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HMRC To Issue Guidance For Firms Affected By Lords Tax Ruling

by Robert Lee,, London

01 August 2007

HM Revenue and Customs will be issuing detailed new guidance for the many thousands of small family-run firms in the UK affected by the House of Lords verdict in the Arctic Systems case ahead of the self assessment deadline for the 2006/7 tax year.

HMRC said that it has been keeping open some similar cases to that in Jones v Garnett (Arctic Systems) whilst it awaited the Law Lords' ruling. HMRC will now review all these cases and will seek to settle them in line with the Jones v Garnett decision if appropriate.

"Not every case will be exactly the same as Jones v Garnett. We will consider each case on the basis of its individual facts, but unless there are any additional factors which might cause us to take a different view, we expect that most cases where the settled property comprises: ordinary shares in a company; or an ordinary (ie unlimited) interest in a partnership, will be within the exemption for outright gifts between spouses," HMRC explained in a statement.

HMRC added that self assessment returns for the tax year 2005/6, which should have been completed in line with the Court of Appeal's decision in favour of Arctic Systems in December 2006, will not need to be amended. Meanwhile, tax returns for the 2006/7 tax year should be completed in line with the House of Lords decision, which was also in favour of Arctic Systems, the department said. However, new detailed guidance is being prepared on the settlements legislation in line with the decision and HMRC will issue it this autumn in time for the deadline for 2006/2007 returns, which falls on January 31, 2008.

On 25 July 2007 the House of Lords gave its judgment in the case of Jones v Garnett. HMRC had previously lost this case in the Court of Appeal and as a result had appealed to the House of Lords. The case concerned dividends payments made by a company to Mrs Jones through which Mr Jones provided IT consultancy services. HMRC’s view was that the settlements legislation deemed the dividends received by his wife to be Mr Jones’ for income tax purposes. The House of Lords, however, has now ruled in favour of Mr Jones.

In a ministerial statement issued in response to the Lords ruling, the government has indicated that it will bring forward proposals for changes to legislation to ensure that "individuals involved in these arrangements should pay tax on what is, in substance, their own income."

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