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BUSINESS MATTERS
The House of Lords
– John Whiting is a member of the
Chartered Institute of Taxation
warms the arctic
John Whiting is a member of the Chartered Institute of Taxation. The Chartered
Institute of Taxation is the main professional body concerned solely with taxation.
Here he advises small businesses particularly husband and wife businesses about
validating their tax planning...
Small businesses don’t usually look towards the recognise aspects of it; why then did HMRC deserved reward for her efforts. What was at issue
House of Lords for guidance on how they can object? was the amount paid to Mr Jones: HMRC would
organise their tax affairs but their Lordships’ have been happy if he had been paid a substantial
recent decision in the long-running - some six
What’s wrong with it: the
salary (whatever that was) by the company,
years - saga of the ‘Arctic Systems’ case has been
technical argument
leaving just a small profit to be paid out as
very helpful in that regard. So what was it all Clearly Mr and Mrs Jones were saving tax by dividends to the co-owners.
about, how can husband and wife businesses use their way of managing their business affairs. Most
the decision to validate their tax planning and is would say they were just taking advantage of the One point worth noting at this stage is that
there a danger the tax rules will be changed in the opportunity to run their affairs tax efficiently: not companies that had significant assets – perhaps a
future? a loophole but something that followed from shop owned by husband and wife – wouldn’t be
Background to the case
some key principles – that husbands and wives are caught by this new approach. That’s because when
taxed separately; and businesses are taxed the shares in the company were allocated, even if
The Jones v Garnett (Arctic Systems Ltd) case differently from employees. the husband was making a settlement, it wouldn’t
concerns the tax treatment of a husband and wife be just a gift of income but would involve the
owned company – the alleged ‘married couples HMRC’s technical argument was that Mr Jones’ assets owned by the company as well.
business tax’. It has been a controversial and actions in setting up the company, allowing his
important case concerning the way small business wife to subscribe for an ordinary share and the The Jones’s first appeal to the Special
income is taxed, with HM Revenue & Customs general arrangements, all constituted a Commissioners produced a finding in favour of
(HMRC) believing that unacceptable arrangements ‘settlement’. Under anti-avoidance rules, the HMRC and this was upheld at the High Court.
had been made in order to reduce the overall tax income of a settlement can be treated as that of However, the Court of Appeal found for Mr and
liability of the husband and wife concerned. the settlor (i.e. Mr Jones) in some cases; this is the Mrs Jones, saying that although there may have
source of the rule that stops parents putting been an arrangement between the taxpayers (in
The company, equally owned by Geoff and taxable income into the hands of their young setting up the company in the way they did) the
Diana Jones, had a turnover of £91,000 for one children apart from £100. arrangements didn’t confer a ‘bounty’ at that
particular year, derived from Mr Jones’s activities. stage, so there could be no settlement. Even if
Mr Jones drew a salary of £7,000, while his wife As far as husband and wife (or civil partners) are there was a settlement, it wasn’t something that
drew a salary for administrative work of £4,000, concerned, the settlement rules don’t operate was ‘wholly or substantially a right to income’ as
for which she worked approximately four hours unless the property given is “wholly or the share gave other rights.
per week. After expenses and corporation tax the substantially a right to income”.
couple shared the remaining £60,000 equally in The House of Lords has now upheld the Court of
dividends. As a consequence, the Jones’ paid less HMRC assessed Mr Jones on six years’ worth of Appeal, albeit on slightly different grounds. They
tax and national insurance contributions on their dividends paid to his wife by Arctic Systems Ltd, did think there was a settlement – there was that
income, because they took dividends rather than producing a tax bill of around £42,000 once element of bounty – but they agreed that it
salaries, and a significant portion went to Mrs interest had been added. Note that there was wasn’t just about income. The arrangement fell
Jones to use up her lower tax rates. never any dispute about the salary paid to Mrs into the exception in the settlement rules and Mr
Jones – it has always been perfectly acceptable and Mrs Jones were vindicated. So were many
This sort of arrangement has been very common (and sensible) for small businesses to pay all those advisers and professional bodies: there has been a
and indeed all but routine advice for couples involved at appropriate rates. Mrs Jones did work virtually unanimous chorus from the tax
running a business. No doubt many readers will for the company, supported Mr Jones, and profession that HMRC were wrong in their
34 P R I N T W E A R T O D A Y AUGUST 2007 www.mayerhousebusinessmedia.co.uk
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