Jones v. Garnett

The House of Lords is about to consider the tricky question of whether dividends paid by a company, Arctic Systems Limited to a working shareholder Mrs Jones, consisted of income arising under a settlement as defined by a s660A(1) ICTA 1988 and so should be treated as income of her director and IT contractor spouse, Mr Jones.

There are two issues; firstly whether the act of forming a company with your spouse, and then working for it and then choosing to pay low salaries and distribute the remaining profits by dividend creates a statutory settlement for the purposes of s600A.
 
Secondly, whether the above can also be described as an outright gift of property within s600A(6) (exemption from settlement provisions for outright gifts between spouses).
 
The Facts
 
Mr Jones is an IT specialist and his wife had been the manager in the catering industry. In 1992 they decided that he would set up his own IT business. On the advice of accountants a company was acquired from formation agents, it was called Arctic Systems Limited. Mr and Mrs Jones each paid £1 for one share each in the company. Mr Jones became the sole director and Mrs Jones was the company secretary as they were advised to do so. Neither had written service agreements with the company and the business provided Mr Jones’s services as an IT contractor to outside users, via agencies, for fees. Mrs Jones undertook all the book keeping, financials and day to day administration which took on average about four to five hours per week.
 
The couple took low salaries as recommended by their accountant and extracted the balance of the company’s profits by dividend, except that in some years this did not happen as they thought IR35 applied, which did not as it later transpired. The Jones were aware that paying dividends saved them tax, but were assured that this set up was normal practice. HMRC assessed Mr Jones on dividends paid to his wife on the basis that they were income from a settlement created by him. Mr Jones appealed, and now supported by the Professional Contractors Group, donations and his tax counsel has taken the case all that way to the House of Lords.
 
Earlier decisions by the Courts
 
At the first hearing the Special Commissioners and the High Court found in favour of HMRC.
 
The Court of Appeal
 
Three judges then found in favour of the tax payer.
 
The House of Lords ?
 
Hearing commences on 5th June 2007, we will keep you up to date with what happens next.

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