The House of Lords unanimous ruling regarding the Arctic Systems case is welcomed today by ACCA (the Association of Chartered Certified Accountants).
ACCA says the ruling in favour of Arctic Systems brings much-needed clarity for small business owners – especially those owned by spouses – who want to pay dividends and legitimately take advantage of the lower tax status of the wife within the business partnership.
The long-running case centres on a business called Arctic Systems, owned by Geoff and Diana Jones. The couple were originally taken to court by HM Revenue & Customs who challenged Mrs Jones' dividend payment. On 15 December 2005, the Appeal Court judges ruled in favour of the Jones' saying their decision to pay dividends to the wife was not tax avoidance and was merely dependent on the performance of the company.
HMRC then took the case to appeal, saying the ruling "cannot be regarded as final". As a result, the case has been heard in the highest court of the land – the House of Lords – finally resulting in a positive ruling for Mr and Mrs Jones.
Chas Roy-Chowdhury, head of taxation at ACCA, says of the victorious ruling: "Mr and Mrs Jones must be delighted. But importantly, clarity had been brought to cases that mirror Arctic Systems. It means similar small businesses will now be able to run their affairs without fear of being classed as tax avoiders."
Roy-Chowdhury concluded: "What the Jones’ were doing was a well-used practice within such businesses. The argument has been rather esoteric, and the case cuts across the whole idea of the independent taxation of husband and wife, which is widely agreed to have been a healthy development in the tax system in recent years. But caution is still needed because we wonder whether this will be the last of the matter and whether we can expect legislation from government."
ACCA will be issuing guidance to its members as HMRC have published a list of circumstances (in Tax Bulletin 64) where it would look at the situation with a view to invoking the legislation. These are:
• A main earner drawing a low salary leading to enhanced profits from which dividends can be paid to shareholders who are friends or other family members. The Arctic Systems case was a victory for the taxpayer, but similar cases may have different circumstances;
• Disproportionately large returns on capital investments e.g. excessive rates of interest paid on loans;
• Differing classes of shares enabling dividends to be paid only to shareholders paying lower rates of tax e.g. ‘A’, ‘B’, ‘C’, ‘D’ etc. shares, some carrying higher dividend rights than others;
• Dividends being waived so that higher dividends can be paid to shareholders paying lower rates of tax. Waivers have to be made before a dividend is declared, so that leaves a higher profit available for future distribution;
• Income transferred from the person making most of the profit to a friend or family member who pays tax at the lower rates. (There is already legislation in place regarding diverting income to minor children).
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Notes to editor
1. ACCA is the largest and fastest-growing international professional accountancy body and has 296,000 students and 115,000 members in 170 countries.
2. ACCA experts are available for media comment on all aspects of UK and international accounting, auditing, tax, small business, environmental reporting, corporate governance, business law and public sector finance.
3. Background to the case: The Arctic Systems case involved Geoff and Diana Jones, who set up an IT consultancy in 1992. The couple had arranged their tax affairs so that both held shares in the company and received similar dividend payments - but Mr Jones was identified as generating the most income while his wife tended to the administrative side of the business. The Inland Revenue argued that he had unfairly transferred some of his income in the form of the dividends to his wife to benefit from her lower tax status.
For further information please contact:
Chas Roy-Chowdhury, ACCA Head of Taxation
phone: 020 7059 5976 / 07710 707516
e mail: chas.roy-chowdhury@accaglobal.com
Helen Thompson, ACCA Press Office
phone: 020 7059 5759 / 07725 498 654
e mail: helen.thompson@accaglobal.co.uk
