The Wardman Wire

I have written previously about the tax regime applied to small companies, and how under Gordon Brown and Dawn Primarolo the system has been recast to work in favour of large companies.

The Times is reporting that the Inland Revenue has been defeated in the Arctic Systems landmark case:

HM Revenue and Customs suffered a major defeat today when the House of Lords gave the legal all clear to a tax saving arrangement used by thousands of husband-and-wife small businesses.

IT consultant Geoff Jones and his wife, Diana, took on the Revenue after Mr Jones received a £42,000 back tax demand in 2003.

Mr Jones, 50, won his case at the Court of Appeal in December 2005, to the delight of an estimated 30,000 other couples in the same situation, who believed they could legally save on their tax bills by drawing a large part of their income in the form of share dividends, which are taxed at a lower rate than income.

This is truly excellent news in a case that has been going on since 2003:

The case centred on whether Mrs Jones’s share of the company profits, paid to her as a 50 per cent shareholder in the form of a dividend, should be taxed as part of her husband’s income.
Related Links

Mr Jones and his wife, who played a lesser role in the company, both drew a small salary as well as a dividend, which was split equally between them.

HMRC argued the scheme operated by the couple was not permitted under tax regulations and took their case to the House of Lords.

It also puts the skids under much of the misguided taxation policy of the last decade with respect to small freelance consultancy businesses.

Mr and Mrs Jones will be having a well-deserved huge party (or a quiet drink) tonight.

Potential for Improved Efficiency in the Public Sector

Ironically, this decision will also free up much potential for the Public Sector to improve its efficiency and save money at the same time - which is probably the single thing most desperately needed at present. And yet - the industry of which Arctic Systems is a part has been decimated by tax changes brought in under the current administration.

Small businesses, such as Arctic Systems, typically charge between a third and a half of the daily rate charged by large management consultancy companies listed on the London Stock Exchange for the same work - often supplying consultants with far greater experience. Yet the latter have been favoured by Tax Changes brought in by Gordon Brown while he was Chancellor.

So - a potential win-win situation all round. Unless they decide to mess around with the system again.

More Coverage

Professional Contractors Group has the most compete (and technical) coverage

Overall, perhaps the most concise summary of the judgment can be found in the comments by Lord Hope of Craighead: “For the reasons my noble and learned friends have given, an arrangement by which one spouse uses a private company as a tax-efficient vehicle for distributing to the other income which its business generates is likely to constitute a “settlement” on the other spouse within the meaning of section 660G(1) of the 1988 Act. But so long as the shares from which that income arises are ordinary shares, and not shares carrying contractual rights which are restricted wholly or substantially to a right to income, the settlement will fall within the exception created by section 660A(6).”…

…the case has finally been concluded. Of the eleven judges and Commissioners to have reached a judgment in it, only two have agreed with the Revenue (one Special Commissioner and Park J at the High Court), albeit that the various findings in favour of the Joneses have been arrived at for diverse reasons.

PCG members who have established their companies in this way may now wish to take professional advice, particularly if they have paid tax on the basis of being caught by the settlements legislation. PCG awaits the Government’s response, both in terms of how HMRC will deal with S660A cases that are currently open pending today’s result, and in terms of whether or not the Treasury wishes to change the law, and will continue to use its relationship with the Government to represent its members’ interests in this area.

Accounting Web

The House of Lords has found in favour of Geoff Jones in the landmark tax case Jones v. Garnett (also knows as “Arctic Systems”). The law lords rejected HM Revenue and Customs’ appeal to tax Geoff Jones on dividends paid to his wife, Diana. The judgment marks the dramatic end of a tax case that has gripped accountants and small business owners for the last four years and dominated all recent SME tax planning. No further appeals are possible under UK law.

In their judgment, read out to a packed chamber this morning, the lords ruled that:

* The Jones were creating an arrangement in the nature of a settlement when they subscribed for one share each, and set up their company Arctic Systems Ltd

* However, the exemption for gifts between spouses also applied and dividends paid to Mrs Jones were therefore not income arising under a settlement.

The Jones were jubilant after the landmark decision, which was not totally unexpected by HMRC, (the Court of Appeal had previously and unanimously found in favour of the taxpayer).

Accountancy Age

Geoff Jones has talked of the ‘terrible ordeal’ he and his wife have been through in fighting the Arctic Systems case.

Speaking after winning the case in the House of Lords, the highest court of appeal in the UK, Jones said: ‘Diana and I are delighted that the Law Lords have vindicated our position, and confirmed that we have done nothing wrong. This has been a terrible ordeal for us, which looked like it could cost us our home at one point. We’re relieved it’s all over, but I am still extremely angry that the government tried to pull this stunt in the first place.’

The Professional Contractors Group, which helped fund the Joneses appeal, expressed relief at the verdict of the Lords.

PCG chairman David Ramsden said: ‘This is an enormous relief for family businesses throughout the UK, who had been facing a tax rise from a previously obscure bit of law. We will now be working to ensure that HMRC respects this decision and does not attempt to penalise family businesses unfairly.

Tax Blogger

In the judgment, it was ruled that, although the Jones were creating an arrangement in the nature of a settlement when they subscribed for one share each in their company Arctic Systems Ltd, the exemption for gifts between spouses also applied and dividends paid to Mrs Jones were therefore not income arising under a settlement.

Tax Blagger

Having lost the case, does HMRC not have another case to answer? Why did they pursue this case so far, despite not regardng it as a test case?

Contractor Calculator

This landmark tax case would have had implications for tens of thousands of small businesses if the HMRC had won it’s appeal. Firms taking advantage of the common tax planning technique used by the Arctic Systems’ owners, Geoff and Diana Jones, could have faced back-dated claims of around £42,000.

The Jones’ battled HMRC for four years, including taking the case to the Court of Appeal, which ruled in their favour. HMRC then appeal that result, which is the ruling today.

According to Keith Gordon of Atlas Chambers, assisting counsel for Arctic Systems, “The case hinged on the fact that Mrs Jones held ordinary shares in Arctic Systems. As a result the Revenue was not able to claim that Mrs Jones’s share of the company income could not be treated as a dividend.”

Shout 99

The long legal road for Arctic Systems ended in the House of Lords today with a victory for husband and wife businesses and hopefully an end to the uncertainty which has plagued similar businesses for years.
The House of Lords has ruled in favour of Arctic Systems and rejected HMRC’s attempts to impose the so-called married couples’ business tax - Section 660 - on tens of thousands of small businesses.

HMRC had used an old piece of legislation, Section 660, to argue that the dividends paid to one partner were really earned and belonged to the major fee earning partner, a higher rate tax payer. It is a business structure used by thousands of married couples who jointly own a small business in which one partner is the major fee earner.

The uncertainty has left thousands of businesses concerned that they too could face tax demands of up to £40,000 - even though many were advised to structure their businesses in that way.

Disclosure

Disclosure: On occasions I work as a consultant Project Manager in the public sector in my day job.

Tags: ir35, dawn primarolo, taxation policy, consultancy taxes, arctic systems case, gordon brown, chancellor, tax reform, house of lords, geoff jones, diana jones, umbrella companies, tax avoidance[tags]ir35, dawn primarolo, taxation policy, consultancy taxes, arctic systems case, gordon brown, chancellor, tax reform, house of lords, geoff jones, diana jones, umbrella companies, tax avoidance[/tags]