Jones v Garnett (Arctic Systems): Victory for Joneses

Kashflow logo
Share this content

The House of Lords has found in favour of Geoff Jones in the landmark tax case Jones v. Garnett (also knows as Arctic Systems). The law lords rejected HM Revenue and Customs appeal to tax Geoff Jones on dividends paid to his wife, Diana. The judgment marks the dramatic end of a tax case that has gripped accountants and small business owners for the last four years and dominated all recent SME tax planning. No further appeals are possible under UK law.

In their judgment, handed this morning, the lords ruled that:

  • The Jones created an arrangement in the nature of a settlement when they planned, and subscribed for one share each, and set up their company Arctic Systems Ltd
  • However, the exemption for gifts between spouses also applied and so dividends paid to Mr...

Please Login or Register to read the full article

The full article is available to registered members only. To read the rest of this article you’ll need to login or register. Registration is FREE and allows you to view all content, ask questions, comment and much more.

About AccountingWEB


Please login or register to join the discussion.

26th Jul 2007 08:04

Well done to the Jones and all those involved in this case. It's one of those punch the air moments and I for one am delighted they've thrashed the revenue.

It's a disgrace that HMRC took this view in the first place and wasted millions of pounds to get back to where they started.

Any bets on a new close company dividend rate applicable to all close company dividends?

Thanks (0)
By Anonymous
27th Jul 2007 09:29

Rush to incorporate?
Would it now be correct to advise clients to incorporate, gift shares to the spouce and thake advantage of the tax breakes?

I hope not because HMRC will, I am sure will counter this and use a sledhemmer to clobber us with new rules imho.

Thanks (0)
By wdr
27th Jul 2007 09:46

As posted in another string -Pyrrhic Victory for taxpayers as a
Pyrrhic Victory for taxpayers as a whole- WE NOW HAVE A GAAR BY THE BACKDOOR
In all the euphoria over the Revenue's 'defeat', no-one seems to have picked up what must be sending Alistair Darling all the way to the Bank[?of England].
Not only will the specfic point be legislated[this has now been announced], to counteract 'income splitting', but mush more important, with frightenng ramifications, is the HoL's confirmation that TAX PLANNING IPSO FACTO CREATES A SETTLEMENT.

Baroness Hale's reservations are really important, and we should be looking again at whether taxpayers can rescue anything from this disaster for taxpayers as a whole, despite Mr & Mrs Jones's well deserved success

Thanks (0)
26th Jul 2007 10:07

Problem for Unmarrieds
I disagree slightly with Nicola on the question of unmarried couples.

I think there is a problem where the couple live together, in that they share the same home, common living expenses etc, but one person generates most of the income for the company. In this situation the settlor (the main earner) may be treated as retaining an interest in the property of the settlement where the property or any related property is applicable for the benefit of the settlor... ( ITTOIA 2005, s. 625(1)( b)). If the non-active partner uses their dividend income to pay the joint household expense surely this income is being made available for the benefit of the settlor.

As the couple are not married there is no spouse exemption for the gift.

On the other hand I do not think HMRC would pursue this line as it would mean picking part the domestic arrangements of the couple.

Thanks (0)
27th Jul 2007 09:14

...not a cat...
....Anthony, it is at the heart of this aspect of what is "right amount" of tax.
Is there a nuclear family unit or not and does it benefit society or not and if so should it have tax advantages or not.

One area I fundamantally disagree with some of the more strident voices on this case is the idea that HMRC had no right to bring the case at all.
On the contrary, the head standing involved only proves that things were not clear at all.
But the solution was to either
(i) bring a test case (to argue this was not a test case is just dishonest even by political standards) , or
(ii) change the law.
Not try to bully - that was the atrocious part of Govt/Treasury/HMRC actions.

One aspect which the "hard-working" independent business person has to address is exactly your point - if a hubbie/wife team have only one bread-winner, who happens to be employed, how might they get this tax benefit, or is it not to be available under those circumstances? (and it is no good coming up with the argument that all employees are work-shy spendthrifts !! They are not.).

Other than that, the Govt ultimately has litte hope of winning hearts and minds over this "fair" point about tax unless every person magically transforms to have the exact same political ideology and view as to how much they should contribute and how much they should take. That solution might be a good one, but it is a little way off yet !!

So to have a genuine and transparent debate will be "good" and interesting.

