Jones v Garnett : Overview of the final judgment By Nichola Ross Martin

Kashflow logo
Share this content

The five law lords, Lord Hoffmann, Lord Hope of Craighead, Lord Walker of Gestingthorpe, Baroness Hale of Richmond and Lord Neuberger of Abbotsbury found unanimously in favour of the taxpayer Mr Geoff Jones, in their judgement released on the 25th July, however, they each gave us a few extra reasons for reaching the decision that they did.

The decision

The Lords overturned the Court of Appeals findings by deciding that there was a settlement and that Geoff Jones was its settlor. Lord Hoffmann, in his leading judgment describes how the description "settlement" catches an arrangement as simple as an incorporation of a new venture, when combined with the right degree of motivation (to divert income away from the income earner for less than commerical reasons). The case authorities which...

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.

30th Jul 2007 16:51

Society as a whole
The task system never considers society as a whole. It considers groups or categories of people.

Thus single parents receive massive amounts of Tax Credits, families with working partners receive less generous tax credits and middle aged men receive no tax credits.

Meanwhile, private equity has a somewhat generous tax settlement and anyone who can claim non-dom does even better.

The tax system is always a dance - some people are deemed to be worthy of having their pockets felt and others are deemed worthy of having their palms crossed with silver.

The concept of fairness is a complete myth. The Chancellor defines fairness based on whatever he wants to do.

There is nothing to stop anyone setting up a company but few relatively speaking do so.

Thanks (0)
By Anonymous
29th Jul 2007 10:55

What is GAAR?

Thanks (0)
By Anonymous
30th Jul 2007 19:40

The "only workable conclusion". Well, put it this way, can you imagine the result if HMRC had got it right?
We would have to assess each business year on year, and if husband and wife were working flexibly on different contracts, you might have a settlement one year and not the next.
How would you measure who was entitled to what? Eg. a case where say, Mr Jones contract earned 80% of billed fees and Mrs Jones 20%, but she did 100% of the admin? How would be entitled to what, and why? It would be "unworkable" in my opinion.

Just to add, regarding "income splitting", it has always been deemed OK to split investments with your spouse, and this was fully debated in Parliament back in 1990. Investments produce income, so why can you not split earned income too, or is this "relief" only to be available to those who have high investment or property income? It was always OK to gift ordinary shares anyway, no changes there, and of course, if you are a couple but unmarried you have always been able to do what you like as the chances of HMRC ever managing to pin you down under the settlement provisions is extremely slim.

Thanks (0)
By wdr
26th Jul 2007 10:26

Pyrrhic Victory for taxpayers as a whole- WE NOW HAVE A GAAR BY
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, 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)
By Anonymous
26th Jul 2007 09:12

David W
No, I guess that you were not being too picky! I have altered the piece to emphasise that there needs to be some sort of non-commercial motivation behind an incorporation to transform it into a settlement.

Now, all we need to worry about tis he phrase "outright gift", unless of course the Treasury still wants to pursue that outmoded phrase "the right amount of tax", but I think we will just all go round in circles with that...

Thanks (0)
25th Jul 2007 22:35

Extremely troubled....
I think that one of the most troubling aspects to this whole sordid affair, and it is sordid because of the arrogant and politically led vendatta by HM Revenue & Customs against the typical small businesses such as the Joneses, is the fact that, for the past eleven years or so we have lived in a tax world of "self-assessment". Yet the glaring thing here is that, in a very common situation, three out of four tiers of taxation 'judges' have given three different answers. So just how can the ordinary 'man in the street' be expected to know the answers??

So to Brown and his successor - if ever there was an argument for tax simplification, this is it!!!

Oh, and my own hearty congratulations to Mr & Mrs Jones and all their legal team for the excellent work. However, I have no doubts that this empty and bankrupt Government will now just change the rules to try to continue to fill their coffers to pay for their illegal wars and largely fictituous "war on terrror". Coffers filled from the backs of the hard working entrepeneurial men and women of this once great nation.

Thanks (0)
25th Jul 2007 19:39

Law and precedent


I think one has to look at 'the guts' (the key points) of the HoL reasoning and give most weight amongs those key points to the points upon which all the judgments agree.

