Arctic Systems - The Verdict

At last, a bit of Christmas cheer! No, not from Gordon Brown’s Pre-Budget Report on 5 December, which contained more convoluted ways of raising tax, (but we have come to expect that from the Chancellor!) but from the Court of Appeal.

On Thursday 15 December the judgment in the Arctic Systems case was issued, which creates a little more certainty for tax returns that have to be filed by 31 January 2006. The decision went in the taxpayers’ favour.

For those of you in need of a reminder, the case hinged on whether dividends paid by the company to the wife (who was not a higher rate taxpayer) could be taxed instead on her husband (who was a higher rate taxpayer). In the High Court the Judge decided that they could applying what he referred to as ‘well established principles’ (namely legislation relating to settlements and arrangements) to the case. The Court of Appeal has overturned the High Court’s decision. This is clearly good news! The court has refused the Revenue leave to appeal to the House of Lords. However this does not mean that the Revenue may not apply for leave to appeal and so we shall have to wait and see whether or not this is the end of the road.

You can read the full Court of Appeal judgment by clicking on the link below, but in summary the Court of Appeal made clear that the settlement rules could only apply if there was an element of ‘bounty’. The High Court had argued that an intention to provide bounty in the future was enough for the rules to be applied but the Court of Appeal disagreed. In essence, at the time the company was created and Mrs Jones subscribed for her share, there was no agreement as to the future income of the company or indeed what would happen to it by way of salary and/or dividend payments. Quoting from the Court of Appeal judgment:

‘In the absence of any service agreement between the Company and Mr Jones I am unable to accept that the payment of modest salaries to Mr Jones was any part of the arrangement. Similarly the declaration of the dividends was not arranged in advance; it was dependent on the trading fortunes of the Company. Further, as counsel for Mr Jones submitted, and, as I accept, the fact that the structure being set up might lend itself in the future to some tax mitigation is irrelevant to the existence of an element of bounty. ‘

Internet Link:

If you would like to read the full judgment go to:
Court of Appeal's decision.