Arctic Systems win High Court appeal

Lovely judgement
Just read the judgement. I love the way Carnworth LJ puts it at the end

"The lack of a clearly ascertainable legislative purpose underlines the need for caution in extending the concept of settlement beyond the scope of existing jurisprudence. The Revenue's position in this case seems to me a significant extension. For the first time, they seek to apply the concept to what has been found to be a normal commercial transaction between two adults, to which each is making a substantial commercial contribution, albeit not of the same economic value. Such a difference, by itself, is not enough to my mind to take the arrangement into the realm of "bounty", as it has been understood in the existing cases. If the legislature wishes such an arrangement to be brought within a special regime for tax purposes, clearer language is necessary to achieve it. "

In other words, if you want to do this Mr Brown, change the law.

NeilW

...first and foremost.....
...everyone must be so very pleased for the Jones, for whom this must be a wonderful Christams present.

Secondly, we will all have to see what the detailed judgement says before we can see where the law now stands (even temporarily!!), and whether HMRC are likely to take it further.

I think the commentators on BOTH sides of the divide who saw the case as clearly only winnable by the Jones' or clearly winnable by HMRC have been somewhat premature throughout. The fact is there are problems in our tax system with respect to married couples, and with the new civil partners legislation it is set to get worse.

Once upon a time we had married couples and (sort of) part joint taxation as a unit. Then we had independent taxation. But the lines between the two are not rationally fixed at all.

It will take a bold Chancellor to try to get this rationalised from the bottom up, and (to be fair, since it is Christmas) it may not be that easy.

The judiciary...
...comes riding to the rescue!

Chancellor's challenge?
One battle one, but the war goes on.

The basis of this case has been how the shares were acquired. So is the chancellor now going to look at the status of dividends earned from shares acquired by any means other than purchase at market value? Or only when transferred between husband and wife? Only in closed companies? What about shares held in trust for children?

I think it's safe to assume that he will be looking for ways, as ever, to stop anybody paying less than if all their income was earned, but goodness knows how he'll tackle this one.

It would be nice to think that we can go back to the straightforward definition of a dividend just being a function of being a shareholder, and taxed the same whoever you are, but I have a horrible feeling that definition is going to get 'fudged'.

Preliminary analysis available on PCG Website
In answer to Nicholas Wilson's question, the result is now on the PCG front page, together with a preliminary analysis by Dave Smith of Accountax, who was closely involved with the case.

Don't rejoice just yet
HMRC are sore losers, not to mention Gordon Brown, sorry I just mentioned him.

Arctic Systems - CONGRATULATIONS
Never Give up is the theme that we all can learn from the strong conviction the Joneses had.

Tremendous acheivement by any means. mY HATS OFF TO THE JONES

Unexpected surprise
Can I echo Tim Good's comments, though he gets to talk in person to far more people than I do... Ten would have got you fifty from me, particularly when the judgment date was so soon after the hearing.

The basis of the decision seems to be that there is no settlement, with Hawkins distinguished on the grounds that the contract of employment at a low rate was already in place.

I also understand that the Revenue asked for leave to appeal to the HL and had it turned down, so they will have to petition direct if they want to. Presumably the CA thought that this was a straightforward case that raised no significant difficulties, as was said by another judge in another place...

Mike Truman
Taxation magazine

Set-back for HM Fagin
At last some commonsense, HM Fagin has had one of his pickpocketing operations halted, but no doubt we shall soon see more.

Rather than the evermore oppressive tax burden why doesn't this Government simply streamline the tax system, make it fairer, and reduce the tax burden thereby encouraging business growth. Simple economics shows that inproved growth = greater profits = a greater tax take, even with a lighter tax burden.....

So why not do it since it is clearly in the best interests of the country? ...... oh yes, sorry, I forgot ... a clear tax system would enable taxpayers to work out just how much of their money the Government wastes, and would mean the end of the gravy train for our "fat cat" politicians and the bloated bureaucracy.

The "(im)moral" stance taken by the Government and HMRC against tax avoidance is simple the kettle calling the pot black.......

