that double taxation may arise in some circumstances is no ground for giving an artificial construction to the words of this enactment. Section 405 provides the criterion whereby income is to be treated as that of the settlor and not as that of any other person. When section 405 applies, the income is to be treated as the settlor's income although a beneficiary would otherwise be taxable.

The taxpayer's father could not be assessed, though if the trustees had applied the income for her maintenance, he might have been charged under Chapter 2 of the Act on the footing that the child's income was his.

If the income had not been distributed the Revenue might have applied for a surtax direction under section 245. See also Chapter 3 of Part IX relating to the situation in the event of a winding up of the company.

Stewart Bates Q.C., D. C. Potter Q.C. and David Milne for the taxpayer. In finding the person providing funds for the purposes of a settlement one is looking for the person who intended to provide them. There must be knowledge and understanding out of which the necessary intention could arise. The test is subjective. In all the reported cases that test is satisfied by an intention to benefit someone other than the settlor. The element of bounty makes it more likely that the intention will be found. In Crossland v. Hawkins [1961] Ch. 537 the vital question was whether there was an arrangement and what knit the thing together was the purpose of the taxpayer. There was no settlement here because the taxpayer was not intending to benefit anyone but himself.

One does not have to look for an intention in the circumstances of the present case because clearly the intention was that the money should go into the settlement. The taxpayer did no more than enter into a service agreement on her father's advice, but the intention was his, not hers. On the evidence there was no evidence that she so intended. She had no conception of the amounts which were to be received under the Disney contract. In order to be liable under this legislation she would have had to have an intention to provide funds for the purpose of the settlement. She would have had to know that she was providing funds for that purpose. Her father was not her agent. He was only doing what any responsible father in the normal circumstances of this family would have done. What is being assessed here is the dividends from the shares, not the income of the company. The taxpayer entered into the contract with the company. The shares, which are very valuable, were put into the settlement by her father for her benefit. The taxpayer entered into part of the arrangement, the service agreement, but not into the arrangement as a whole. She did not know a thing about it. The quality of her knowledge was nebulous. In the case stated it is said that when her father tried to explain the arrangement to her she was not very interested. But, if she was to be liable, it was important that she should have the requisite intention. The fact is that her father was making a reasonable arrangement for his daughter and got her to enter into this service agreement. She was not intending to make a provision for anybody: see Crossland v. Hawkins [1961] Ch. 537, 545-547, 549, 553, where there was clearly an element of bounty. The

taxpayer in the present case was not intending to benefit anyone in the sense in which the expression was used in that case. The arrangement was her father's: see also Inland Revenue Commissioners v. Leiner (1964) 41 T.C. 589, 596; Bulmer v. Inland Revenue Commissioners [1967] Ch. 145, 164 and Inland Revenue Commissioners v. Wachtel [1971] Ch. 573, 585-586.

The funds which came into this settlement were dividends. It was the taxpayer's father's valuable shares that provided the funds. Accordingly it is a wrong analysis to say that the taxpayer provided the funds. Her father made the shares very valuable by getting her to act for Disney. They became valuable as a result of the agreement with Disney. He was the beneficial owner of the shares and they were valuable because his daughter had entered into the service agreement and provided services under it. It was an instance of a father looking after his child. Reliance is placed on Lord Herbert v. Inland Revenue Commissioners [1943] K.B. 288.

Because someone else provided the funds within section 409 the taxpayer did not: see subsections (1), (5) (a) and (b). In considering this scheme one must look for "property originating from the settlor." One is here dealing with dividends from the shares in Sussex, dividend income from shares provided by the taxpayer's father. When that is established it is the end of the inquiry designed to find the property which is the origin of the income, which under the section must originate from one settlor. The section is designed to achieve an unequivocal allocation of income. The dividends came from the shares and are the income of the property. Since that income originated from the taxpayer's father, it could not have originated from her. She could only be a settlor if she provided the funds for the settlement. If, for any reason, it could be said that the income was not provided by her father the position would be different.