In particular the comments of Baroness Hale in which she expresses some doubt as to whether there was a settlement at all would not be regarding as binding precedent as: (i) no one else in the HoL agreed with her, (ii) she said herself it would be presumptous of her to rule that there was no settlement, and (iii) she did not need to decide that there was no settlement in order to come down in favour of the taxpayer.


Thanks (0)
25th Jul 2007 19:25

A question of law and precedent
the lead judgement presumably provides the precedent. what is to made of concurring judgements from the other LoA? what is to be made of additional commenst that they make? what fiorce do they have<

Thanks (0)
25th Jul 2007 18:03

we are going to get confused ..... postings in different places, let alone by the fundamental differences in the bases of the learned judgements made in the course of this case !!

Couple of points :
(i) er, careful Nicola about the infamous phrase "common sense" !! It's a result everyone bar HMRC thought was "right", but given the head-standing (most especially as between CoA and HoL) that has happened as between experts (ie the judges) who have been given immense resources to examine the issues, not sure that we can say that in coming to the "right" conclusion is same thing as the outcome is "common sense" !!
(ii) a most noteworthy aspect was the esteemed judgements as to whether or not an ordinary share is substantially a right to income.
An ordinary share most clearly and 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 would collapse !!
Quoted or non-quoted makes no odds ultimately.
Phew, thankfully their Lordships took a legal view, rather than an "overview" or financial / economic view on that aspect.

Thanks (0)
25th Jul 2007 17:43

Creating a settlement


I am being picky, but I think your comment that "the term "settlement" catches an arrangement as simple as an incorporation of a new venture" does lack the full flavour of the House of Lords decision.

If there had been simply an incorporation of a new venture I do not think anyone would regard that as creating a settlement. What The Lords are saying, if I understand them correctly, is that you have to take a common-sense view of the whole thing. That is to say that the incorporation of the company together with the share ownership between Mr and Mrs Jones and the plan as to how the company would operate and the expectation as to how it would remunerate Mr and Mrs Jones and pay dividends and the result that was actually achieved in the event - looked at all together - had a certain unity and amounted to a settlement.

Do you agree?


Thanks (0)
30th Jul 2007 12:26

General Anti-Avoidance Rule.

Thanks (0)
30th Jul 2007 13:03

What's in a word
I thought it was Evasion that was illegal - Avoidance is just "planning" surely ?

Thanks (0)
30th Jul 2007 15:34

Artifical or Complex?
It's easy.

First determine the maximum amount of tax payable under say IR35 or the MSC legislation or a zero dividends policy.

If your arrangement is paying less than the maximum by more than a few pennies it will be deemed to be a scheme - unless perhaps you manufacture widgets and offer free childcare to 20 employees.

Remember the Artic case was kicked off by an IR35 investigation which the IR folded on. They then tried with s660a. That failed. Now they want to change the law.

Follow the money...

Thanks (0)
30th Jul 2007 16:10

The only answer?
I really do think that for Nichola to claim that the Lords' decision was the only workable answer to this case is a little over the top.

If, as she claims income splitting is now legal and people can do as they like and no economic consideration need be given to the salary / dividend split in companies for tax purposes then she clearly shows why this may have been the only anwer in current law (with which I have agreed) but why a change in the law is essential so that unfair advantage is not supplied to one group in society at considerable cost and prejudice to the rest.

It would be good if comment on AccountingWeb could, just occasionally, see beyond self interest and consider the duty that politicians and tax authorities owe to society as a whole. Actually accountants as a profession also have that duty. But they seem to have forgotten it.

See for more and I will be publishing a more in depth analysis on this later this week (if all goes according to plan).

Thanks (0)
31st Jul 2007 11:07

Pot - kettle
If HMRC calls certain "tax planning" schemes "artificial", what the heck should you call the HMRC's (and Chancellor Brown's) own convoluted and contrived measures to extract additional revenue from the taxpayer ? Who started it ?!

