Journal :: The Ongoing Saga of Arctic Systems & Settlement Legislation

Published: December 16, 2005
Author: Graham Dragon
Category: Tax
Permalink: The Ongoing Saga of Arctic Systems & Settlement Legislation

Yesterday Lord Justice Keene of the Appeal Court handed a decision in the Arctic Systems case which must be causing clients all over the country to breath a sigh of relief. A decision which is, I believe, a victory for common sense.

I am sure you are aware that the Special Commissioners found for the Revenue and against Mr & Mrs Jones in this case, and that their decision was upheld by Justice Parks in the High Court.

In summary, Mr & Mrs Jones set up a company in which they subscribed for equal shareholdings. Mrs Jones did all the clerical and administrative work, and Mr Jones did the ?income producing? consultancy work. Mr Jones took a salary from the company in some years considerably below the amounts paid for his consultancy work. Clearly he would need to take a salary below those sums, as otherwise the company would run at a loss. But the Special Commissioners and the High Court seemed to accept the Revenue?s argument that this meant he was taking a salary artificially below the ?market rate?, and that the subsequent payment of a dividend of which Mrs Jones naturally shared half was therefore a ?settlement of income? by Mr Jones on Mrs Jones.

Fortunately, Lord Justice Keene has now disagreed. I quote from paragraph 83 of his decision:

?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.?

This is, I believe, a landmark decision. And perhaps the beginning of the return to a more common sense approach to tax law ? without which it is almost impossible for us to give sensible planning advice to our clients.

The Revenue may, of course, decide to take this to the House of Lords. My own view is that they probably will not, although I may, of course, be mistaken.

Keep your eye on the bulletins I send out from time to time for information on tax matters and other items that could be vital to your practice. Or why not join me on one of my training days ? speak to one of our sales advisers on 023 8089 2222 and see what benefits you might obtain.

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About Graham Dragon

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