If Crossland v. Hawkins [1961] Ch. 537, 551-552 had fallen to be considered under section 409 it could have been said that the income was in fact provided by the taxpayer and not by his father.

Chamberlain v. Inland Revenue Commissioners (1943) 59 T.L.R. 343, 345 (Lord Thankerton), 345-346 (Lord Macmillan), shows that in applying these provisions one is looking at the dividend and asking where it originated from. It also supports the view that the legal position is not affected by the contention that the company is a mere conduit pipe.

It is accepted that under section 412 a number of persons might qualify to be charged to tax under these provisions but there is no authority to establish that the Revenue may pick whom it chooses. Section 409 sets out to avoid any such discretion.

Ransom v. Higgs [1973] 1 W.L.R. 1180 was a very different case from the present.

Compare with section 409 the terms of section 437 (1) of the Income and Corporation Taxes Act 1970, which is expressly referred to as a tax avoidance provision.

To bring the present case within sections 409 and 411 there must be an intention. There was none. The taxpayer did not understand what was being done. She would be entitled to plead non est factum.

Potter Q.C. following. For the purposes of the ensuing submissions on

section 409 it is assumed, for the purposes of argument only that the taxpayer and her father were both settlors. The income accruing to the company is not in issue. The shares were property provided by the father directly for a classic deed of settlement. So the taxpayer is only a second settlor if she too has provided funds.

Section 409 of the Act of 1952 is a re-enactment of provisions in the Finance Act 1936 and the Finance Act 1948. It also relates to sections 404 and 407 which are anti-tax avoidance sections.

Herbert's case [1943] K.B. 288 was concerned with section 38 (2) of the Finance Act 1938, the predecessor of section 404. Subsection (1) of section 404 presupposes a settlement of income. Subsection (2) deals with capital. Section 405 does not contain such a two-pronged attack on income and capital. Section 407 also relates to income. In this group of sections, to which section 409 applies, there are provisions relating to income settlements and capital settlements. Section 409 was directed at the mischief revealed by Herbert's case [1943] K.B. 288.

Under section 409, when there are two settlors, one predicates that each is the only one. Then under subsection (3) one must look for "income originating from that settlor." References to such income include by subsection (6) (a) "income of property originating from that settlor." That has a function in income settlements. There is an unqualified allocation of income to one settlor only. The alternative interpretation would be that Parliament has conferred a discretion on the Revenue. That is unacceptable: see Herbert's case [1943] K.B. 288.

The taxpayer's father is admitted to be a settlor in relation to the deed of settlement. The income with which we are dealing is the income of shares which he put into the settlement. Section 409 is designed to deal with the situation where the Revenue does not know which of the settlors to charge. If the taxpayer's father had given her only a protected life interest there would have been a case of double taxation. The origin of section 409 is in section 20 and Part I of Schedule 6 to the Finance Act 1943.

In F. S. Securities Ltd. v. Inland Revenue Commissioners [1965] A.C. 631, 638, 644-645, 650-651, it was in the Crown's interest to argue against double taxation. Inland Revenue Commissioners v. Clifforia Investments Ltd. [1963] 1 W.L.R. 396, 400, 402, was a case very similar to the present. In applying the statutory provisions to such a case as Herbert's case [1943] K.B. 288 the solution is to be found in section 409 (5) (c). Section 409 must result in an unequivocal allocation. Alternatively in applying section 409, even if such an allocation is not possible in every case, yet it is to be preferred, because that is the object of the section.

In itself providing services cannot in itself be providing funds. There is no authority for that. The result of so holding would be extraordinary. Thus a retired civil servant who took a job running a charity would be providing services and not funds. Or a retired executive of a company might work in running its retirement benefit scheme, only taking his out-of-pocket expenses, though his services were worth £5,000. His wife and family might be objects of the charity and of the benevolent fund. If he were regarded as a settlor and his services were taken as providing funds, the results would be ludicrous. A trustee of a family settlement under

which he and the family benefited, providing his services free, could not be providing funds.

