The long running case of 'Artic Systems' or 'Jones v Garnett' has finally reached its conclusion  - with the House of Lords finding in favour of the taxpayer.

As reported in a previous newsletter from us, the basic facts of the base surrounded a small business owner who set up his business with both himself and his wife subscribing for a share each.  Mr Jones was the director and main trader and his wife was company secretary and dealt with the administration side of the business.  They both withdrew a minimum salary as advised by their accountant at the time, and extracted the rest of the profits via dividends, paid to them both in equal proportions in accordance with their shareholdings. 

This set of circumstances reflects the way many business owners have set up their company, which is why there was high interest in the case when H M Revenue & Customs tried to use legislation dating back to the early 20th century, to treat dividends paid to Mrs Jones as though they had been paid to Mr Jones and should be taxed accordingly under the settlements provisions.  They tried to do this on the basis that the sole purpose was to avoid tax by artificially transferring income to the wife and taking a small salary in comparison the the work involved, and that there was a gift giving substantially the right to income to the wife which was therefore not covered by the settlements exemptions. 

The legislation was however never intended to apply to husband and wife in this way.  The tax payer has been battling with HM Revenue and Customs on this basis ever since the issue was raised, a battle which has finally been won.

The case was first heard by the special commissioners. Although the tax payer lost at this point, only two commissioners were at the hearing, with one finding in favour of their colleagues at HM Revenue and Customs and the other in favour of the tax payer.  They eventually settled on the opinion of the higher ranking officer who was in favour of HM Revenue and Customs and the case was therefore taken to the High Court who also found in favour of HM Revenue and Customs. 

A further hearing at the Appeal Court however found in favour of the tax payer, on the basis that Mrs Jones had subscribed for her share and had contributed to the business, and Mr Jones was taking a low salary on the basis that it was prudent to do so in the early years of the business.  Not being too pleased with this, HM Revenue and Customs arranged for a final hearing to be held in the House of Lords who have now unanimously upheld the  Appeal Court decision and found in favour of the tax payer.  Following this decision there can be no further appeal and the case is finally closed.

Although the circumstances of the case were specific and the decision will not apply to every business, the majority of owners can now relax in the knowledge that the way they have set up their business should not be questioned by HM Revenue and Customs as a result of this case.

A victory for all small businesses!