But so long as Govts are prepared to put Ministers in the Treasury who advocate not paying taxes that they happen to personally disagree with, it is difficult not to get totally hacked off with the brazen hypocrisy.

Thanks (0)
By dgwsoft
25th Jul 2007 12:20

No cake for the Revenue
Initial analysis:

This judegement actually overturns the reasoning of the Court of Appeal, which held there was no "arranagement".

But is is actually a lot better than that, because the exact way in which a company was formed, and the expectations people had, could have affected whether there was an "arrangement" in each individual case, and might have allowed the Revenue some wriggle-room in applying the legislation to other people. The HoL says there was an arrangement, but it is exempt as a gift between spouses.

Lord Hoffman:

"28. ... It was Mr Jones's consent to the transfer of a share with expectations of dividend to Mrs Jones for £1 which gave the transfer the "element of bounty" for the purposes of section 660A. By the same token, I think it made the transfer a "gift" for the purposes of subsection (6)."

This is the Common Sense position, and is very close to what I said to the Reveune in my own S660 dispute back in December 2003:

"Your position seems to be that there is an "element of bounty" sufficient to create a settlement, but not enough to create a "gift" in Section 660A(6). I think this is called "having your cake and eating it" and I see no reason to believe any court would take such a selective view of the legislation."

So, if there is bounty, there is also a gift. And since an ordinary share is not "wholly or substantially a right to income", I think that means we are all in the clear.

So much for "not setting a precedent". I don't see how the Revenue can now begin to think about applying the settlements legislation to any husband and wife company that issued ordinary shares.

So, good on the Lords for denying the Revenue their cake.

What I still want to know is, how many couples paid up under pressure, and what can be done to help them get their money back?

Thanks (0)
26th Jul 2007 10:38

good point by R Cave (see below) but I think
this could also be considered in the light of the Arctic judgement.
s 626 4 b (ii)

a gift is not an "outright gift" if there are any circumstances in which the property is applicable for the benefit of the giver.

in the case of husband and wife, the dividends payable to the wife may be used to pay the joint mortgage etc.

Not a line pursued by HMRC but it shows that the situation is not so clear cut, and maybe explains the differing opinions by the various courts.

The dividends haven't been gifted but they would come under the heading of related property.

Thanks (0)
25th Jul 2007 12:23

A test case - without question
Note Lord Neuberger of Abbotsbury words at para 72 in the judgement:

"The case raises points of some difficulty, it is significant to a number of people, and it has attracted media coverage in the professional press, and, unusually for a revenue case, more widely."

There you go - straight from the horses mouth. The arrogancy of HMRC in refusing to award test case status has been simply breathtaking.

Each Lord had a subtantial amount of comment to make - surely because of the wider interest.

Thanks (0)
25th Jul 2007 12:25

Who... going to pay for this farce? Was there an order for costs?

Thanks (0)
25th Jul 2007 12:39

not too excited
As a first point - one needs to add that on the question of whether there was a settlement, the Revenue won, and it was only the "husband and wife" get out that saved the day.

An interesting one for the Tory party because here is a piece of tax legislation which advantages married couples over those who merely live together - but of course applies to those living in civil partnerships as well !

Thanks (0)
26th Jul 2007 11:05

Unmarrieds OK (I think...)
I'm rather more sanguine about the position of unmarrieds. The Revenue's line was that because the 'working partner' could choose at any time to stop working, s/he retained an interest in the property. That, however, depends on the Revenue's view that the whole arrangement is an agreement for the working partner to transfer income to the non-working partner, and the company is merely a a mechanism for doing so. I don't think that stands in the light of Lord Hoffmann's comment about the share transfer being 'the essence' of the settlement.

You could just construct an argument for HMRC based on the idea that Baroness Hale raised about looking at each year individually, and I do wonder whether partnerships (especially those without partnership deeds) might be slightly more suspect, but I doubt HMRC has the stomach for another big fight on the existing legislation.

Mike Truman
Editor, Taxation magazine

Thanks (0)
25th Jul 2007 12:49

All those tax courses years ago
Tim Good 0
Rebecca Benneyworth 1

In all of those CCH / Hawksmere tax seminars, Tim Good consistently said HMRC would win, Rebecca said they wouldn't.

Now, does anyone remember Tim saying he'd eat his hat?

But more seriously, who advised their clients to change their arrangements when this first blew up? If I recall correctly, there was a suggestion at the time that perhaps they should.

