Arctic Systems: the saga continues...
You may recall that earlier this week Cathy Corns, Corporate Tax Partner at Mercer & Hole wrote an article on the Jones v Garnett case for her SME Blog. Following on from this piece Cathy has submitted an additional blog on the topical "Arctic Systems Ltd" case.
The House of Lords issued their judgement in the case of Jones v Garnett (also known as the “Arctic Systems Ltd” case) on 25 July 2007. To much rejoicing the case was decided in favour of Mr and Mrs Jones. However, the Revenue is a bad loser.
On 26 July a written Ministerial statement was issued by the Exchequer Secretary to the Treasury, announcing the intention to change the law.
Using the standard “the Government is committed to maintaining fairness in the tax system” statement the Government now believes it needs to do something to “ensure that there is greater clarity in the law regarding its position on the tax treatment of income splitting”. Actually, in my opinion, the law is now clear – it may not say what the Revenue wants it to, but that is unfortunate (for them) rather than unclear.
In the Government’s view minimising a tax liability “results in an unfair outcome” that puts other businesses “at a competitive disadvantage”. Surely competition is a vital part of a free market. Anyway, what happened on Lord Tomlin’s statement in IRC v Duke of Westminster in 1936 (yes even in 1936 people were planning to reduce tax):
“Every man is entitled if he can to order his affairs so as that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to result this result, then, however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax.”
Presumably nowadays that should finish “until the Government change the law so he has to!”.
The Government are therefore planning to bring forward proposals for changes to the law to ensure that individuals such as Mr Jones should pay tax on what is, in substance, their own income. In the meantime, (I assume, grudgingly!) “HMRC will apply the law as elucidated by the House of Lords and will be providing guidance in due course.”
A final throwaway statement – “The Government would not want commercial arrangements to be caught by any change in legislation. Consultation should help to ensure this.”
Watch this space!
I have a small business and i rent my company my industrial units .
I have been told by two seperate companys different things about entrapenour tax .
I would like to know how it effects me ? dose it only effect me if i sell my business in the next 2 years .
Or do i stop charging my company rent now .
Derek
The position on entrepreneurs relief and let property is very complicated. You should, however, be aware that the position is not yet final, my reply is based on the Finance Bill which is currently being debated and may change before it becomes law.
Broadly if you own the properties and these are let to a trading company in which you own at lest 5% of the shares and votes, which from your question I understand is the case, then in principle entrepreneurs relief may be due. However, the relief is restricted where rent is or has been charged for the properties. Basically you have to look at the rent charged over the total period of ownership of the property; if the rent is - for any year - less than a market rent relief is due on a proportionate basis depending on the amount of the undervalue. If you stop charging rent now then you should be entitled to relief for the proportion of the gain between now and the date of sale.
You should, however, look at all of the commercial implications of not drawing rent, for instance: -
• Do you have any borrowings on the units - interest relief is only available against the rent;
• Would you need to draw extra salary with the additional national insurance costs/
The other thing to remember is that relief on the property is only available where it is associated with the disposal of some or all or your shares in the company. Entrepreneurs relief is capped at £1 million - if selling the units and the business together, would the gain on the shares mop up most of the relief anyway?
I hope that helps
Cathy