Artic Systems case - The Implications

Following the recent verdict in the Artic Systems tax case, the Government announced its intention not to let the matter rest. It plans to introduce new legislation aimed at clamping down on family owned companies where dividends are "split" and shared to parties who are demed to be "non-commercial" partners In the Arctic Systems case, HMRC had argued that Mr Jones had not drawn an adequate salary and because he was solely responsible for the income generated by the couples' company, he should have received a greater share of the profits. Being a higher-rate taxpayer than Mrs Jones, it claimed he would then have been subject to tax at a higher rate.
 
Ministerial Statement
 
On 26 July 2007 the Exchequer Secretary to the Treasury, Angela Eagle made a Written Statement to Parliament:

“The Government acknowledges the judgement given by the House of Lords in the Jones v Garnett (Arctic Systems) case.

The Government is committed to maintaining fairness in the tax system. The case has brought to light the need for the Government to ensure that there is greater clarity in the law regarding its position on the tax treatment of ‘income splitting’.

 
Some individuals use non commercial arrangements (arrangements that they would not reasonably enter into with an arms-length third party) to divert income (which would, in the absence of those arrangements have flowed to them) to others. That minimises their tax liability, and results in an unfair outcome, increasing the tax burden on other tax payers and putting businesses that compete with these individuals at a competitive disadvantage.

It is the Government’s view that individuals involved in these arrangements should pay tax on what is, in substance, their own income and that the legislation should clearly provide for this. The Government will therefore bring forward proposals for changes to legislation to ensure this is the case. In the meantime, HMRC will apply the law as elucidated by the House of Lords and will be providing guidance in due course.
 
The Government would not want commercial arrangements to be caught by any change to legislation. Consultation should help to ensure this.”
 
CFW will keep you updated of changes that will effect you. If you would like to discuss any issues then please contact us.

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