Ritson Smith hot topic: settlements legislation for small businesses (Jones v Garnett aka Arctic Systems Case)

 
The following article has been prepared by David Dowell, senior tax manager with Aberdeen-based accountancy practice Ritson Smith.

The Court of Appeal recently decided in the taxpayer’s favour in the long-running Arctic Systems case concerning HMRC’s use of the settlements legislation to attack a corporate structure used by many small businesses.

The structure comprised husband and wife shareholders with the husband generating all the turnover of the business and the wife attending to administrative duties.  Each took a small salary and the remaining profits were paid out as dividends with the husband directing the payment of the dividends.

The Court of Appeal has now held that the above arrangement did not constitute a settlement because there was no element of bounty but HMRC have petitioned the appeal.  Therefore, until such time as the appeal is heard, the Court of Appeal’s decision represents the current state of the law.

It should however be noted that HMRC would not be precluded from reopening the matter if the House of Lords subsequently found in their favour.  Furthermore, the fact that a settlement did not exist in the case of Mr and Mrs Jones does not mean that one cannot exist in other cases.

It is also possible that if HMRC were successful in the House of Lords other taxpayers who fall within the legislation could be pursued for tax for earlier years together with interest.  The Arctic Systems case was restricted to one year in dispute as HMRC were forced to drop assessments relating to earlier years due to issues specific to this case.

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