Though the provision of services plus the machinery whereby they can be converted into funds is a provision of funds, mere acquiescence in the creation of machinery is different, particularly with the nebulous knowledge which this fourteen-year-old girl had. Her participation fell far short of what was required. There must be active participation in the machinery for converting the services into funds. Otherwise all sorts of people, whom Parliament never intended to include, would be caught. Chancery counsel in advising young persons on the making of gifts and dispositions have to ensure that they understand (1) what they will get without the settlement; (2) what they will get with it; (3) what else they could have done, the broad alternatives; (4) how the whole thing, the machinery and the arrangement, works.

The vital point in this case is that the taxpayer was a girl in the custody of her father. At common law he had a right to his daughter's services. The right of action for seduction was based on quare servitium amisit.

The taxpayer's father had the choice of sending her to school, keeping her at home to make the tea or giving her a secure career in the film world. But for this scheme she would have been at Cheltenham or Roedean. A girl of 14 could not get work as a film star for the asking.

Earnings do not necessarily mean the money she owns. There is no finding of fact that this girl knew that she would be the owner of her earnings nor that she knew the difference between getting a job for herself or accepting a job in the films. No matter how anxious she might have been to go into films, her father would have had a veto. This was not a tax avoidance scheme but primarily a scheme to protect her earnings. No man embarking on a commercial scheme would choose the course which would attract the greatest amount of tax: Inland Revenue Commissioners v. Brebner [1967] 2 A.C. 18, 30.

Section 411 (2) defines a "settlor" as "any person by whom the settlement was made" and he is deemed to have done so "if he has made or entered into the settlement directly or indirectly." The words "entered into" have no technical meaning. The taxpayer did not enter into the settlement by signing the service agreement. It would be too wide an interpretation of the words to say that all the parties to the transaction entered into the settlement. A person makes a settlement if, at the start of the day, he has property or funds and, at the end of the day, he has not got them. This girl did not have the free disposition of her services. Her father was in a position to prevent her having free disposition of her earnings. He could tell her that she might go into films on these terms and no others.

[LORD REID intimated that their Lordships only wished to hear argument in reply to section 409.]

Vinelott Q.C. in reply. The contentions put forward for the respondents would not avoid double taxation. Under section 409 one is dealing with a situation where there are two settlors. One must not approach it on the presupposition that one will always get an unequivocal allocation between the two. Both may be persons to whom the income can be attributed under section 409 on the respondent's construction.

The respondent's construction was also inconsistent with section 409 (1) and (2). In subsection (1) one is directed to look at the settlement as if each of the two settlors were the only one and to disregard everyone else. If one does that there is no reason for putting a gloss on subsection (6) (c) because, if one applies the section to one settlor, it matters not that the income may be attributed to the settlor under more than one paragraph.

There was never a possibility that the taxpayer's father would be caught by liability. The possibility that two joint settlors will be assessable under the charging provisions is very remote. It has never happened in any reported case. If it did happen, it would be easy for the settlor indirectly caught to assign his interest.

The dichotomy between capital and income settlements is false because what is settled as income may be capital in the settlement, income for the settlor but capital for the trustees, e.g., in the case of settled annuities.

In Herbert's case [1943] K.B. 288 the situation was that under a family arrangement (the details of which are set out on p. 289) Lord Pembroke and Lord Herbert were joint settlors. The assessment on Lord Herbert was set aside because Lord Pembroke was also a settlor and it was said that under section 38 (2) of the Finance Act 1938 (section 404 of the Income Tax Act 1952) the income had to be treated as his income and as the income of no other person. If Lord Pembroke had been assessed, the same argument could have been raised on the ground that Lord Herbert was a settlor. That meant that in any case where there were two settlors section 38 (2) was ineffective. The predecessor of section 409 was introduced to avoid this absurdity.

