Lords rule in favour of Arctic Systems
25 July 2007, 06:00 PM
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Lords rule in favour of Arctic Systems
I got htis e-mail today
Jones v Garnett (Arctic Systems):
The House of Lords has found in favour of Geoff Jones (the taxpayer) 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 contractors, their accountants and in fact most small business owners for the last four years and dominated all recent tax planning.
No further appeals are possible under UK law.
In their judgment, read out to a packed chamber this morning, the lords ruled that:
• The Jones were creating an arrangement in the nature of a settlement when they subscribed for one share each, and set up their company Arctic Systems Ltd
• However, the exemption for gifts between spouses also applied and dividends paid to Mrs Jones were therefore not income arising under a settlement.
The Jones were jubilant after the landmark decision, which was not totally unexpected by HMRC, (the Court of Appeal had previously and unanimously found in favour of the taxpayer).
HMRC will now have to review and substantially re-write its guidance on settlements and review its guidance on outright gifts.
For once some good news...............
Jones v Garnett (Arctic Systems):
The House of Lords has found in favour of Geoff Jones (the taxpayer) 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 contractors, their accountants and in fact most small business owners for the last four years and dominated all recent tax planning.
No further appeals are possible under UK law.
In their judgment, read out to a packed chamber this morning, the lords ruled that:
• The Jones were creating an arrangement in the nature of a settlement when they subscribed for one share each, and set up their company Arctic Systems Ltd
• However, the exemption for gifts between spouses also applied and dividends paid to Mrs Jones were therefore not income arising under a settlement.
The Jones were jubilant after the landmark decision, which was not totally unexpected by HMRC, (the Court of Appeal had previously and unanimously found in favour of the taxpayer).
HMRC will now have to review and substantially re-write its guidance on settlements and review its guidance on outright gifts.
For once some good news...............
25 July 2007, 06:15 PM
#4
basically his wife was working for the company, but instead of recieving a wage, recieved dividends instead (which are tax free/lower rate of tax?
) as a blatent tax dodge.
(how I understand it)
) as a blatent tax dodge.(how I understand it)
25 July 2007, 06:22 PM
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25 July 2007, 06:30 PM
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Originally Posted by Here's what they did
Mr. Jones is an IT specialist and his wife had been a manager in the catering industry. In 1992 they decided that he would set up his own IT business. On the advice of accountants a company was acquired from formation agents, it was called Arctic Systems Limited.
Mr. Jones and Mrs. Jones each paid £1 for one share each in the company. Mr. Jones became the sole director and Mrs. Jones was the company secretary as they were advised to do so. Neither had written service agreements with the company, and the business provided Mr. Jones’s services as an IT contractor to outside users, via agencies, for fees.
Mrs. Jones undertook all the book-keeping, financials and day to day administration which took her on average about four or five hours each week.
The couple took low salaries as recommended by their accountant and extracted the balance of the company’s profits by dividend, except that in some years this did not happen as they thought IR35 applied, which it did not as it later transpired.
The Jones were aware that paying dividends saved them tax, but were assured that this set up was normal practice. HMRC assessed Mr Jones on dividends paid to his wife on the basis that they were income from a settlement created by him. Mr Jones appealed, and now supported by the Professional Contractors Group, donations and his tax counsel has taken the case all the way to the House of Lords
Mr. Jones and Mrs. Jones each paid £1 for one share each in the company. Mr. Jones became the sole director and Mrs. Jones was the company secretary as they were advised to do so. Neither had written service agreements with the company, and the business provided Mr. Jones’s services as an IT contractor to outside users, via agencies, for fees.
Mrs. Jones undertook all the book-keeping, financials and day to day administration which took her on average about four or five hours each week.
The couple took low salaries as recommended by their accountant and extracted the balance of the company’s profits by dividend, except that in some years this did not happen as they thought IR35 applied, which it did not as it later transpired.
The Jones were aware that paying dividends saved them tax, but were assured that this set up was normal practice. HMRC assessed Mr Jones on dividends paid to his wife on the basis that they were income from a settlement created by him. Mr Jones appealed, and now supported by the Professional Contractors Group, donations and his tax counsel has taken the case all the way to the House of Lords
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25 July 2007, 10:45 PM
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Clearly there is a happy medium ground to be found in all of this. The advice we received with regards to companies and dividends is that HMRC were so hot on this topic you could not safely pay dividends to a spouse without risking huge hassle, even if they did work for the company 
They have treated some people very unfairly which sparked off this whole debate, and it has now swung very far in the other direction. Don't worry though, good old Brown is sure to bring in new legislation, and most probably make it retrospective.
They have treated some people very unfairly which sparked off this whole debate, and it has now swung very far in the other direction. Don't worry though, good old Brown is sure to bring in new legislation, and most probably make it retrospective.
25 July 2007, 10:46 PM
#11
Sounds to me more like the exploitation of a loophole in order to avoid paying income tax that every Employee has to pay.
I hope the law is changed to stop that going on.
I hope the law is changed to stop that going on.
26 July 2007, 09:22 AM
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There is no way the legislation was ever intended to allow this, as it was written at a time long before the advent of the sole director/employee or husband and wife director/employee companies.
Fair play to those who exploited it, but ultimately all those not doing so are having to subsidise what would have been collected in tax had the exploitation not taken place.
26 July 2007, 09:23 AM
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Absolutely correct, and whilst legally within the law, it is most certainly a way to reduce the tax liability.
There is no way the legislation was ever intended to allow this, as it was written at a time long before the advent of the sole director/employee or husband and wife director/employee companies.
