ARCTIC SYSTEMS

THE FUTURE FOR FAMILY OWNED SERVICE COMPANIES

It has been reported previously in Enterprise Express that on the 25th July 2007 the House of Lords gave its judgment in the case of Jones v Garnett (also known as “Arctic Systems Ltd”). The Revenue had previously lost this case in the Court of Appeal and as a result had appealed to the House of Lords.

 The case concerned dividends payments made by Arctic Systems a company owned by Mr and Mrs Jones to Mrs Jones. The company’s business was to provide IT consultancy services to third parties but only Mr Jones provided those services on behalf of the company. The Revenue took the view that the settlements legislation (section 660A et seq of the Income and Corporation Taxes Act 1988) applied. They therefore sought to tax the dividends received by Mrs Jones as Mr Jones’ income. Due to the application of higher rate tax, this resulted in a substantially higher assessment against Mr Jones than the assessment in aggregate for Mr and Mrs Jones.

Most practitioners thought that the Revenue was wrong and that the Revenue were grasping at straws in trying to apply the settlements legislation. Sadly, it required Mr and Mrs Jones to go all the way to the House of Lords to prove it.

Clearly, however, there were political forces at work behind the case other than the Revenue’s stated desire to tax people fairly according to the system. The view that the politicians were behind the Arctic Systems case all along is borne out in a written statement by Angela Eagle, the Exchequer Secretary to the Treasury on the 26th July 2007. In effect, she acknowledged the judgment given by the House of Lords and restated that the government is committed to maintaining fairness in the tax system. However, she made it clear that the case has brought to light the need for the Government to ensure that there is greater clarity in the law regarding its position on the tax treatment of ‘income splitting’. She said that it is the Government’s view that individuals involved in these arrangements should pay tax on what is, in substance, their own income and that the legislation should clearly provide for this. She said that the Government intends to bring forward proposals for changes to legislation to ensure this is the case. In the meantime, the Revenue will apply the law as elucidated by the House of Lords.

We can therefore expect legislation to be passed in due course that will seek to prevent such arrangements as existed between Mr and Mrs Jones from obtaining a tax advantage. It is also possible that the tax legislation will have retrospective effect as have other tax measures introduced by the current government (but by no other government in history). How sweeping the legislation turns out to be may well depend on whether Gordon Brown is still Prime Minister and how he perceives his popularity at the time. The best we can say in this regard is watch this space.

In the meantime the Revenue has stated that gifts of ordinary shares in a company, or an ordinary (unlimited) interest in a partnership, will be within the exemption for outright gifts between spouses. We would not therefore advise attempting to undo any ownership of a company or partnership that is shared between spouses at this time. Indeed we would positively advise you to take advantage of the existing legislation now by transferring business interests between spouses, on the basis that even though future legislation may be introduced to affect these arrangements, there is still a good chance that it will not be retrospective. Even if legislation does prove to be retrospective it will in all likelihood give an amnesty period in which the arrangements can be changed without attracting an additional tax charge.

If you think you are affected by this case or may be affected by the proposed legislation, we would strongly advise you to take advice now. Sandersons Solicitors are able to give advice and planning assistance on a wide variety of tax issues for businesses and individuals and we would be pleased to help.

If you wish to contact us please contact in the first instance Duncan Rann.

Tel:       01482 324662

Fax:      01482 223110

e-mail:  enquiries@sandersonssolicitors.co.uk

 Source:  The Federation of Small Businesses, November 2007