F. S. Securities [1965] A.C. 631 only emphasised the presumption that one does not tax the same person twice in regard to the same income. No one would challenge that. But one must construe the section as it stands: see Canadian Eagle Oil Co. Ltd. v. The King [1946] A.C. 119 cited in that case. The principle never applied where legislation of this kind might result in two persons being taxed in respect of the same income: see Lord Howard de Walden v. Inland Revenue Commissioners [1942] 1 K.B. 389, 396-397. As in that case there is here no double taxation in the strict sense.

The Clifforia case [1963] 1 W.L.R. 396 affords no guidance in the present case. There a liberal construction was adopted to achieve the ends of the Act.

Here there was unquestionably an arrangement within the legislation.

Their Lordships took time for consideration.

February 12, 1974. LORD REID. My Lords, for the reasons given by my noble and learned friend, Viscount Dilhorne, I would allow this appeal.

LORD MORRIS OF BORTH-Y-GEST. My Lords, for the reasons contained in the speech prepared by my noble and learned friend, Viscount Dilhorne, which I have had the advantage of reading, I would allow the appeal.

LORD HODSON. My Lords, for the reasons given by my noble and learned friend, Viscount Dilhorne, I agree the appeal should be allowed.

VISCOUNT DILHORNE. My Lords, in 1960 Walt Disney Productions Ltd. were anxious into enter into a contract with Miss Hayley Mills, the respondent, to secure her exclusive services for a period of years. She was then a schoolgirl of 14 years of age and had already acted in two films. Mr. Mills, her father, was not particularly anxious that she should take up a career in the film-making business and put no pressure on her to do so. She was not at that time interested in the monetary rewards of acting, being comfortably provided for by her father.

From these findings of fact made by the commissioners it is to be inferred that she made the decision to act of her own volition. Having signified her willingness to make films with Walt Disney Productions Ltd., Mr. Mills was concerned to see that any money earned by her should not be squandered by her or her relatives. He was anxious to make arrangements to secure that her earnings should be "legally protected" so that they would not be available for spending either by him or by his wife and would be saved for her benefit.

With that in mind he consulted his solicitors, his bank manager and his accountant "to provide him with the means to protect his daughter's earnings." They produced a somewhat complicated scheme which was carried into effect. On February 18, 1960, a company, Sussex Productions Ltd., was formed with a nominal capital of £100, divided into a hundred £1 shares, the subscribers to its memorandum being two clerks in the firm of solicitors who acted for Mr. Mills, each of them subscribing for one share. On May 18, 1960, 98 shares were allotted to Mr. Mills, on which date two partners in Mr. Mills's firm of solicitors and Mr. Mills's bank manager were appointed directors. Also on May 18, 1960, Mr. Mills settled the hundred shares in Sussex Productions Ltd. in trust for the respondent absolutely on her attaining the age of 25, and, if she failed to attain a vested interest, in trust for any children she might have and subject thereto in trust for such persons as she might by will appoint and in default of appointment in trust for Mr. Mills absolutely. The trustees of the settlement were the three directors of Sussex Productions Ltd. and Mr. Mills's accountant.

On the same day, May 18, 1960, the respondent entered into a service agreement with Sussex Productions Ltd., whereby she bound herself to render to that newly-formed company her exclusive services as an artiste in films and as an artiste in stage plays for the period of five years from April 1, 1960, at a salary of £400 a year.

Before these arrangements, which the commissioners found as a fact were part of a comprehensive plan, were carried out on February 18 and May 18, 1960, Mr. Mills, who was advised that they would save tax but who was not familiar with the details of the scheme, tried to explain to the respondent what was being done for her. He found her not very interested. The commissioners found:

"She knew that her father was making arrangements with regard to her possibly considerable earnings from films which would be for her ultimate benefit and she signed the necessary documents without reading them."