Fair play to those who exploited it, but ultimately all those not doing so are having to subsidise what would have been collected in tax had the exploitation not taken place.
There is no way the legislation was ever intended to allow this, as it was written at a time long before the advent of the sole director/employee or husband and wife director/employee companies.
Fair play to those who exploited it, but ultimately all those not doing so are having to subsidise what would have been collected in tax had the exploitation not taken place.
I agree - fair play, but we don't subsidise anybody. We pay what's due, no more no less.
26 July 2007, 09:27 AM
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They do pay tax on dividends, just a lot less. At least the small businessmen (in the Uk) 
are not being hammerred where the big companies can wangle tax credits for tax paid overseas and avoid billions!
are not being hammerred where the big companies can wangle tax credits for tax paid overseas and avoid billions!
26 July 2007, 09:37 AM
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"We pay what's due, no more no less."
should read
"Everyone should pay what's due, no more no less."
A large proportion of high net worth individuals pay a lot lower % of tax than most of us.
Some people are so wealthy they have successfully negotiated with the IR a one off tax payment; the IR are pretty happy and they save costs on investigation.
It's us hard working individuals/families, in normal permanent jobs, paying the majority of this country's tax share.
should read
"Everyone should pay what's due, no more no less."
A large proportion of high net worth individuals pay a lot lower % of tax than most of us.
Some people are so wealthy they have successfully negotiated with the IR a one off tax payment; the IR are pretty happy and they save costs on investigation.
It's us hard working individuals/families, in normal permanent jobs, paying the majority of this country's tax share.
26 July 2007, 09:42 AM
#19
What is wrong then when a company is formed and the risks and rewards are shared between the 2 shareholders? I mean if the company went insolvent both are liable for anything arising out of directors liabilities?
The very reason this failed was because it was completely "unconstitutional", if HMRC had succeeded this would have had thrown divorce laws into disarray as they are based on this idea of partnership and sharing.
There can be no suggestions of avoiding an taxes because paying a small salary and the rest in dividends is totally legitimate.
26 July 2007, 10:13 AM
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Of course, once the govt. close the loophole to get their £yyy then we can expect a reduction of £xxx surely
Of course not
Originally Posted by Yes Prime Minister
- Sir Humphrey: "Taxation isn't about what you need."
Jim Hacker: "Oh, what is it about?"
Sir Humphrey: "Prime Minister, the Treasury doesn't work out what they need to spend and then think how to raise the money."
Jim Hacker: "What does it do?"
Sir Humphrey: "They pitch for as much as they think they can get away with and then think what to spend it on." - Jim Hacker: "These figures are just guesses."
Sir Humphrey: "No, they are government statis..... they're facts."
26 July 2007, 10:19 AM
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Besides, people who have large income in the form of dividends pay more tax per capita than people on salaries, even if it's a lower percentage. So THEY subsidise YOU.
26 July 2007, 12:40 PM
#24
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There is no exploitations or loopholes whatsoever, When a man and wife marry they enter into partnership for life, they essentially share everything.
What is wrong then when a company is formed and the risks and rewards are shared between the 2 shareholders? I mean if the company went insolvent both are liable for anything arising out of directors liabilities?
The very reason this failed was because it was completely "unconstitutional", if HMRC had succeeded this would have had thrown divorce laws into disarray as they are based on this idea of partnership and sharing.
There can be no suggestions of avoiding an taxes because paying a small salary and the rest in dividends is totally legitimate.
What is wrong then when a company is formed and the risks and rewards are shared between the 2 shareholders? I mean if the company went insolvent both are liable for anything arising out of directors liabilities?
The very reason this failed was because it was completely "unconstitutional", if HMRC had succeeded this would have had thrown divorce laws into disarray as they are based on this idea of partnership and sharing.
There can be no suggestions of avoiding an taxes because paying a small salary and the rest in dividends is totally legitimate.
There is a massive diference between the issue of payment of dividends to husbands/wives/siblings to bring income to the familiy unit without paying income tax as opposed to sharing of reward between two or more business associates. It is an issue that quite rightly gives HMRC serious cause for concern.
Whilst the wife in question in this particular case may well have played an active role in that company, the more common scenario is that the other party has sod all to do with the business. He or she is a director/secretary in name only, has paid...oh wow, £1 for the shareholding and is paid a dividend on that share for the simple reason of extracting funds from the company. 99% of the time the "dividend" is simply paid into a joint bank account or effectively gifted back to the husband or wife thus avoiding income tax.
It may well be in accordance with the current legislation bit it is most certainly tax avoidance as it goes against what the legislation intended.
That's most certainly exploitation of a loophole, and only the directors in question would be accountable in the unlikely event they were found liable in an insolvency, not the shareholders. Shareholder liability is limited to the extent of their shareholding, usually in such cases, £1...
IR35 legislation was introduced to stop individuals avoiding income tax - there will certainly be legislation introduced to stop similar avoidance in small companies with husband/wife shareholders.
Last edited by Devildog; 26 July 2007 at 12:45 PM.
26 July 2007, 12:41 PM
#25
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26 July 2007, 04:45 PM
#26
I'm not sure, and I'm no expert, but everything I read from experts in law pointed to the fact that you couldn't have an unfair legal system that treated marriage differently depending on what aspect of the law your were talking about. ie: divorce courts essentially work on 50/50 splits for married couples, why should that be any different from any aspect of their lives. Even if the wife does nothing and only buys a £1 share, the fact is a husband and wife become a single unit - both of them live their lives together and any actions one takes has an effect on the other.
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