27 July 2007

Martin Hesketh, managing director of Brookson, comments on the Arctic Systems judgement.

"The long awaited decision of the House of Lords in the tax case of Jones v Garnett (commonly known as Arctic Systems) was released on Wednesday 25th July. 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. Following the judgement, on Thursday 26th July, 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.

“Brookson will provide further information to its members when it becomes available."

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