The UK government has announced that it will bring forward new legislation to change the tax laws in the light of the House of Lords judgment in the Arctic Systems case.
In a ministerial statement issued on Thursday, the day after the verdict was delivered by the Law Lords, Exchequer Secretary to the Treasury, Angela Eagle announced that the case has highlighted the need for the government to ensure that there is greater clarity in the tax system regarding the tax treatment of 'income splitting'. She added that the government is of the view that individuals should pay tax on their own income.
"Some individuals use non commercial arrangements (arrangements that they would not reasonably enter into with an arms-length third party) to divert income (which would, in the absence of those arrangements have flowed to them) to others. That minimises their tax liability, and results in an unfair outcome, increasing the tax burden on other tax payers and putting businesses that compete with these individuals at a competitive disadvantage," Eagle stated in response to the verdict.
In the Arctic case, the tax authority challenged the way in which the owner distributed income through the firm to take advantage of his wife's lower tax rates, but was eventually defeated in the House of Lords earlier this week.
"It is the Government’s view that individuals involved in these arrangements should pay tax on what is, in substance, their own income and that the legislation should clearly provide for this," Eagles continued. "The Government will therefore bring forward proposals for changes to legislation to ensure this is the case."
In the meantime, HM Revenue and Customs will apply the law as elucidated by the House of Lords and will be providing guidance in due course, but the government intends to launch a consultation on how the law in this area can be changed.
"The Government would not want commercial arrangements to be caught by any change to legislation," Eagle assured businesses.
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