The commissioners also found that she did not know that under the

service agreement she was entitled to receive a salary and that "she had at that time no conception of the amounts being received by the company in respect of the exploitation of her services."

At that time no amounts were being received by the company for the exploitation of her services. "It was known, however," so the case states, "that a five year contract" with Walt Disney Productions Ltd. "was a virtual certainty" and that the contract would provide a guaranteed minimum of $30,000 for the first year of the five.

On January 13, 1961, an agreement was made between Walt Disney Productions Ltd., Sussex Productions Ltd. and the respondent, whereby Sussex Productions undertook to make available to Walt Disney Productions the exclusive services of the respondent for five years in the making of five films and the respondent agreed to render to Walt Disney Productions her sole and exclusive services. Walt Disney Productions were to pay for her services sums ranging from $30,000 U.S. in the first year to $75,000 U.S. in the fifth year.

Under this agreement Sussex Productions received very large sums of money. That company declared dividends and the income tax returns of the trustees of the settlement disclosed that the trustees received net income from dividends amounting in 1963 to £25,378, in 1964 to £7,610 and in 1965 to £30,678 none of which was distributed. This income grossed up was the income assessed under the assessments to surtax appealed against, which were for the year 1962-63 £42,161, for the year 1963-64 £14,403 and for the year 1964-65 £50,034.

If the contentions advanced on Miss Mills's behalf are well founded, then liability for very large sums for surtax is avoided. It cannot have escaped Mr. Mills's notice that the plan devised by his advisers might greatly reduce his daughter's liability and so be to her benefit, The commissioners inferred that Miss Mills could have been advised to enter into the service agreement with Sussex Productions only on the footing that she would at some time enjoy the large profits arising from her earnings which were known to be going to accrue to that company by virtue of its agreement with Walt Disney Productions. They said:

"In other words, the creation of the company and the settlement of the shares therein were necessary preliminary acts if the appellant [now the respondent] was to be advised to sign, for her own benefit, the agreement for service."

Goulding J. dismissed Miss Mills's appeal from the commissioners. The Court of Appeal by a majority (Lord Denning M.R. and Buckley L.J., Orr L.J. dissenting) allowed the appeal from Goulding J.

Section 405 (1) of the Income Tax Act 1952, so far as material, is in the following terms:

"If and so long as the settlor has an interest in any income arising under or property comprised in a settlement, any income so arising during the life of the settlor in any year of assessment shall, to the extent to which it is not distributed, 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: ..."

The income received by the trustees of the settlement by way of dividends declared by Sussex Productions was ultimately, on her reaching the age of 25, to go to Miss Hayley Mills. She therefore had an interest in it. It was not distributed, and so, if she was settlor, coming within the section, of a settlement which comes within the section, the income received by the trustees is required to the extent to which it was not distributed to be treated as her income for that year and not as the income of any other person.

Section 411 (2) reads as follows:

"In this Chapter" (which includes sections 404 to 411 of the Act) "'settlement' includes any disposition, trust, covenant, agreement or arrangement, and 'settlor,' in relation to a settlement, means any person by whom the settlement was made; and a person shall be deemed for the purposes of this Chapter to have made a settlement if he has made or entered into the settlement directly or indirectly, and in particular (but without prejudice to the generality of the preceding words) if he 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."

The settlement of the shares in Sussex Productions was clearly a settlement within the definition. It was also part of an arrangement which, by reason of the definition, must also be regarded as a settlement for the purposes of section 405 (1). The commissioners held that the incorporation of Sussex Productions, the issue of the shares therein, the making of the settlement of February 18, 1960, and the making of the service agreement on that day, were all acts done in furtherance of an integrated scheme planned solely for the benefit of Miss Hayley Mills and that the scheme was an arrangement and so constituted a settlement to which section 405 (1) applied.