Are you listening Mr Brown? if the tax burden was not too high there would not be such a big business in helping people reduce their tax burden.

If a wheel bursts on your lorry because it's overloaded you don't start kicking the road.... unfortunately this Governments response is not only to do that, but also to then load even more on the lorry as a penalty.

Leave to appeal
Presumably the CA thought that this was a straightforward case that raised no significant difficulties, as was said by another judge in another place...

I don't think it is that. Refusing permission to appeal to the HL is the judges way of saying to HMRC that if they want this to work the way they appear to want it to work, then they should ask the Treasury to include the measure in the Finance Bill, not continue beating up hard working taxpayers through the courts.

NeilW

Further legislation
The old nut-shell of an NIC or similar charge being put on Dividends from a close company may be one way of HMRC collecting what they think they should.

Won on both counts
What is really pleasing about this judgement is that the Judge ruled that: (1) s.660G(1) could not apply "I conclude that there was no settlement as defined in this case" and (2)If s.660G(1) had applied s.660A(6) did not disapply s.660A(1)because "(a)there was no outright gift of the share from Mr Jones to Mrs Jones, but if there had been, (b) the share was not substantially a right to income.

To summarise the judge concluded that there was no "arrangement" and no "element of bounty". Mrs Jones purchased her share for full value in the context of a joint business venture and hoped for the best. At that time, there was no additional structure or arrangement and therefore no settlement.
Also, no gift as she purchased her share and all the rights attached to them therefore not substantially a right to income.

All in all pretty conclusive and mirroring what a lot of people in our profession had been saying. But I dont think this will be the end of the matter. I expect that further legislation will be introduced to counter such arrangements. But at least it will be a lot clearer, (one hopes!), and we can advise our clients accordingly.

S660A Examples
Can anybody throw any light on how this leaves all the other business situations that the HMRC are trying to attack under S660A?

I'd like to think that because the COA threw out the 'business as settlement' argument, that they are all kicked into the long grass.

I suspect that it's not that simple though!

I understand that costs were awarded...
Well, as far as I am concerned, the PCG and/or Mr & Mrs Jones can keep my modest donation paid to the fighting fund.

Fine job they did, and I, for one, admire them and their professional team.

Having now read the full judgement of the case I am quite simply amazed (and delighted) at how conclusively the COA have come down on the side of the taxpayer. A bloody nose indeed for the Revenue, and quite rightly so, in my opinion.

At last we have courts taking the whole consideration of what is involved in running a company (or, indeed, any business) and not just the very restricted view taken by Dr Brice and J Park, both of whom have displayed a complete lack of knowledge and understanding of the business or commercial world.

Three key Q&As?
Am I in the clear in every case?

The Court of Appeal decided that in Arctic there was no settlement. This was - broadly - on the basis that Mrs Jones had paid full market value for her share; and that Mr Jones was not contractually obliged to work for Arctic at less than a market rate or indeed at all. Any subsequent decision on the part of Mr Jones to draw less than a full salary, or to pay out a dividend, was not part of any "arrangement" that was capable of constituting a settlement for tax purposes. If you have cases which share these key features, we think it is unlikely that the Revenue would be able to distinguish your case from Arctic.

Does it matter if the "passenger spouse" has done nothing at all?

Mrs Jones undertook book-keeping work, invoicing etc and spent four or five hours a week on the business. The judgement refers to an acquisition of shares "for full value in the context of a joint business venture to which both parties made substantial and valuable contributions". It is possible that, if the Revenue could find a case in which it could be demonstrated that the spouse did nothing whatsoever in the business, the Arctic case could be distinguished. But we suspect that if it came to it, the level of contribution by the spouse would not be held to have been of such critical importance as to be crucial to the decision. We think that even 100% passengers (if such cases do really exist) would be covered by the Court of Appeal decision.

What if the shares have been gifted?

