Arctic win at the House of Lords

Arctic Systems has won its gruelling tax battle after the House of Lords roundly rejected an appeal by HM Revenue & Customs to impose tax on it retrospectively under the Settlements Legislation (s660A).

The judgement is a victory not only for the IT consultancy but for tens of thousands of other husband and wife companies who also reduce their tax bills by taking income via dividends and low salaries.

It has been welcomed by freelance and small business groups, as well as leading tax advisors, who believe the taxman was wrong to use decades-old legislation to penalise companies for accepted tax planning.

The Professional Contractors Group welcomed the vindication of family-run businesses, saying they will now press the government to ensure their tax treatment remains undisturbed.

David Ramsden, chairman of the group, which has supported Arctic Systems throughout its four-year legal battle, said: “This is an enormous relief for family businesses throughout the UK, who had been facing a tax rise from a previously obscure bit of law.

“We will now be working to ensure that HMRC respects this decision and does not attempt to penalise family businesses unfairly.”

Geoff Jones, founder of Arctic Systems, said: “Diana and I are delighted that the Law Lords have vindicated our position, and confirmed that we have done nothing wrong.

“This has been a terrible ordeal for us, which looked like it could cost us our home at one point. We’re relieved it’s all over, but I am still extremely angry that the Government tried to pull this stunt in the first place.”

And Anne Redston, spokesperson for the Chartered Institute of Taxation , which also welcomed the Lords' decision, said: “The CIOT is delighted that, after such a long battle, the House of Lords has confirmed that HM Revenue & Customs were wrong to attack husband and wife businesses in this manner.

“The CIOT has always considered that HMRC were wrong to use this obscure legislation against small businesses like the Jones’s, and the House of Lords has now agreed with us.”

In their judgement, the Lords said the arrangement by which one spouse, like Geoff Jones, uses a private company as a tax-efficient vehicle for distributing to the other income from its business is likely to constitute a “settlement.”

They added: “But so long as the shares from which that income arises are ordinary shares, and not shares carrying contractual rights which are restricted wholly or substantially to a right to income, the settlement will fall within the exception created by section 660A.”

The Federation of Small Busineses has applauded the judgement, but said HMRC's conduct in the case had been "utterly shameful."

Evidencing the claim, the group said the department used taxpayers' money to fund its four-year campaign of trying to extract money from the Joneses.

Bill Knox, its taxation chairman, said: "The family tax arrangement that the Jones’ had in place has been around for years and for HMRC to suddenly decide to clamp down without warning was totally unjustified.

He added: "We are very pleased with the House of Lords’ decision, which totally vindicates the Jones’ position. Hopefully HMRC will now realise this type of aggression towards honest taxpayers is unacceptable.”


25th July 2007

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