At last, a bit of Christmas cheer!
No, not from Gordon Brown’s Pre-Budget Report on
5 December, which contained more convoluted ways of raising
tax, (but we have come to expect that from the Chancellor!)
but from the Court of Appeal.
On Thursday 15 December the judgment
in the Arctic Systems case was issued, which creates a
little more certainty for tax returns that have to be
filed by 31 January 2006. The decision went in the taxpayers’
favour.
For those of you in need of a reminder,
the case hinged on whether dividends paid by the company
to the wife (who was not a higher rate taxpayer) could
be taxed instead on her husband (who was a higher rate
taxpayer). In the High Court the Judge decided that they
could applying what he referred to as ‘well established
principles’ (namely legislation relating to settlements
and arrangements) to the case. The Court of Appeal has
overturned the High Court’s decision. This is clearly
good news! The court has refused the Revenue leave to
appeal to the House of Lords. However this does not mean
that the Revenue may not apply for leave to appeal and
so we shall have to wait and see whether or not this is
the end of the road.
You can read the full Court of Appeal
judgment by clicking on the link below, but in summary
the Court of Appeal made clear that the settlement rules
could only apply if there was an element of ‘bounty’.
The High Court had argued that an intention to provide
bounty in the future was enough for the rules to be applied
but the Court of Appeal disagreed. In essence, at the
time the company was created and Mrs Jones subscribed
for her share, there was no agreement as to the future
income of the company or indeed what would happen to it
by way of salary and/or dividend payments. Quoting from
the Court of Appeal judgment:
‘In the absence of any
service agreement between the Company and Mr Jones I am
unable to accept that the payment of modest salaries to
Mr Jones was any part of the arrangement. Similarly the
declaration of the dividends was not arranged in advance;
it was dependent on the trading fortunes of the Company.
Further, as counsel for Mr Jones submitted, and, as I
accept, the fact that the structure being set up might
lend itself in the future to some tax mitigation is irrelevant
to the existence of an element of bounty. ‘
Internet Link:
If you would like to read the
full judgment go to:
Court
of Appeal's decision
