Joy over tax ruling may be short-lived

The House of Lords’ landmark ruling in the Arctic Systems tax case may turn out to be a pyrrhic victory for family businesses after the government announced plans to change the law.

In Jones v Garnett (Inspector of Taxes) the law lords rejected an appeal by HM Revenue & Customs (HMRC) to impose tax on a husband- and wife-run IT consultancy retrospectively under the Income and Corporation Taxes Act 1988, s 660A. They ruled that Geoff and Diana Jones would not be taxed for dividends that Mr Jones paid to his wife.

HMRC claimed the pair had avoided tax on earnings by paying themselves a small salary (£7,000 for him and £4,000 for her) from Arctic Systems’ 2000–01 turnover of nearly £100,000. The amount was then split equally, less tax and expenses, in dividends.

In a ministerial statement issued this week, the government says it wants to clamp down on the tax-saving arrangement used by thousands of husband and wife businesses. However, Francesca Lagerberg of the Institute of Chartered Accountants in England and Wales Tax Faculty says: “There is a danger that rushed legislation will result in unworkable legislation, plunging thousands of taxpayers into yet more uncertainty about their tax position.”