Analysis: Impact of HMRC Arctic appeal

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By Nichola Ross Martin

HMRC issued a statement on Friday, announcing its intention to appeal to the House of Lords against the Court of Appeal's ruling in favour of the taxpayer, in the case of Jones v Garnett, also known as 'Arctic Systems'.

Their statement says 'The (settlements) legislation applies in a wide range of circumstances, including income from small companies and partnerships but it does not apply to income from those companies and partnerships that have normal commercial arrangements.'

It seems therefore that HMRC will be intending to argue that the Joneses' business arrangements were neither normal or commercial. In HMRC's...

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By Scion
07th Feb 2006 12:14

Gift of shares to non working spouse
Nichola Ross Martin in her analysis of Jone V Garnett on 16 December 2005 concluded that advisers are best off recommending outright gifts of ordinary shares for a non contributing spouse.

Whilst we have current law from the Court of Appeal, with commentary regarding s660A(6) spouse exemption, what is the perceived downside of fee earnng spouses making a gift of shares now and dividends paid to non working spouse prior to 5 April 2006, accepting that there may be an appeal to House of Lords which may ultimately prove successful ? How provacative is this or is a better course of action for the non working spouse to pay full market value for her shares to the working spouse ?

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16th Jan 2006 23:52

Article 7 of the Human Rights Convention??
Whilst it is not suggested that HMRC will institute criminal proceedings, the European Court of Human Rights, I believe, has held that a potential penalty of 20% or more of the tax involved would bring a tax case within the scope of the Human Rights Convention and remove it from what, in much of Europe, is considered to be administrative law and, therefore, not within the scope of the convention. Art 7, no punishment without law, might be one defence as this is a relatively new interpretation of these provisions. It might not prevent retrospective taxation but it might be a defence to the penalties (the jury is out on interest).

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16th Jan 2006 17:22

Law & Justice
Rachel's remark:
> A case of whoever has the biggest chequebook
> wins is not an acceptable method of justice.

The role of the courts is not to dispense Justice but to deliver an interpretation of law. If Justice is served in the process then so much the better. In this respect Justice is blind.

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17th Jan 2006 10:55

Has HMRC agreed?
Nichola - has HMRC agreed this is 'bad' law?

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By wdr
17th Jan 2006 16:27

illogical, and paradoxical perhaps- and what about Civil parners
but the Revenue are not responsible for the text of the legislation.

They are ,however, misguided in seeking to enforce that illogicality.

There are plenty of examples where the Revenue have taken a pragmatic view[ e.g. ESC's]and not sought to interpret legislation literally where it is manifestly inappropriate to do so.

So why are they pursuing this case?

Presumably because there is plenty of tax potentially at stake, and they have seen husband and wife "partnerships", in whatever legal business structure as a soft touch.

Has anyone sat down to follow through the logic of this legislation for Civil partnerships if , by some mischance , the Revenue were not only to receive consent to bring the appeal before the Lords, but to win it??

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16th Jan 2006 12:58

Wasting Taxpayers Money
What is clear is that HMRC are not accounting for what they spend on cases like this in terms of profit/loss, it seems to be a waste of money. Tax collection has to be cost effective.

If focus groups cannot obtain figures on prospective revenue losses or the cost of maintaining an HMRC perception of legislation then one must assume that these figures are simply not available or are being deliberately withheld because of their embarrassing nature.

There is a political agenda at work here and its being pushed by the Paymaster Generals Office in deference to common sense as an act of vindictive attrition.

As crown subjects we have no individual rights in law (we are not a republic) and its hard to see how the government can be made accountable in situations like this.

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By Anonymous
16th Jan 2006 14:20

Re waste of taxpayer's money
Another fine analysis by Nicola. (thank you)

I have no objection to people being made to pay the right amount of tax - and sometimes that meaning test cases are a loss leader. But in Artic the courts have already decided and the Revenue is wrong. Have the Revenue offered to pay the legal costs of the Jones's yet? If not, why not? The financial might of the Revenue is being used to try to bully taxpayers into paying what they think is owed, sometimes without much reference to actual legislation or caselaw, without the taxpayer having any recourse if they think the Revenue is wrong. If the Jones's were not supported by the PCG they would have had to pay up long ago. A case of whoever has the biggest chequebook wins is not an acceptable method of justice.

