High Court deals 'bitter blow' in Arctic Systems

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The High Court has decided in favour of the Inland Revenue in the landmark 'Arctic Systems' section 660A case.

The Professional Contractors Group (PCG) announced that Geoff and Diana Jones of Arctic Systems Limited have lost their appeal to the High Court, heard by Justice Park last month.

The decision handed down today, 27 April, means that the settlements legislation will apply to dividends received by Diana Jones and deem them to be her husband's income, taxable at his marginal rate of income tax.

The first indications are that the judge came down "very heavily" on the Revenue's side, one source told TaxZone.

The Forum of Private Business (FPB) reacted with "dismay", saying the decision could have "serious and expensive consequences for thousands of husband and wife firms".

'Bitter blow'<...

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29th Apr 2005 16:24

What now?
I must say I do agree with Mike Thexton here (although the legislation we're looking at, in the main, predates 1990 - although s660A(6) was in FA1989 and came into effect then because of the introduction of independent taxation - before which this situation was of no interest to the revenue because of aggregated taxation. The cases referred to are usually concerned (with the exception of the Pearce and Scrutton cases in 1991) to children's settlements.

For some years now it has been argued that it is safer to give shares than subscribe for them - and this is certainly borne out by Park's comments - although both the revenue and the taxpayers seemed to agree at the Commissioner's stage that the exemption in s660A(6) did apply Park makes it clear that subscription cannot be a gift in itself. I think I agree.

As we have not yet seen the full transcript we do not know what weight was placed on the Brice theory that a settlement arose because only Graham was a director - certainly spouses should be directors as a precaution and as shareholders should vote at an annual general meeting on the payment of the dividend - how lazy we all are in dispensing with general meetings.

Graham did pay himself a ludicrously low salary - well below even the National Minimum Wage and that must be provocative, but how much larger should it be for safety's sake?

It is disappointing that the issues over the exercise of the casting vote were so glibly set aside to get to the "more interesting" aspects of the case (suggested by commentators on day by day reports. Had the Commissioners found for the taxpayers the revenue might have been persuaded to fund the cost of an appeal giving us greater certainty with no further risk to the Jones'.

Any other bright ideas out there?

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By allanr
04th May 2005 10:45

Family Law implications
If the stress is too much for a husband and wife team and results in divorce, presumably the "earning" spouse now gets to keep the assets eg family home since it was acquired with his money and she cannot claim to have contributed to her husbands success, being merely a beneficiary of his munificence?

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By Anonymous
27th Apr 2005 14:40

Well what did we expect
With an election next week and a serious lack of money in government coffers we could hardly expect basic principles of independent taxation to get in the way of public policy.

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By Taxi
27th Apr 2005 16:03

It is all back to the question of "what is the right amount
of tax?" This is just a move to make IR35 mainstream.
Clearly. there is no such thing as "the rewards" as in "the risks and rewards of running your own business" if your happen to be a married couple in business.
Entrepreneurs should swallow the risks and pay the same amount of tax as employees, unless S.660A is overhauled, of course...

Analysis of the judgement handed down is appearing on my website in about an hour.

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27th Apr 2005 17:17

Transcript of judgement in Jones v Garnett
I understand the official transcript of today's High Court judgement should be available in the next few days at:

Incorporated Council Of Law Reporting For England & Wales


British and Irish Legal Information Institute

Andrew Goodall
Editor, TaxZone

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29th Apr 2005 12:02

The suggestion that the timing and the content of Park J's decision could have anything to do with an election or a shortage of government money is cynical, but it is not exactly realistic. The judge is applying - arguably incorrectly - a piece of legislation that was enacted in 1990, based on case precedents from the previous 60 years. The case has been rumbling through the appeals process for a couple of years. The Revenue gave publicity to their view that more businesses were caught than previously thought back in April 2003. And - he's a judge. He doesn't take any notice of governments and shortages of public funds. "Realist" may scoff, but I think that's a much more realistic view of how judges think than a cynical "he would say that, wouldn't he?".
The only relevance of the election is - would any party change the rule, or direct the Revenue to interpret it in a friendlier way? I doubt it.
Will the Joneses be able to carry on? It's pretty tough for them, and the decision seems very forceful (although Judge Park has been wrong before now).
Will other people instantly fall into line and cough up 6 years of back tax on the basis that all husband and wife businesses are subject to the same rule in the same way? I hope not. Some will think that they are different from the Joneses and the rules don't apply even if the Revenue and Park are correct; some will be willing to argue that the Revenue and Park are wrong. Unfortunately, they will now have to argue to the Court of Appeal.

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