Thanks (0)
25th Jul 2007 12:56

A big thankyou
I think we should give a very big thank you to Mrs and Mrs Jones for sticking with this case. and taking it as far as they did. Thank God that common sense preveiled for once when it comes to dealing with the beast that is HMCR.

Thanks (0)
26th Jul 2007 11:32

Why am I not surprised.....
As reported on this morning....

"The Treasury will make a statement to Parliament today indicating that income splitting will be outlawed in the name of maintaining fairness in the tax system. "

For the full article go to:

Thanks (0)
25th Jul 2007 13:01

In the context of the Tories
let's remind ourselves that when Independent Taxation was to be introduced, Chancellor Lamont said in 1988: "Independent taxation is bound to mean that some couples will transfer assets between them with the result that their total tax bill will reduce. This is an inevitable and acceptable consequence of taxing husbands and wives separately'" Note "acceptable"!

Prior to Arctic Systems, many of us thought that the chief representative of the Treasury spoke for his successors unless advised otherwise. If HMRC has any honour it should back off. I am sorry to see that the Revenue's Solicitor refers to a loophole. Sour grapes, Emily!

A loophole is a quirk in the law which was not intended. Mr. Lamont was quite aware of the possibility of certain arrangements likely to be made.

Thanks (0)
By Anonymous
25th Jul 2007 13:01

Arctic views
I bet the champagne was on ice, and there was a frosty reception from HMRC waiting for them. No doubt they were very chilled about the whole thing and just played it cool........

Thanks (0)
25th Jul 2007 13:25

Don't count your chickens
The advantage the State has over we mere mortals is that if cases go against them they can just change the law. I'm sure Gordon and his thieves are already drafting the appropriate legislation for the next Finance Bill. If the Tories can spot an opportunity (which they seem incapable of doing) they will block such a change to the law by committing themselves once and for all to transferable tax allowances between spouses - which should enable married couples to arrange their family finances to suit them as a family. Which is what Dave wants isn't it?

Thanks (0)
26th Jul 2007 12:07

It's strange how this 'fairness' does not seem to result in taxpayers paying less tax - unless they are exceedingly rich.

Is it fair that the IR (as it was at the time) decided to bring all its might to bear to reclaim taxes it believed was due for one year based on a dodgy interpretation of S660a.

Is it fair that small businesses are treated as tax avoiders without any real justification?

Is it fair that under IR35 a 'disguised' employee is liable for much more tax than would be due if he was a 'real' employee.

Is it fair that HMCE are not particularly clear in their definitions of what an MSCP is?

Thanks (0)
25th Jul 2007 20:26

Not just Tim Good, but Mercia as well
Interesting to see the Tim versus Rebecca comments earlier. One of the last Mercia courses I went on before giving up my membership of them in disgust was in a similar vein. Can't remember the guy's name, Mark something I think, was being evangelical about how we should all be advising our clients not only to stop paying their spouses, but also to accept defeat and stop the high dividend/low salary route as well, and for the future to pay all small company director/shareholders wholly or mainly under PAYE. Its no wonder the amount of clients that have come to us from the larger town centre firms who claim never to have been even told of the option of the low salary/high dividend route, nor the option to pay dividends to their spouses, after several years being a client with such firms. Are they on HMRC's payroll I wonder?

Thanks (0)
25th Jul 2007 19:30

Unchallenged Budgets
This is one of those happy occasions when the law has at last served justice.

Its a wonderful moment for Geoff Jones and his wife and is a true David and Goliath victory. The Law Lords are to be congratulated too given the failings of tribunals that ruled against the defendants.

Is there a single underlying reason why this case happened?

For me there is. It is the need for the Treasury to meet the budget demands of an elected government in the full knowledge that it will be set in place regardless of its size or wisdom.

There was a time when this was not possible. The House of Lords had the power to block Commons budgets. However, in 1911 the Liberal government wanted to create a fledgling welfare state and the Tory dominated Lords would not let it happen. The Commons won the day and the Parliament Act came onto the statute books. The House of Lords then began its slow decline, one that continues today.

Was it the right thing to happen? Of course it was!

However, we have now reached a point in time where the Treasury is finding it very difficult to meet the demands placed upon it. It feels that it has to be creative albeit at the expense of Civil Liberties.

One of those demands is revenue earned from National Insurance, supposedly to pay for the welfare state. I say supposedly, because those revenues are not ring fenced but go into the purse of general taxation. The commercial profile of the country has changed to the point where this tax is proving to be no longer economic to collect.

