Arctic Systems "family tax" hearing begins at House of Lords

A landmark "Section 660" family tax hearing began today in the House of Lords. This will be the final stage in the landmark case which will have implications for hundreds of thousands of family businesses.

The case centres on a family-run business, Arctic Systems Ltd, which used dividends from the business to remunerate Geoff and Diana Jones, the shareholders.

Known as the "married couples business tax" in some circles, the outcome may affect how married couples renumerate themselves from their businesses. In the Arctic Systems case, both Mr and Mrs Jones extracted funds from the company in the form of dividends, even though Mrs Jones had less day-to-day involvement that her husband. Due to this fact, the Revenue argued that Mrs Jones' share of company profits should be taxed as if they were in the form of salary rather than as a shareholder dividend.

You can read more about the background to the tax legislation in question in our Section 660 overview.

Despite a decisive ruling by the Court of Appeal in favour of the taxpayer, HMRC is continuing its campaign to extract money from the Jones’.

The Federation of Small Businesses (FSB) has attacked the conduct of HM Revenue & Customs (HMRC) in its approach to the case. The FSB criticised HMRC’s decision to ignore a refusal by the Court of Appeal to allow a petition to the House of Lords in the so-called Arctic Systems case.

Bill Knox, FSB Taxation Chairman, said:

“HMRC’s conduct towards a family-run business in this case is utterly shameful. They refused to respect the decision of the Court of Appeal, which delivered a decisive and authoritative ruling in favour of the taxpayer."

“Hounding hardworking small business owners in this way sullies the good name of HMRC and will not instil confidence in the UK small business community as a whole, which rightly expects to be treated proportionately and fairly by the tax authorities."

“The craven decision to pursue the case further will be at the expense of the taxpayer and will result in a damaging loss of confidence in HMRC’s record with small businesses.”