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16th Jan 2006 16:27

At first sight ...
... I am sure we were all relieved by the CA decision but the number of situations which are on all fours with Jones v Garnett may be less than imagined. Nichola's analysis is of course very helpful but there is one issue not mentioned which I would like to touch upon if I may. At para 73, the Lord Chancellor says "there can be no doubt that the acquisition [by Mrs Jones]... was for full value in the context of a joint business venture to which both parties made substantial and valuable contributions". So there was no bounty in the arrangement and the Lord Chancellor goes on to say at para 75 that the bounty HMRC must rely upon therefore is in acts of Mr Jones as sole director & 'breadwinner', after the fact so to speak. Which of course he then dismissed as not part of the arrangement and therefore there was no settlement. However, it is obviously a question of fact what is a 'substantial contribution', but the reality in many of these cases is that the wife does very little. That seems to not be a problem if the shares were gifted, but if the wife plays no part in the business at all (not even compay secretary) then it would logically follow that the acquisition of their share or shares did involve bounty as they had not given 'full value'. In such cases should we therefore still be flagging up as additional info that under HMRC guidance the settlement provisions may apply etc. Expect,perhaps, for this point, in most husband and wife company situations it would seem to be a reasonable view that J v G does not apply and no disclosure is required.

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16th Jan 2006 16:29

Sorry ..
... I meant of course in the final sentence that J v G does apply and therefore s660A/s624 doesn't.

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17th Jan 2006 12:56

Bad law?
Nichola: - you said: "The legislation is somewhat suspect in any case - why allow a working spouse to make an outright gift of a share to a non-working spouse, but catch a situation where a non-worker subscibes?"

To me 'suspect' sounds like 'bad.'

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By Taxi
17th Jan 2006 07:15

Grey areas: cases where a non-working spouse subscribed for a sh
It depends how if there was a contract in place at outset, and then is depends on the future actions of the working spouse. In Arctic it was found that these elements were all too uncertain, and lacking in fluidity to be part of an arrangement in the nature of a settlement.

At the end of the day, the Court of Appeal judges agreed that HMRC was just reading too much into the legilsation. The legislation is somewhat suspect in any case - why allow a working spouse to make an outright gift of a share to a non-working spouse, but catch a situation where a non-worker subscibes?
In the States, they would call this a "no brainer", pity HMRC feel that one should read more into it. Parliament surely didn't mean this to happen, and this is why I constantly say that there has been a victory for common sense here.

There cannot be a clear answer on this grey area - because we do not have an identical court decision, no one - especially, HMRC knows the right answer! They have just lost in Court, so I would be inclined to say that they got it wrong.

If clients are affected by this, it is up to you to relay the facts. I think that most people will just carry on as before, treating their cases as if no settlement exists.

Penalties for a 2005 return, in the event of a later discovery?
HMRC would have to prove that the client was guilty of negligence (or fraud). Pretty hard to prove if one has relied on the Court of Appeal judgment - three judges agreed unanimously that HMRC got it wrong.

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16th Jan 2006 22:08

Has it occurred...?
Reading the Advice, HMRC says:
"...taxpayers whose circumstances are consistent with the situation in Jones v Garnett are entitled to self assess or, within the time limits allowed, amend a self assessment in accordance with that judgement. Clearly, each individual case is different and it is not easy to lay down a clear line which defines whether a case is consistent with Jones v Garnett. To that extent taxpayers will need to be guided by their advisers."

Unless I am totally mistaken, HMRC is saying two conflicting things.

1. if you reckon you're in GvJ territory - OK
2. but it's hard to figure out whether you are.

This looks like a much more volatile position than at first seems. Given the trouble most have had figuring out how to fight this and win, should we heed the Advice? Perhaps.

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18th Jan 2006 09:32

Prevailing practice?
Nichola writes:

"HMRC’s published manuals describe prevailing practice in this way; “there has to be a general acceptance of the practice by the Revenue, taxpayers and agents throughout the UK”."

But if there is general DISagreement between taxpayers / agents on the one side and the Revenue on the other, then what in the Revenue's view IS the prevailing practice? In that situation, we inevitably have to fall back on the legal judgments; there is nowhere else to go. But that invalidates the Revenue's view quoted above.

Schadenfreude is not my natural state, but I can't help feeling they've shot themselves in the foot on this one.

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By Taxi
17th Jan 2006 14:57

Aah, see what you mean. HMRC had that particular issue
pointed out to them in both the High Court and Court of Appeal , and from memory, I think it was mentioned in the Spec judgment.

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By Anonymous
17th Jan 2006 11:45

Sorry Dennis, I don't understand the question.
HMRC have agreed is that the law as it stands is based upon the Court of Appeal's decision. The judgment questions their interpretation of the legislation.
Clearly they do not like it, and are loath to accept it.
For the moment they have to accept it, and that, as they say is that.

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