In Copeman v. Coleman [1939] 2 K.B. 484 and in Inland Revenue Commissioners v. Prince-Smith (1943) 168 L.T. 406 not wholly dissimilar transactions to those in this case were held to constitute arrangements which were, by the Finance Act 1936, section 21, to be treated as settlements and, in my opinion, the commissioners were clearly right in holding that the acts referred to above constituted an arrangement and so a settlement, though why they did not include the tripartite agreement between Walt Disney Productions, Sussex Productions and the respondent as part of the arrangement, I do not understand.

This being so, was she a settlor? She had not made or entered into the settlement created by the vesting of the Sussex Productions shares in the trustees on the trusts specified but she was a settlor if she directly or indirectly entered into the arrangement or directly or indirectly provided funds for the purpose of the arrangement or of the settlement created by the vesting of the shares.

Lord Denning M.R. held that she was not a settlor. He held that it was Sussex Productions which provided the funds for the settlement, that the word "purpose" connoted a mental element and for her to provide funds for the purpose of the settlement she must have had the object - the end

in view - of promoting the purposes of the settlement, and that she was so young that she had neither the knowledge nor the intention to do so. She had not, in his view, reached the age of discretion. He said that she was incapable of making a settlement or any contract on her own account for she had not sufficient understanding to know what it entailed or at any rate not a sufficient discretion to exercise a sound judgment upon it.

Buckley L.J. posed the question whether a man has provided funds for the purpose of a settlement is to be answered on purely objective grounds or subjectively. He held there must be a motivating intention by the provision of funds to benefit those interested under the trusts. In his opinion ([1973] Ch. 225, 246) Miss Mills

"can have had no conception of benefiting anyone except, perhaps, herself, and can have had no formed intention of providing any funds for the purpose of the settlement." He said she "lacked the legal capacity, as well probably as the knowledge, and understanding, necessary to enable her to make any effective decision in this respect"

and, at p. 247, that she was "incapable of binding herself contractually or otherwise, or of forming an effectual determination so to do."

Lord Denning's conclusion that Miss Hayley Mills had not provided funds for the settlement is not one with which I can agree. In Crossland v. Hawkins [1961] Ch. 537, where the arrangement was very similar to that in this case, it was held by the Court of Appeal that moneys paid to a company for Mr. Hawkins's acting and received by way of a dividend by the trustees of a trust for his children were indirectly provided by Mr. Hawkins.

Similarly in this case it is, to my mind, taking too narrow a view of the arrangement to conclude that the funds which went to the trustees by way of dividends were just provided by Sussex Productions. To do so means shutting one's eyes to the fact that the source of the dividends was money paid for Miss Mills's work and money which but for the arrangement would have been received by her.

In my opinion, she must be held to have provided funds for the purpose of the "settlement."

I do not agree with Lord Denning that the word "purpose" in this section connotes a mental element or with Buckley L.J. that there must be a motivating intention. I do not myself think that it assists to consider whether the question he posed is to be answered objectively or subjectively. I do not consider it incumbent, in order to establish that a person is a settlor as having provided funds for the purpose of a settlement, to show that there was any element of mens rea. Where it is shown that funds have been provided for a settlement, a very strong inference is to be drawn that they were provided for that purpose, an inference which will be rebutted if it is established that they were provided for another purpose. In this case there is not a shred of evidence that the funds were provided for any other purpose.

In support of his conclusion that there must be a motivating intention to benefit those interested under the trust Buckley L.J. pointed out that the employees of a company, some shares in which were held by trustees, could be said to contribute to the profits of the company and so to the

shareholders' dividends and so to the income of the settlement. He also pointed out that a stockbroker might, if the advice he gave to the trustees of a settlement proved well founded, be said to be contributing to the settlement. The difference between those cases on the one hand and Crossland v. Hawkins and this case on the other is that in Crossland v. Hawkins and in this case funds, which ordinarily would have been received by Mr. Hawkins and by Miss Mills for their acting, were diverted to companies which were channels for their transmission to trustees. It is not the provision of services but of funds which comes within the section.

