Appeal Date Set For Key UK Tax Case

by Robert Lee, Tax-News.com, London

16 September 2005

The landmark Section 660, or 'husband and wife' tax case is set to be heard in the Court of Appeal between 17 and 18 January 2006, although, controversially, the outcome of the case will not known until after the self assessment tax deadline on January 31.

The case in question centres on Geoff and Diana Jones, who are contesting a £42,000 tax bill relating to their company, Arctic Systems. According to HM Customs and Revenue’s interpretation of the settlements legislation, the couple had sought to illegally reduce their tax bill by allocating income to the less active partner, who pays tax at a lower rate. It is said that about £1 billion in annual tax revenues depends on the outcome of the case.

The case has been deemed by the Master of The Rolls as one of significant importance, and this will mean that the hearing must include the Vice-Chancellor, who sits in the Court of Appeal only for the first three days of any given term. However, this also means that the outcome of the case will not be known until after the 2004/2005 self assessment deadline.

“This is deeply troublesome for hundreds of thousands of taxpayers and their advisers who will face further uncertainty about the classification of income and calculation of tax due,” commented Dr. Simon Juden, chairman of the Professional Contractors Group, a representative body established to support the UK's freelance and small business community in tax cases.

“We call upon HMRC urgently to issue new guidelines regarding the completion of self-assessment returns, and as always our services are on offer to help them draw up such guidelines and mitigate the potential uncertainty for taxpayers," Dr. Juden added.

In what was described as a "bitter blow" to potentially hundreds of thousands of small firms in the UK, the High Court in May rejected an appeal against Revenue & Customs's interpretation of Section 660.

In his judgment, Mr Justice Park agreed with the views of Special Commissioner Dr Nuala Brice in an earlier hearing, who had asserted that Diana Jones’s dividends were in fact income arising under an arrangement and that the exemption in Section 660A (6) should not apply.

Mr Jones generated £91,000 in fees in the tax year investigated by the Inland Revenue, but only paid himself around £7,000 in salary, distributing the rest as a dividend split between himself and his wife, who owned a half share in the company. Accountants believe that had Mr Jones paid himself significantly more in the form of a salary, say £60,000, the Revenue would not have taken up the case. However, just what constitutes a "going rate" salary for owners of such firms is, for the moment, something of a grey area.

While many observers fear that as many as 200,000 small firms could be adversely affected by a decision in favour of the taxman, Mr Justice Park stated in his concluding remarks that the ramifications of the case are unlikely to be widespread.

"In my view apprehensions that almost every case of a husband and wife company is going to be affected by this case are greatly exaggerated," he said.

"If a husband and wife set up a joint company and run it together (for example, the company opens a shop and the couple run and staff it), it does not follow from my judgment in this case that the husband is going to be taxed on the wife's dividends," he concluded.

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