Thanks (0)
21st Aug 2007 12:07

A Marxist analysis
What lies behind all the nonsense we have been putting up with for the last few years, IR35, Non-corporate distributions, s660 is the fact that this government and the previous one have sytematically created a tax system which favours investment income over earned income. Workers are taxed and NICed punitively whilst the owners of investments (capitalists) are treated favourably. Unsurprisingly, workers like the Jones try to get the advantages given to the capitalists. This is what the government wants to stop. There is an easy solution. Bring back investment income surcharge (Note for the youngsters - this was abolished in 1983) and perhaps reduce the NIC levels for everyone else. But, whoops, this would hurt the very wealthy, so it isn't going to happen. As long as the goverment insists on maintaining its unfair prejudices against working people, they will attempt to circumvent the laws and the government will be forced into ever more artificial schemes to prevent them.

Up the workers!

Thanks (0)
02nd Aug 2007 12:00

All four tiers disagree
Just to amplify John Savage's point, in fact all four tiers of 'judges' have disagreed on the ratio for this case. The presiding SC decided for HMRC (with a controversial casting vote) on the basis that Mr Jones as sole director controlled the dividends. Andrew Park J decided for HMRC on the grounds that it was a settlement because a fair market salary was not paid, and that there was not an outright gift (in fact that there was not a gift at all).

The CA found for the taxpayer on the grounds that there was no settlement, but (obiter) that if there had been it would not be an outright gift. The Lords unanimously upheld the CA but on precisely opposite reasoning - there WAS a settlement, but there also WAS an outright gift.

The judicial statement in the case which is probably now most regretted by its author is probably Andrew Park's to the effect that it was really all very straightforward...

Mike Truman

Thanks (0)
By Anonymous
02nd Aug 2007 16:02

Dawn Primarolo should be hanged and quartered
because these are the sorts of impenetrable questions on tax liability and disgraceful maladministration to which we taxpayers - I’m sorry I’ll rephrase that - we customers were subjected by HMRC under her watch.

Thanks (0)
By Anonymous
30th Jul 2007 14:18

Battle won - war lost already?
Delighted as I am by unanimous decision of the Lords and the clarity of their remarks about ordinary shares I don't feel inclined to celebrate. The party pooper is Part 7 of the ITEPA 2003.

With one or two limited exceptions, shares in a company issued to or otherwise acquired by an individual by reason of his or another's past, present or future employment by that company are deemed to be employment ralated securities.

A dividend is a benefit in connection with shares.

Originally, Section 447(4) provided that a dividend from an employment related security would not be the subject of a PAYE charge because dividends are taxable under Chapters 3 and 4 of ITTOIA 2005.

However, 447(4) was amended by Finance (No2) Act 2005, with effect from 2 December 2004. Since then if something has been done which affects the employment related securities as part of a scheme or arrangement the main purpose (or one of the main purposes) of which is the avoidance of tax and national insurance contributions then PAYE is due.

On 21 June 2005 Dawn Primarolo made a Ministerial Statement (a transcript of which can be found within Paragraph 90060 of HMRC's Employment Related Securities Manual). Her stated purpose was "to offer small businesses some reassurance" in light of genuine concerns raised by professionals.

90060 tells us that "normal dividends are unlikely to be charged under Chapter 4" and that ", where an owner managed company, run as a genuine business, pays dividends out of company profits and there is no contrived scheme to avoid Income Tax or NIC on remuneration or to avoid IR35 rules HMRC will not seek to argue that a Chapter 4 benefit has been received by the directors because of the exclusion provided by Section 447(4)".

Why do I not feel reassured? Is the payment of a dividend something that "affects" a share? What does HMRC consider to be "normal"? What does the Paymester General consider to be complex or contrived? Where does one draw the line? How does one self assess? Will the like of Mr and Mrs Jones now be attacked with 447(4)? Am I simply becoming paranoid?

Thanks (0)
09th Aug 2007 11:28

Arctic Systems: Moving on
I have written a paper on how to resolve the issues raised by the Arctic Systems case.

It is available at

Thanks (0)
09th Aug 2007 11:44

the law report published today
present the judgement in an easy manner

i also find Richards article gobsmackingly arrogant, more legisation , more enforcement , more tax ,
more complication and all based on fairly riduculous notions about fair amounts of tax. hogwash. the challenge for the rest of us is to counter Richards arguements as he has so shyly stuck his neck above the parapet

Thanks (0)