Both Lord Denning M.R. and Buckley L.J. held that Miss Mills on account of her age was incapable of entering into a settlement or of making a contract. I cannot agree that that was so. Under the common law an infant's contracts are generally voidable at the instance of the infant. Exceptions to this rule are contracts for necessaries and certain other contracts, such as contracts of service and apprenticeship if they are clearly for the infant's benefit. Contracts which are obviously prejudicial are wholly void: see Halsbury's Laws of England, 3rd ed. (1957), vol. 21, p. 138 and the cases there cited.

The service agreement entered into by Miss Mills might be regarded as prejudicial to her, for she received in consequence of it far less than the sums paid for her acting, if the fact that it was part of an arrangement designed to ensure the avoidance of surtax and so the receipt by her of much greater sums on reaching the age of 25 is ignored.

Miss Mills has never contended that the service agreement was void or, if voidable, should be avoided. She has made no plea of non est factum, and it is not surprising that she has not, for such a plea, if it had succeeded, would have been fatal to the contention that she was not liable to surtax on the payments made by Walt Disney Productions Ltd. for her acting. It would have followed that her contract with Sussex Productions Ltd. was a nullity and the fees received by that company for her acting would have been received on her behalf and held in trust for her. In the absence of any such contentions or plea it would be wrong to deal with this case as if those contentions or that plea had been put forward. That she had the capacity in law to enter into the contract is, in my view, clear. By entering into it she entered into the arrangement which constitutes a settlement. By entering into it and by entering into the agreement with Walt Disney she secured that what was earned by her acting should be paid to Sussex Productions and so she indirectly provided funds for the trust.

For these reasons she was, in my opinion, a settlor within the definition in section 411 (2).

There may be more than one settlor of a settlement to which this subsection applies and section 409 of the Act states what is to happen in that case. It reads as follows:

"(1) In the case of any settlement where there is more than one settlor, this Chapter shall, subject to the provisions of this section, have effect in relation to each settlor as if he were the only settlor."

Mr. Mills was clearly a settlor coming within section 411 (2) but in view of the terms of this subsection one has to consider the position in relation to Miss Mills as if she were the only settlor.

The section continues as follows:

"(2) References in this Chapter to the property comprised in a settlement include, in relation to any settlor, only property originating from that settlor and references in this Chapter to income arising under the settlement include, in relation to any settlor, only income originating from that settlor. (3) In considering for the purposes of this Chapter, in relation to any settlor, whether any, and if so, how much, of the income arising under the settlement has been distributed, any sums paid partly out of income originating from that settlor and partly out of other income must (so far as not apportioned by the terms of the settlement) be apportioned evenly over all that income. ... (5) References in this section to property originating from a settlor are references to - (a) property which that settlor has provided directly or indirectly for the purposes of the settlement; (b) property representing that property; and (c) so much of any property which represents both property provided as aforesaid and other property as, on a just apportionment, represents the property so provided. (6) References in this section to income originating from a settlor are references to - (a) income from property originating from that settlor; ... and (c) income provided directly or indirectly by that settlor."

As Miss Hayley Mills indirectly provided income for the settlement, that income has to be treated as income originating from her and so as income arising under the settlement in which Miss Mills has an interest. It has, therefore, by virtue of section 405 (1) to be treated in respect of any year of assessment in which it has arisen, to the extent to which it is not distributed, as her income.

It may be that a case will arise in which it can be said that income has been provided directly by one settlor and indirectly by another, in which case there may be a liability in respect of undistributed income falling on both settlors. What would be the position then has not to be determined in this case, for in this case it is clear that Mr. Mills is not a settlor affected by section 405 (1).

For the reasons I have stated, in my opinion this appeal should be allowed.

LORD SALMON. My Lords, I agree with the opinion of my noble and learned friend, Viscount Dilhorne, and would allow the appeal.

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

F. C.