Keith Preece writes:
This long-running dispute involves Geoff and Diana Jones, whose family business, Arctic Systems Ltd, was challenged by HM Revenue & Customs (HMRC) under the Settlements Legislation, specifically Section 660A Income and Corporation Taxes Act, now rewritten as Sections 624 – 627 Income Tax (Trading and Other Income) Act. HMRC had said that the company share dividends paid to Mrs. Diana Jones had to be assessed as the income of Mr. Geoff Jones, because the latter had transferred property to his wife in a “bounteous settlement”.
Typical
Keith Preece |
The company set up by the Joneses was typical of thousands of family businesses. Mr. Jones did the work that earned fees for the company, while his wife played a supporting role. They subscribed equally for the company shares. Mr. Jones took only a modest salary from the business, leaving a significant amount of profit at the year-end, to be paid out as dividends to himself and his wife. The Joneses arranged their affairs in good faith, believing that they were doing nothing wrong.
The essence of HMRC’s challenge lay in the perception that the company’s income was derived wholly from Mr. Jones’s efforts. Thus the dividends paid to Mrs. Jones were seen as representing “bounty”, because she did not contribute enough to deserve the level of income concerned. The “bounteous” aspect was increased by the fact that Mr. Jones took only a modest salary, or lower than what HMRC would regard as a normal rate for the job, leaving more profit to be paid as dividends to his wife. The “settlement” existed in the transfer of the shares to the wife, which enabled her to receive the income that was seen as being that of her husband. HMRC’s objection to this arrangement is based upon the belief that the couple had arranged their affairs in such a way as to save tax, making use of Mrs. Jones’s personal allowances and basic rate band.
Court of Appeal
When the case was heard at the Court of Appeal, the three judges unanimously rejected the arguments put forward by HMRC. Sir Andrew Morritt, Chancellor of the High Court, said that although Mr. Jones controlled the company, which gave him an ability to confer benefit upon his wife, the other shareholder, this arrangement did not in itself confer any benefit and was not a settlement within the meaning of the law: …”the declaration of the dividends was not arranged in advance; it was dependent upon the trading fortunes of the Company”.
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Lord Justice Carnwath expressed his concern about the lack of clarity in the statute and the interpretation being placed upon it. He felt that HMRC were taking things too far: “If the legislature wished such an arrangement to be brought within a special regime for tax purposes, clearer language is necessary to achieve it”.
The appeal by HMRC is scheduled to be heard by the House of Lords on June 5-7. There must be hundreds of HMRC enquiries around the country, similar in principle to the Arctic Systems case, which have been put on hold, awaiting the final decision. Their Lordships’ judgement is expected to provide some sort of clarity. A decision in favour of the Joneses will put many minds at rest, both amongst those who run their own businesses and their professional advisers. However, if the Lords find for the tax authorities, each individual case should still be assessed on its own merits.
Keith Preece
Qdos Consulting
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Further information
Shout99 has followed this case closely and all developments relating to Section 660. You can read more about the background and the issues at stake in Shout99's Section 660 resource centre
Freelancers Outside IR35 (FO35) includes protection against Section 660 investigations, as well as IR35. It provides representation by Qdos Consulting in the event of a Revenue investigation, an operating manual with advice and information, draft contracts and insurance against penalties. Cost £104.50 a year.
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