Opinion: Arctic Systems and unpalatable truths

Were it not for the Jones and their moans,
And the feeling in Justice Parks' bones,
TaxZone's arcticulation on 'Arctic',
Would have been less than catharctic.
And Self Assesments would simply be clones!

This whole tedium is a further nail in coffin of pretending that notional insurance is sep. from inc. tax.

IR35 is another clumsy attmept to stem the losses thru the div route. And now we hav s.660 etc..

Just fix inc tax at 30,40,50%, and get on with things.

According to the IR guidance (See TSEM4355) the presence of significant capital in the company removes the application of 660A.

What is the meaning of 'significant capital'?

If for example the capital value of the shares is 10% of the dividend I personally would consider that as significant. (Although I have been told I am a literalist)

I am surprised that there has been very little discussion of this avenue of escape.

Has anyone considered the effect if there was only one share and husband and wife subscribed out of joint resources. Income would be split 50/50 but is there a settlement?

of getting around the problem with jointly held shares, s.282A was amended as a result, and in short, it will not help in this situation.

Back to the main article, Arctic was picked because it was a personal service company, and Mr Baldry for the Revenue stated in court that this case was picked precisely for that reason. Mr Park went over this with him, and his understanding was that if Arctic had been some different sort of company, such as a restaurant or motor repairer, the facts would have been very different, and the settlement rules would not apply.
Personally I feel that Mr Park was wrong in this assumption, becuase we can all see that other types of businesses will clearly be affected. However, Mr Park had to deal with the case, and the facts directly applicable to that case only, and so it was no good surmising the outcomes for other businesses.

We will hear whether there is to be an appeal in the next few days, and really we need to have an appeal to answer the questions that Mr Park seems so doubtful about in his judgement.

*****

John Newth if you are around and reading this "Congratulations on your award, mate!" I do not have your email, do get back in touch nicki@rossmartin.co.uk.

A difference is that, with a company, there is really no 'alienation' of anything.

Whatever is 'given' to the company automatically accrues to the benefit of the shareholder through the increase in value of the shares.

Which is as much as to say that, with a one-man company, there is no bounty involved because you cannot give a gift to yourself.

If there is no bounty there cannot be a settlement, so s660 could not apply.

Again, Artic isn't about companies. It is about a trust. One person said to another, "I will use my personal earning power to obtain a stream of income, some of which I will divert to you via a tax avoidance arrangement."

That is Artic in its simplest expression. Everything else is simply window dressing - the mechanim by which the diversion came about.

S660A is design to target those arrangements and divert them back by statute.

In my view I believe that you have to get rid of the diversion to get rid of Artic's effect. Introducing capital, having other streams of income and the such like won't help if the 'settlor' is still diverting the proceeds of his effort via the arrangement.

In fact it could make a bad situation worse. I haven't heard anybody comment yet on whether settlements such as these have a maximum size. My reading at the moment is that the law allows *all* income arising from the arrangement to be diverted back to the settlor. I don't think it is limited to the amount the settlor underpaid themselves.

I think the only way forward for anything that remotely looks like Artic is to get rid of 50/50 companies and go back to 100% owned. Then wind the salary right down to £4895, pay out dividends as required and either retain cash in the company or look at making pension contributions.

If husband and wife are "really" working together the only solution to avoid any challenge from IR is individual Limited companies with both parties invoicing clients for the work they have done. The alternative is loads of paperwork including individual timesheets, job costings etc.

...where that person only pays himself enough to cover ,say, the PA and pays the rest out in dividends: has he made a settlement in favour of self.

obviously the interation between

small co distributions
IR35
s660

is now so blurred that ther is a clear case for consolidation

A one person company operating outside IR35 should not be affected by the settlement legislation, and even if they could it shouldn't have any effect.

I don't think that you can have a settlement with yourself.

Unless of course the Revenue try and come up with some convoluted argument that the individual is settling on the company if they don't pay themselves maximum salary. However I don't see anything in the tax code that would allow that, but then we didn't see the 'settlement of effort' line either.

NeilW

The logic of the Revenue's argument is that the company is the 'arrangement' and therefore the equivalent of the trust in a normal settlement. It follows that a one person company which accumulates income rather than paying it out should be treated as similar to an accumulation trust, and just as a trust of which you were settlor and sole beneficiary but which gave the trustees discretion to accumulate would be caught by 660A, arguably so should the company. In fact, arguably the result should be a Sch D II charge on the settlor for the business income, which shows how daft it is.

This was also the basis of the Revenue's argument that unmarried couples etc were also caught. However, there is a brief comment in the Arctic decision that if Mr and Mrs Jones had not been married they would not have been caught. Whether that is something we can rely on, or whether it is a misunderstanding by Park J that did not affect the case in front of him is open for debate.

Mike Truman

It occurs to me that the IR may have shot themselves in the foot over this S660 case. I could pay myself and my wife the minimum salary and take all the dividends myself, and pay less tax and NI in the process. This judgement may encourage other businesses to do the same, thus reducing the tax take to the treasury.

I raised this aspect of the issue a few weeks ago in this forum without much reponse. Does the existence of capital in the company remove the threat? The inland revenue guidance would seem to indicate it does, but offers no guidance as to the amount.

Certain aspects of the anti-avoidance targetting in the 2005 Finance Bill removes the symmetry with reference to the practical ability to offset capital losses. Section 92(3) was introduced and debated and approved for this purpose. The removal of this piece of legislation appears to be a move against business and business rationalisation where capital losses may be incurred.

Are husband/wife partnerships covered by the Arctic ruling?