HMRC Given Leave To Appeal Arctic Systems Decision In Lords

by Robert Lee, Tax-News.com, London

31 March 2006

HM Revenue and Customs, which has been granted leave to appeal a Court of Appeal decision in favour of Arctic Systems in a key tax case affecting small businesses to the House of Lords, has issued advice to affected taxpayers on how to complete their self assessment returns.

HMRC's new guidance has been published in the light of a judgment by a three-judge panel in the Court of Appeal last December, which overturned an earlier ruling by the High Court concerning the tax department's interpretation of Section 660A Settlements Legislation.

"In the circumstances we believe it would be premature to reconsider the guidance and the examples we issued in November 2004 in A Guide to the Settlements Legislation for Small Business Advisers," HMRC explained in a statement.

"The Court of Appeal judgement represents the law as it now stands. It follows therefore that taxpayers whose circumstances are consistent with the situation in Jones v Garnett are entitled to self assess or, within the time limits allowed, amend a self assessment in accordance with that judgement," the department added.

HMRC said that taxpayers who filed their returns online are entitled to write to the department detailing any amendments they wish to make. Taxpayers have until January 31, 2007 to make amendments to their 2004/5 tax returns.

According to HMRC, in the case in question, Geoff and Diana Jones, owners of Arctic Systems, a small IT consulting company, sought to illegally reduce their tax bill by allocating income and dividends to the less active partner in the business to take advantage of their tax allowance and lower tax rate.

However, the Court of Appeal panel ruled that HMRC had pushed its interpretation of the law too far, and stated that the couple's remuneration arrangements did not constitute pre-planned tax avoidance.

The tax authority petitioned the House of Lords directly to seek leave to appeal, despite the fact that the Court of Appeal refused it the right to challenge its judgment in the Lords.

The Professional Contractors Group, which has supported Geoff and Diana Jones throughout their legal ordeal, expressed dismay at HMRC's decision to pursue the case in the Lords.

"We are naturally disappointed that HMRC has chosen to prolong the uncertainty for hundreds of thousands of family businesses, rather than accepting the unanimous and common sense verdict delivered by three of the most senior judges in the land," commented PCG chairman Simon Juden.

"We strongly believe that where a husband and wife share the burdens and hard work of running their business, they are both entitled to share in the reward," he added.

A decision by the House of Lords regarding the case is not expected until the end of the year.

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