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Business Newsletters - Autumn 2007
Lords rule in favour of husband and wife businesses
The long running case of Jones v Garnett (commonly called ‘Arctic Systems’) which began in 2003, has finally been resolved in favour of the taxpayer. This is good news for the thousands of husband and wife businesses that have faced years of uncertainty.
Background
Geoff and Diana Jones own and run an IT consultancy called Arctic Systems. Like thousands of other couples with similar enterprises, the structure of the business is such that both parties have shares and responsibilities in the company, with one major fee earner (in this case Geoff) and the other partner offering administrative support. Dividends are paid according to their shareholdings.
The case centred on the issue of whether Mr Jones' salary was set at an artificially low level, and whether the dividends received by Diana should have been treated for income tax purposes as those of Geoff, a higher rate taxpayer. HMRC had used an old piece of legislation to argue that the dividends paid to one spouse were really earned by and belonged to the major fee earning partner. This meant a retrospective tax bill of £42,000.
The uncertainty over the case has left thousands of similar businesses concerned that they too could face large and potentially crippling tax demands.
There have been many twists and turns, with the case going through the Special Commissioners and the High Court (with the couple losing in both) and then the Court of Appeal, where HMRC lost in a unanimous ruling before finally appealing to the House of Lords. The Lords’ ruling is now final as no further appeals are possible under UK law.
Implications
Although the government has not said that Arctic Systems will be a test case, in practice it will be difficult for the lower courts to ignore the Lords’ judgment. Similar husband and wife businesses are therefore highly unlikely to be hit with retrospective tax bills like the ones originally issued in this case.
However, it seems probable that the government will now act to bring in new legislation to close what it considers to be a tax ‘loophole’. Arrangements like the Arctic Systems structure may therefore soon become a thing of the past.
We will stay abreast of the legislation and, as your accountants, we can advise you on all your tax planning needs, including the most appropriate structure for your business. Contact us for advice on your particular circumstances.
