Arctic Systems lose High Court Section 660 Appeal

Geoff and Diana Jones of Arctic Systems have lost their Section 660 appeal which was heard by Mr Justice Park at the High Court in March.

As a result of today's landmark ruling, there could now be increased Section 660 challenges from the Inland Revenue and many other husband and wife teams could face high - and unexpected - tax bills.

The Chairman of the Professional Contractors Group, Simon Juden, said:

“This is a bitter blow, not just to Geoff and Diana Jones, who’ve had to endure years of uncertainty, but also to the hundreds of thousands of small family businesses who’ve shared the risk and the hard work of running a business, expecting to share in the rewards. Now many of them will frankly be wondering whether it’s worth it."

Head of Research at The Forum of Private Business, Andy Mowlah, said the decision would send shock waves across husband and wife businesses.

"Businesses will be extremely worried about the implications of this decision,' he said. "Business owners will now be looking over their shoulder to see if the Inland Revenue are now going to come and knock on their door. The concern will be that the Inland Revenue will be asking complicated and searching questions about what justifiable contribution the wife or husband has made to the firm. If the decision then goes against the firm they could be stung with a backdated tax bill going back up to a six years. This could be a mortal blow to many firms. It must be remembered that a spouse often shares the risk but not the reward of the business."

Mr Mowlah said it is critical the Government took a more sensible pragmatic approach to settlements legislation.

"There is a real lack of clarity about this legislation,' he said. "There is no clear idea of what a market salary is, what sufficient working hours are and what an adequate capital contribution is. Moreover is it really worth the Inland Revenue pursuing such businesses for small sums of money and seeking to impose a complex tax regime based on the uncertainties that surround settlements legislation?"

Background to the Arctic Systems Section 660 Case

Two years ago, the Joneses, who own an information technology business, Arctic Systems, were told by the Revenue that they owed an extra £42,000 tax on dividends they paid themselves during the previous six years. The couple had arranged their financial affairs so that both held shares and received similar dividend payments, even though only one, Mr Jones, generated the income. The Jones took the Inland Revenue to court and the case was heard by two special tax commissioners early last summer. Just before that, the taxman dropped his claim for backdated tax, but remained adamant that the Joneses had broken the law by paying themselves a low salary and high dividends in order to reduce their joint tax bill. The tax commissioners were split on the merits of the case, with the presiding commissioner, Judith Powell, using her casting vote in favour of the Inland Revenue. Both sides then filed their arguments at the High Court.

Accountants estimate that hundreds of thousands of husband-and-wife companies could be affected by the ruling in the Jones case, with each facing an additional tax bill on average of £9,000.

The Inland Revenue has rejected these claims, insisting that only up to 30,000 companies could be affected.