The long awaited decision on Arctic Systems
Cathy Corns, Corporate Tax Partner at Mercer & Hole wrote this article for her SME Blog earlier today.
This all seems to have been going on for so long you may need reminding of what all the fuss is about; so
- Mr and Mrs Jones ran a small IT company of which Mr Jones was the sole director. They each owned one share in the company took a small salary and extracted the majority of their required funds by way of dividend. These, of course, were paid in line with the shareholdings, on a 50:50 basis.
Nothing out of the ordinary there so what was the problem? It seems to be that Mr Jones paid tax at higher rates and Mrs Jones did not. HM Revenue & Customs (HMRC) argued that the settlements legislation should apply to the dividends paid to Mrs Jones such that they should actually be taxed (at the higher rate) on Mr Jones.
The Special Commissioners and the High Court (April 2005) agreed with HMRC, however the Court of Appeal (December 2005) rejected HMRC’s argument.
The result of all this is that there has been significant doubt about the correct tax treatment and obligations to report income and dividends in such circumstances.
The House of Lords unanimously decided in favour of the taxpayer. The key issue appears to be that an ordinary share is not “wholly … a right to income” and therefore the dividends are not caught by the settlements legislation.
This represents a resounding success for taxpayers and gives them back the right properly to plan their affairs in companies and partnerships.
If you were waiting for this judgement to instigate any planning or indeed need help on amending returns for earlier years, please contact any member of our tax team
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Daily Telegraph readers will be clapping their hands with joy, as this represents a victory that rests on the taxpayers being married! As I read it, a non married couple could still have a 'settlement' problem, based on this decision.