IT consultants, Arctic Systems. owned by Geoff and Diana Jones, won a six year battle against HM Revenue & Customs who wanted to use and old piece of legislation, Section 660, to tax dividends paid to Diana as if they belonged to her husband, a higher rate tax payer.
Though the news of the victory was tempered somewhat when the Government announced it intended to change the law in this area. However, any changes will be for the future and they will be unable to claim six years retrospective taxes as had originally been their intention.
Martin Hesketh, managing director of Brookson, providers of tax advice and accountancy services to contractors, said: "The five Law Lords unanimously ruled in favour for the taxpayer, albeit each for slightly differing reasons. HMRC had argued that, by allowing Mrs Jones to hold an equal share in the company and receive dividends and by Mr Jones receiving a significantly reduced salary, he had created a ‘settlement.’ This would enable HMRC to tax the dividends Mrs Jones received, as income of Mr Jones.
“The Law Lords disagreed among themselves as to whether there was actually a ‘settlement’ but all agreed that the arrangements fell within an exception preventing HMRC from applying the ‘settlements’ legislation where there is an outright gift by one spouse to another (or civil partner).
"The circumstances covered by the Arctic Systems case are specific to spouses (and civil partners) by relying on a specific exception. The ‘settlements’ legislation is complex and can still catch any arrangements where a settlor retains an interest in an income earning asset, which has been transferred to another person other than a spouse (or civil partner). This judgement did not cover the position on second shareholdings of non-spouses.
“It is good to get certainty on this long standing ‘husband and wife’ matter and the conclusion of the House of Lords is excellent news not only for the Jones' but also for all spouses who have traded through a limited company and paid themselves on a similar basis to Mr and Mrs Jones.
"The effect of the judgement may be short lived however. The day after the judgement the Government announced its intent to bring forward legislation to tackle the use of non commercial arrangements to divert income to others that minimises their tax liability. The Government has confirmed that HMRC will apply the law as determined by the Law Lords and will issue guidance in due course."
Qdos Consulting described the decision as a 'commonsense judgment' which brought a sigh of relief to thousands of husband and wife businesses .
Andy Vessey from Qdos said: "The facts and arguments surrounding this case and the application of Section 660A have been well documented during this protracted battle. The Lords agreed that the acquisition of an ordinary share(s) in a company confer on the individual certain rights not just a right to income.
"This point has general public significance and is not unique to the Arctic case. The Revenue cannot therefore argue that this case has no influence in all the other Section 660A enquiries that have been hinging on this decision and where ordinary shares are a factor. The accountancy and tax profession have always understood the value of holding ordinary shares, it’s just a pity that HMRC selectively dismissed this in their blind pursuit of extorting additional revenue from legitimate business arrangements.
"Had this decision gone against the taxpayer, then many married couples could have been staring down the barrel at large tax bills and many accountants dusting off their P.I policies! Perhaps the next time some bright spark at HMRC attempts to dust down an old piece of legislation and apply it mercilessly in a way that it was never intended, the Revenue will exercise discretion and caution – and pigs might fly of course!
"Finally, Qdos Consulting would like to extend their congratulations to Mr and Mrs Jones in their stalwart perseverance in seeking justice."
Contractor specialist accountants, Danbro, also welcomed the news.
Damian Broughton of Danbro said: "This case been going on for four years, during which time IT contractors and family run businesses across the UK have been in a period of constant uncertainly over whether their tax affairs are in order.
"The landmark ruling this week is great news for Geoff and Diana. All five Law Lords rejected HMRC's case on the basis that, although there was a "settlement" for the purposes of S660, it fell within the exemption provided for an outright gift between spouses. The settlements legislation therefore does not apply to companies jointly owned by married couples and civil partners and structured in this way."
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Susie Hughes © Shout99 2007