UK Tax Bodies Publish Arctic Systems Guidance

by Jason Gorringe, Tax-News.com, London

20 January 2006

In the wake of HM Revenue and Customs' decision to appeal to the House of Lords in connection with the long-running Arctic Systems tax dispute, the UK's six main tax bodies have issued an updated guidance note to help tax advisers and their clients with their tax returns for the year ended 5 April 2005.

The representative bodies in question are:

• The Chartered Institute of Taxation (CIOT)
• The Tax Faculty of the Institute of Chartered Accountants in England & Wales (ICAEW)
• Association of Chartered Certified Accountants (ACCA)
• Institute of Chartered Accountants of Scotland (ICAS)
• Association of Taxation Technicians (ATT)
• Association of Accounting Technicians (AAT)
  

HMRC announced on March 13 that it intends to seek a review of the recent decision by the Court of Appeal in a key test case involving Section 660A settlements legislation, leaving many thousands of small businesses in the UK continuing to face an uncertain tax future.

The tax authority indicated last week that it will petition 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.

According to HMRC, 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.

Mr Jones had generated GBP91,000 in fees in the tax year investigated by the Inland Revenue, paying himself around GBP7,000 in salary while his wife received around GBP4,000 in salary. The rest, after expenses and corporation tax had been subtracted, was distributed as a dividend split between himself and his wife, who owned a half share in the company.

However, overturning an earlier ruling by the High Court, a three member Court of Appeal panel ruled last December that the tax department had pushed its interpretation of the law too far, and stated that the couple's remuneration arrangements did not constitute pre-planned tax avoidance.

Recommended