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.

more from General Information

Revised Treatment of VAT incurred on home computers
Revised Treatment of VAT incurred on home computers made available by employers to their employees
Artic Systems case - The Implications
“Artic Systems” may lead to changes in the taxation of family companies
Rates of interest on tax
On 5th July 2007 bank rate increased from 5.5 per cent to 5.75 per cent. This affects the rates of interest on unpaid tax and overpaid tax
Offshore Disclosure
The door has closed on the offshore disclosure initiative which allowed for a reduced penalty regime for those who voluntarily notified that items had been missed off tax returns by the deadline date of 22 June 2007.
Powering On
Revenue & Customs is continuing its update and, at times, radical overhaul of its existing powers.
New fuel advisory rates from 1st August 2007
HMRC announced on 27 June that the advisory fuel rates for company cars will increase from 1 August 2007
Jones v Garnett - House of Lords decision
The House of Lords has found in favour of Geoff Jones in the landmark case Jones v Garnett.
Anti Avoidance Expansion
Revenue & Customs has also announced the enlargement of the Joint International Tax Shelter Information Centre – better known as JITSIC
Non-Residence pages on Returns
The latest self-assessment tax return (2006/07) contains a number of changes to the non-residence pages
Spotlight on Landlords
There has been a raft of press commentary about a planned Revenue & Customs crackdown on landlords
Revenue rethink
The government has tabled amendments to the new rules for charging penalties when taxpayers make errors in their tax returns
Jones v Garnett update
The ‘husband and wife’ case of Jones v Garnett has been heard at the House of Lords
When less is more
Data security issues could soon be a thing of the past
Proof positive
Corporate identity theft is a growing problem
IT system costs anger MP's
Revenue & Customs has been attacked by MP’s over the cost of an IT system that ended up costing nearly three times the agreed sum
Revenue unveils 'get tough' strategy
Revenue unveils 'get tough' strategy for tax cheats and vowed to adopt a 'no compromise' stance
Revenue poised to nab amnesty dodgers
Revenue & Customs is preparing to pursue around 40,000 individuals.
ICAEW spearheading move to protect term 'accountant'
The ICAEW is putting its full weight behind the campaign to get legal protection for the term 'accountant'.
Sage Line 50 Version 9
Sage has recently announced that they will be ceasing to support Version 9
Income Tax Rates
Government proposes to reduce the basic rate of income tax
VAT Fuel Scale Charges
HMRC intends to change significantly the VAT fuel scale charges payable by businesses
Directors' Liability - Personal Guarantees
Personal Guarantees
Jones v. Garnett
Jones v. Garnett - The House of Lords is about to consider the tricky question of whether dividends paid by a company
Declaring Cash on entering or leaving the UK
Declaring Cash on entering or leaving the UK
Offshore disclosure facility
Offshore disclosure facility
CFW Accountants

Northants Chamber of Commerce Member  ACCA  ICAEW
privacy statement - terms of use

CFW Accountants and Business Advisers