This is to assist with self assessment in light of the Court of Appeal decision in the Arctic Systems case where the Court found in favour of the taxpayer but which is now being challenged by Her Majesty’s Revenue & Customs (HMRC).
Francesca Lagerberg, Chairman of the Tax Faculty of the ICAEW, said: “The disappointing decision by HMRC to petition for leave to appeal to the House of Lords maintains a sense of limbo for many small businesses, particularly those involving just a husband and wife, who will remain concerned about how to accurately complete their tax returns in relation to the settlements legislation.”
Anne Redston of the Chartered Institute of Taxation added: “The recent Court of Appeal decision in the Arctic Systems case was strongly in favour of the taxpayer, but the spectre of an appeal by HMRC will worry small businesses. The guidance note issued today by all the main tax representative bodies is intended to help with this dilemma.”
Self-assessment - general
In general, the guidance advises that the current legal position is that the settlements legislation does not apply where the key facts of a client's case are on all fours with those which formed the basis of the judges' decision in the Arctic case.
However, it cautions that there may be cases where key facts are different from those in Arctic and that tax advisers should consider their clients' position carefully.
In cases similar to Arctic
In guidance says: "Representations made to the professional bodies over the last two and a half years by members have indicated that many small businesses are in very similar position to the Joneses. In particular, the level of uncertainty and fluidity as to what would happen in the future means that in many family companies there is no arrangement in the sense contemplated by the legislation.
"Where this is the position, there is no requirement for the taxpayer to self-assess under s624, ITTOIA 2005 in relation to dividends paid to his/her spouse, or to include any information relating to these dividends on his/her tax return (they should, of course, be included on the tax return of the receiving spouse in the same way as other dividends).
"Members should, however, alert clients to the fact that if the judicial process finally resolves this issue in favour of HMRC, the return may have to be repaired (or the information otherwise disclosed if the period for repair has ended) and that interest will arise on unpaid tax; there is also the possibility of penalties if HMRC consider that the position taken was not reasonable."
Amending returns
It advises that it is possible to amend any already submitted tax returns for the year ended 5 April 2005 (2004/05 returns) to reflect the new developments in the Arctic case. This amendment is possible up until 31 January 2007. You may wish to amend a return where a view had previously been taken that the settlements legislation applied, but now wish to file on the basis that it does not apply, in the light of the Court of Appeal decision.
However it warns that it remains possible that the Court of Appeal judgment could be overturned, in which case a further amendment would be required.
Cases not similar to Arctic
In cases were there is uncertainty as to whether the Arctic decision applies, it recommends that a view needs to be taken on the correct level of disclosure required.
One suggestion is possible wording for the white space disclosure that read: "Dividends of £X were received by Mrs Y which may be assessable on me under the settlements legislation found in s624, ITTOIA 2005. These dividends have not been included on my tax return pending the final decision in the Jones v Garnett case".
Insurance
The guidance concludes by advising accountants "Many practices will operate arrangements under which the costs of handing an enquiry are covered by insurance. We strongly recommend that you discuss the approach which your practice is going to take to tax return disclosure in this area to ensure that your clients remain covered by insurance."
Representative bodies
The key tax representative bodies issuing the guidance are: The Chartered Institute of Taxation (CIOT); The Tax Faculty of the Institute of Chartered Accountants in England & Wales (ICAEW); Association of Chartered Certified Accountants (ACCA); Institute of Chartered Accountants of Scotland (ICAS); Association of Taxation Technicians (ATT); Association of Accounting Technicians (AAT).
The Guidance is available in pdf format here: Settlement provisions and disclosure issues
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Susie Hughes © Shout99.com 2006
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