Although it was not necessary for the Court of Appeal to decide the point once it was established there was no settlement, the Court did express an opinion on whether an outright gift of ordinary shares between spouses was protected from being a settlement. They decided that it was. Essentially, the Court said that an ordinary share is not "wholly or substantially a right to income": it is a bundle of rights encompassing capital, income and votes. Accordingly an outright gift of an ordinary share between spouses is not a settlement. So we think that one can infer that if Mrs Jones had not paid full market value for her share but had been given it by Mr Jones, the Court of Appeal would have reached the same conclusion. We therefore think that if the facts of your case are the same as Arctic save that the share has been gifted rather than subscribed, you can file on the basis that the Arctic decision governs you.

Can they legislate successfully?
Stephen Mike and Tim's comments seem eminently sensible. The question is whether, in light of what the LJs said and this government's propensity to put speed in front of consideration, whether their teams of lawyers are really up for drafting appropriate legislation without ending up with yet something else that has to be tested in court?

I seriously doubt it at this juncture without some re-thinking of tax strategy.

Ready-made legislation?
Difficult to produce fair and sensible legislation, I grant you, Dennis. But that doesn't seem to have been of much concern to the present adminstration and it may not be too difficult to produce legislation that would reverse the decision. How about the following?

"Arrangements shall to be taken to exist if it would be reasonable to draw the conclusion, from all the circumstances of the case, that the purpose of avoiding liability to taxation was the purpose, or one of the purposes, for which the relevant transactions or any of them were effected; and for this purpose the intentions and purposes of any person who, whether or not for consideration,—
(a) designs or effects the relevant transactions or any of them, or
(b) provides advice in relation to the relevant transactions or any of them,
are to be taken into account in determining the purposes for which those transactions or any of them were effected.”

Ridiculously wide-ranging? Yes.
Unfair? Certainly.
Vaguely familiar? Yes: it’s based on the new s741A proposed by the recent Pre-Budget Report!

Fatal flaw
To David's point - it's a killer that punches a massive hole in the ability of any tax planner to advise sensibly. But will it be enacted in its current form?

The judgment made specific reference to uncertainty. I don't see s741A as terribly helpful in its current form.

How do you define 'reasonable?'

That is quite a long old query, but I will give you my best
shot (if I might);
You ask:
"The Court of Appeal decided that in Arctic there was no settlement..... If you have cases which share these key features, we think it is unlikely that the Revenue would be able to distinguish your case from Arctic."

That does indeed appear to be the position.

#2
"Does it matter if the "passenger spouse" has done nothing at all?"

Diana Jones was never a passenger. Arctic was set up as a joint venture, and her contribution was obviously overlooked by HMRC in this instance (one presumes that they will not make such a fundamental error in future).

Whilst common sense might indicate that a spouse, passenger, or "rocket scientist" would be a backbone/soul-mate/stabilising force/plain old business partner, in a business, I would not like to say that this decision indicates that the non-fee earning spouse will automatically place a case "on all fours" with this one, although as a result of the outcome (to-date) in this case, it would seem fairly likely that it might be rather hard to disprove similarity. We are all very familiar with the way that seemingly straightforward authorities are "adapted" to fit HMRC's interpretations in employment status cases. It would be untimely to celebrate the outcome in this case on this level.

You add:
"What if the shares have been gifted?"

Agreed. That is an interesting way of saying that a gift or a sale at an undervalue of an ordinary share in a family trading company is not wholly or substantially a right to income.

How kind of the Lord Justices to actually focus on that point for all of us.

I am looking forward to HMRC guidance on this topic in Jan '06 whatever the outcome of the present case.

picking up on the legislative theme
Perhaps it does not matter how well the legislation is drafted. There is far too much of it, and increasing levels of inconsistency and incoherence. Add to that the current stance on applying increasingly draconion interpretation with a view to increasing the tax take, and you end up with the horrible mess of a tax system we have now.

Unfortunately as has been demonstrated consistently over the years there is no political will to make the tax system simpler, so we can expect increasing comlpexity and much much more of this nonsense.

The only small ray of hope is the response of the (higher) courts in applying pragmatic interpretation of the law - but at what cost?

Section 660
I think that this is a complete joke. The Revenue are totally in the right and now the judgement has been overturned.

