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Tens of thousands of small businesses owned by husbands and wives with similar structures as that of Arctic, fear tax demands for up to £42,000 could land on their doorsteps if HMRC wins; equally they are crossing their fingers that a defeat for HMRC in the highest court in the land could remove years of uncertainty.
However, things are not that simple.
Although there is no definition in UK law of a 'test case', convention has it that 'lower' courts follow the precedences set by higher courts in similar cases. It was believed that Arctic would be fall into this category as it mirrored one of the examples in the Tax Bulletin. But HMRC has moved from this position and has indicated that the Lords are considering how Section 660 applies in this particular case rather than the wider implications for businesses in general.
Appeal
Arctic Systems won in the Court of Appeal and HMRC decided to appeal that decision to a higher court. At that point, Geoff and Diana Jones had been saved a tax bill of a few thousand pounds (it had been reduced from £42,000 at an earlier stage when the 'back-dated tax' issue was removed). HMRC faced a legal costs bill of considerably more.
If HMRC had decided that it was a 'test case' in the public interest, the state would have also accepted the costs of it. It has been speculated that it was their reluctance to accept the financial implications.
While it is technically not a test case - it is hard to believe that at some time in the future a hearing at the General Commissioners or High Court in a similar situation would fail to be swayed by a ruling in the House of Lords.
Disagreement
Since the Arctic Systems case came into the public arena more than four years ago, advisers, accountants and freelancers have been at odds with HMRC's interpretation of Section 660. There has been widespread confusion and uncertainty about what had seemed to be an accepted business practice - dividing shares between a husband and wife - and had in fact been advocated by a Government agency.
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Regardless of the outcome of the House of Lords case, it was hoped - and expected - that this ruling would at least ensure that tens of thousands of husband and wife businesses knew where they stood tax-wise and could then organise their business accordingly.
If it only applies in a particular set of circumstances or to a particular group of people, then it begs the question what has been the point of spending best part of a million pounds - possibly from the public purse - on four legal challenges to collect a tax bill of a few grand?
Equally, why did HMRC persuade the House of Lords - after a comprehensive defeat in the Court of Appeal that it was worthy of an appeal when about an £8,000 tax bill was the issue, if it was not of a wider public interest?
What would have happened if Geoff and Diana Jones has said, at that stage, that they were unable to fund a further appeal and would pay the tax bill instead?
Cynics might think that HMRC could be waiting to see which way the decision goes before they commit to how widely it will apply.
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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Susie Hughes © Shout99 2007
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