UK's Small Firms Face Six Month Wait For Final Arctic Tax Verdict

by Robert Lee, Tax-News.com, London

22 November 2006

Hundreds of thousands of small family businesses in the UK must endure another six months of uncertainty surrounding their tax status, after it was announced that the House of Lords would not hear the HM Revenue and Customs appeal in the Arctic Systems case until mid-2007.

The scheduling of the trial, which will commence June 5 and run until June 7, means that the manner in which husband and wife-run businesses can legally arrange their tax affairs will not be resolved before the self-assessment deadline for the 2005/6 tax year on January 31, 2007.

In the case in question, HMRC argues that under settlements legislation, Geoff and Diana Jones, owners of Arctic Systems, a small IT consulting company, reduced their tax bill illegitimately by allocating income and dividends to the less active partner in the business to take advantage of their tax allowance and lower income tax rates.

The Inland Revenue, as it was known at the time, slapped the Joneses with a GBP42,000 backdated tax bill, which has been challenged through the courts until the Court of Appeal finally decided in the couple's favour in December 2005.

While the Revenue was refused leave to appeal this ruling, the department petitioned the House of Lords directly, and got its way earlier this year.

It is estimated 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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