The electorate have become accustomed to asking for more and more and politicians have responded in kind. If you do not promise more, you do not get elected. The waste has become profligate. We are waging wars at great expense with armed forces not properly equipped or funded. More expense and we do not even make our own bullets.

In terms of the events of 1911 the welfare state is gold plated with ever thickening layers of gold. There are so many things where money is seen to be the answer by government and where results are not a good return on investment. Nobody looks at individual self reliance, its always the state that has to carry the can. Nobody can or will elect a government that will put things right.

But somebody has to say stop!

The clock must be turned back. The House of Lords must once again be able to oppose Commons spending to redress the balance and the Commons must find a way for this to happen. If it does not, the Commons will go the way of the Lords into a slow decline.

Thanks (0)
25th Jul 2007 15:27

A rare victory
This was a rare victory for the small business person in the current political and HMRC climate. It also demonstrates that the judiciary are still independent of their political masters in this country, which is a healthy and reassuring thing.

Another respondent has suggested that HMRC will now attempt to change the law. I have no doubt that such an attempt will be made, but for the time being Dave Hartnett and his acolytes at HMRC will need to show a bit of humility - not before time.

Thanks (0)
25th Jul 2007 15:31

I posted my opinion on this on another thread, as below:

The best possible postscript to this case would be if thumbscrews were applied for at least a month to every person who is an employee of, or otherwise associated with, HMRC and involved in its reprehensible conduct here, from original inspector to Dave Hartnett. to Ministers.

They have all been responsible for appalling maladministration and for bringing the tax system into disrepute which helps no-one, least of all them as tax collectors.

Thanks (0)
25th Jul 2007 15:32

What colour is garnet?

Ans = deep red I believe.

What a waste of public money.

Thanks (0)
By NeilW
25th Jul 2007 15:48

Interesting isn't it
I find it interesting that after all the years of turmoil we end up with the original answer.

- Of course its an arrangement to reduce tax. That is plainly obvious.
- However there is damn all HMRC can do about it because of the 'gift' exemption.

Interestingly the judgement clears the way for all those who gifted the shares to their spouses as well.

I love HoL judgements. They are the very epitome of wisdom and common sense.

Thanks (0)
25th Jul 2007 16:51

apart from....
...fact that
(i) CoA and HoL both gave unanimous judgements in favour of one party
(ii) but were at the same time diametrically at odds with each on the very basis of their respective judgements

- which surely must be a unique occurrence !!?? -

a most noteworthy aspect to my mind were the esteemed judgements on whether or not an ordinary share is substantially a right to income.
An ordinary share most definitely involves many other rights than "merely" rights to income.
But if it does not represent ".....substantially a right to income" then the whole of capitalism collapses !! (quoted or non-quoted makes no odds ultimately).
Phew, thankfully their Lordships took a legal rather than financial / economic view on that one.

Thanks (0)
26th Jul 2007 16:15

Heads they win, tails we lose
OK, I know my prediction yesterday was not the sharpest of the day - being pretty obvious - but I didn't expect the Treasury to sulk immediately and announce that they will seek to change the law. Why could they not accept defeat gracefully for a couple of days instead of doing a Sheffield United and saying "we'll be back"!

The only difference between a democracy and a dictatorship is that the latter forces their way into power and then do what the hell they like, whereas the former tell fibs, get voted into power, and then do what the hell they like.

Can I set the cat amongst the pigeons (as I have a knack of doing) and drop the following into the debate: if Husband and Wife have kids and decide that Wife will give up work and look after kids, enabling Husband to go out and earn £50,000, then the family will pay higher rate tax. If husband and wife decide both to go back part time for £25,000 each the same family get two personal allowances, two starting rate bands, and pay no higher rate tax. Questions: (1) does this affect the human rights of the first family, and (2) does anyone care?

Thanks (0)
By Anonymous
25th Jul 2007 17:30

Unmarried couples:
S 625 ITTOIA 2005 is the section which taxes income on the settlor if that income is payable to the settlor, or the settlor's spouse (or civil partner).

So, it does not apply to unmarrieds in business, people who are just friends or business partners in business, brothers or sisters in business, children who have reached majority in business with their spouses and whatever other combination.

Thanks to this decision, everyone is now equal, we can all go into business together!

Analysis and summary of judgment By Nichola Ross Martin.

Thanks (0)