(4) Arctic: A victory for common sense

Accountant Nicola Ross Martin described the Court of Appeal ruling in favour of Arctic Systems as 'nothing more than a ruling on common sense'.

In his judgment, the Chancellor of the High Court, Sir Andrew Morritt said: "The court should not ignore the increasing tendency for married couples to be involved in the business of each other on a commercial non-bounteous basis. Such involvement may take the forms of a partnership or a company in which each own shares. Though one spouse may generate the income of the firm or company, the services of the other may be just as commercially important in providing the essential administrative, accounting, support and back-up services."

Nicola argued that what can now be concluded from the decision (apart from the fact that HMRC's Interpretation of the application of the settlement legislation now needs to be consigned to history's compost bin) is:

• 1. HMRC chose an entirely unsuitable company for a test case on their interpretation of the settlement rules. In this case, Diana Jones makes a valuable contribution to the business - it is actually a joint business, and HMRC tried to make it fit their model, happily it does not.
  
• 2. There may be companies out there which do fit HMRC's model, notwithstanding the fact that it will be very hard to track them down, and if they were not set up with contracts for future income in place, and without service contracts, or if the other spouse is director too, it will now be difficult for HMRC to try and pin the settlement legislation on them.
  
• 3. Tax planning is alive and well. If a structure has by way of a bonus, a tax benefit in the future, that does not automatically mean that it is a settlement from the outset. "Hope value" does not equate to bounty.
  
• 4. An ordinary share is not substantially a right to income and so it follows that a share in a partnership is highly unlikely to ever be either.
  
• 5. We need to totally re-write guidance to clients on this subject.

Further details of Nicola's opinion are available on her website.