UK Contractors Braced For Lords Verdict In Arctic Tax Case

by Jason Gorringe, Tax-News.com, London

06 June 2007

The landmark tax case between Arctic Systems and HM Revenue & Customs (HMRC) has commenced in the House of Lords, and a ruling in favour of the tax man could affect potentially hundreds of thousands of small firms across the UK.

The hearing, which commenced on June 5 and is expected to last for three days, marks the final stage in the case, which has been closely followed by contractors in a similar position to Geoff and Diana Jones, owners of Arctic Systems, a small IT consulting firm.

The couple, who have been supported throughout by the Professional Contractors Group, a body set up specifically to help the UK freelance community contest unfair tax claims, have been fighting HMRC after receiving a back-dated bill for GBP42,000 in tax which, according to the then Inland Revenue, was owed under the settlements legislation.

They had established the jointly-owned company, Arctic Systems Limited, after seeking advice from accountants. Each purchased one share in the company, drew a salary and distributed the profits equally as dividends.

HMRC has argued that dividends paid to Mrs Jones should be treated as Mr Jones' income for tax purposes, causing uncertainty for hundreds of thousands of small businesses with a similar set-up.

"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," PCG chairman Simon Juden, has stated.

After losing the initial hearing at the Special Commissioners in 2004 and a subsequent High Court appeal in March 2005, the couple finally had the judgement overturned by a unanimous ruling in the Court of Appeal in December 2005. However, 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.

Experts estimate that the Lords' verdict, which will be the final stage in the legal process, could have implications for as many as 200,000 small family-run businesses in the UK.

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