No wonder our public services are so terrible.

Quo Vadis?
Martin's point is well made. The issue for the Chancellor and HMRC now seems very clear: How do we get the tax take to where we want it to be when we've got a system that is clearly creaking and where HMRC is forced to take on increasingly risky cases?

It was pleasing to see their Lordships taking what to me is the pragmatic approach rather than some convoluted and obtuse view of the law.

But this is not a time to crow. This is time for reflection and perhaps an appeal to government. More haste, less speed gets a better result.

Nichola's analysis will be illuminating and I look forward to it.

I have now read...
..the judgements and they do seem commendably clear cut. They achieve (subject to any appeal of course) a result that I imagine 99.99% of accountants, tax advisers and mere human beings will welcome and believe appropriate.

However I would just caution a tad against the euphoric "this is the only possible way of looking at a husband/wife company".
Stripping out all the rhetoric, it is surely the case that Mr and Mrs Jones arranged their affairs so that their combined income was split between them in the most tax efficient manner, and that the arrangements would not have been made that way if they were not married or in a personal relationship rather then a "mere" business relationship. Hence the Govt collected less tax. (Or rather,since I personally cannot know that for certain for the specific case, let us assume that as a working hypothesis).

Seems fair enough to me.

But this is not a God-given fairness arrangement which some postings seem to feel.

For an extreme example, if one spouse goes out to paid employment working all hours to feed and clothe the family, and the other spouse works all hours (unpaid) at home, providing support and back up and laundry services etc etc etc there is no similar opportunity to reduce the joint tax bill. There is nothing remotely God-given or fair about that.

As I said in my earlier posting, amidst the euphoria we should not lose sight of the fact there is an unholy mess of issues surrounding many of the contradictions between independent taxation of individuals and taxation of married/cohabiting etc couples.

And no, I don't have an easy solution (although scrapping all direct taxes is a form of solution I suppose).

Talking sense
The comments of both Martin and Bob are thought-provoking and interesting. To Bob I would say that the main objection to the Revenue's approach has not been (as far as I'm concerned at any rate) that it is not "fair". It's about whether you can sensibly have a self-assessment tax system where the rules are this unclear and where the Revenue make what many people regard as major changes in their interpretation retrospectively.

To Martin I'd say - yes - your points are well made. But why not recognise the reality of the family unit by making tax allowances and rate bands transferrable between spouses? It is absurd (and dare I say it socially undesirable) that if Mr and Mrs X both go out to work and leave baby X with Nanny they will usually pay considerable less tax in aggregate than Mr and Mrs Y whose family income is identical but generated by Mrs Y alone with Mr Y staying at home and devoting himself to baby Y. And then Mr and Mrs X demand tax relief for the nanny as well, for goodness' sake!

WOW
Well done to all involved including the Judges, who decided common sense really does exist.
What a result, totally unexpected!!!!!!!!!! The LAW, Mr Brown, has been upheld.
It is good to know there are people willing to stand up to GB's bully-boy tactics.
What now?
This is either the start of the collapse of the attack of what GB calls "tax avoidance" or he will come out fighting. Trouble is TB has lost a few more bob that GB has to find, so my guess is the budget will contain some very nasty "medicine".

Wishful thinking!?
Sorry Les, but in my opinion, your view on 'people power' and the suggestion is nice in principal, but a non-starter. For a start, the French Government aren't controlled by the French People. It is simply that their Government are prepared to listen and act, because they continue to remember that they were elected by the people to serve the people in the positions they are in. Contrast this with the UK Government, who all too easily forget that principal, once they've got their foot in the door. But even worse, just supposing that our Government did remember who they were supposed to serve? Well it wouldn't make any odds, because it's only a minority of people in this country who are a) interested/concerned at what is really going on and b) motivated enough to stand up and say something.
Again contrast that with the French people who I'd say are in the majority like the above, and this is why they can engage their Government. My Mum - who lives in France and speaks fluent French - confirms this, through her many conversations with the average Frenchman.
Back to the UK, the PCG have already tried to do as you suggest, on many occasions. They have only had limited success, mainly because people seem simply not interested enough to get up and do anything, until they get affected directly by something themselves. During IR35's early days, thousands of people wrote to their MPs, 700-odd people went to the HoC to protest (I was there, and lucky (perhaps unlucky ;-)) to be mentioned during the Commons debate) but for all the threats of voting change etc. it made no difference to the end result politically. It seems that the only avenues left are either by legal means, such as Jones vs Garnett, or by showing that practically, they are onto a loser a.k.a 1000+ IR35 cases found outside, as opposed to 3 found inside.
That's not to say that political pressure fails completely. It just has to be the right political pressure - usually the talks that take place in smoke-filled rooms, and never gets reported.
4 million clients out there may be a big number, but I suspect motivating just 10% of them would be a huge mountain to climb?

Actually, why worry?
As professionals we are actually too worried about the implications (actual or possible) of proposed tax changes that we forget we have the power to worry the Government enough to stop them or water them down.

How?

Well how many people do we represent - how many employees do they have?

Instead of talking about tax problems all we have to do really is get our clients (+ employees if possible) to write to downing St and the head office of the Labour party saying that if the proposed change becomes enforced them that taxpayer will not vote Labour in future....

Politicians (with a very few exceptions) are only interested in the gravy train - threaten to take it away from them and they will fall in line.

French farmers control their government - 4 million self employed have far more clout, especially if led by their accountants!

Our French friends
To Andrew's point, I rather think he or his mum is viewing the French landscape thorugh rose coloured specs. Having lived there for 7+ years in the recent past I think you'll find the French are rather more pragmatic.

Chirac was elected because there was a risk of letting a fascist in. He was the lesser of two evils. For Chirac, it was win the Presidency or go to jail. Easy choice for both sides.

As to listening - have you so quickly forgotten when the government ended up with egg on its face over the fully-joined-up-Europe fiasco? And if it's not that, then the train drivers, teachers, lorry drivers and wine producers will be on strike at one or other time. Precisely because employers' treat workers like servants in the Edwardian sense and because the strike weapon is the only thing they have left keeping them in what little employment is left.

Comparisons in that sense are not terribly meaningful. But I take your point. Not enough people, and I include the many ICAEW members who didn't vote in the CIPFA thing, don't care enough, have little or no passion and so a reduced voice.

Government has been sent a clear message about the current situation around settlements. But this is not over over. Government can choose to listen or not as the case may be. The sad reality is that Arctic Systems is only news for a few days. The trick to making this work is to keep the momentum going and keep it loud.

That only comes from informed and lively, but ultimately valuable debate about the future of taxation. 'We've' had our fun at Blair/Brown's expense. The time's come to move on and carry the debate with it.

Without Passion
It is passion that deaf politicians tend to notice. Not petitions nor representations. To me, this is about caring enough to want the best for clients. That's both political and passionate. I don't wish to sacrifice either. Nor give government a free pass over a tax system that has become shambolic executed by an executive, increasingly desperate to meet 'targets.'

I'm sure that is what drove the Jones' and their supporters to keep fighting. Is that political? Sure. It's what tends to happen when people are passionate about injustice.

That is why 'we' should not merely take satisfaction from the win, but continue the debate around what is right and fair and what is not.

None of us is perfect!
To all who heard me say in lectures "not a snowflake's chance in hell" - I was wrong, and never more delighted. Happy Christmas to Mr and Mrs Jones.

Happy Christmas to the Jones
but will it be a prosperous new year ?
Are the Revenue likely to appeal the decision to the Lords ?

Yippee !
Great News! Well done everyone and thanks to the Jones for sticking with it. Will the Revenue (with their bloody nose) now take the case to the House of Lords?

SENSE at last
finally common sense appears to have prevailed, perhaps we can now get on with getting through January!!!

Happy Christmas Mr & Mrs Jones
I'm sure readers will be more than delighted to join with me and wish Mr & Mrs Jones a HAPPY CHRISTMAS.

And in the interests of fairness, the same to HMRC.

alan gerroll
Do not open the champagne yet - keep to spumante