Arctic case goes to appeal

The Arctic Systems' Section 660 case will go to appeal in the High Court. The decision comes after Geoff and Diane Jones of Arctic Systems lost their case in the Special Commissioners recently.

In what was described as a 'landmark' ruling, the Inland Revenue won the case after the two Commissioners disagreed on virtually every point, including the final outcome. The decision went in favour of the Revenue as the senior of the two Commissioners effectively overruled her colleague.

The case, which has been keenly watched by the small business community, was a blow for the hundreds of thousands of married couples or partners in business together. The decision supported the view that the Revenue was right to pursue tax under the 'settlements legislation'. This means, in the Jones's case, that where dividends are paid to the lower tax earner who wasn't the major fee earner, they could be treated as if they were a payment to her spouse as a higher tax earner. It could result in tax bills of up to £42,000 for many small businesses.

New guidance

The Revenue capitalised on the decision by publishing new guidance on the settlements legislation which uses the Arctic Systems case as an example, but fails to stress the 'split decision' element of it.

It has used the new guidance to confirm its stance with regard to the case and has advised any taxpayers whose circumstances are similar to those of the Joneses to disclose this in their self-assessment returns.

Anne Redston, tax partner at Ernst & Young, said, "There is very little new in this guide and I am extremely disappointed that the Revenue have not used this opportunity to clarify their guidance. The fragments of new information it does contain only serve to emphasise the difficulties faced by small businesses who want to find out whether or not the Revenue considers that the legislation applies to them. It seems that the uncertainty surrounding S660A will be resolved only when the Jones’ case is successfully appealed."

Not without risks

The appeal is being supported by the Professional Contractors Group (PCG). While an appeal would seek to clarify the situation, it is not without risk.

Although the Revenue cites the Jones' case, the decision from the Special Commissioners does not establish case law and can only be used in circumstances similar to the Jones'.

A High Court verdict which reinforced the Commissioners' decision could have wider reaching implications. It would then be a question of whether the PCG is able to pursue another appeal to the Court of Appeal following a second defeat.

Equally, if the Revenue lost the case, it is likely they would seek to appeal it and could offer to fund the case themselves at that stage.

Whatever the outcome it is likely to be a long process, leaving small businesses in a continuing state of uncertainty and the prospect of the Revenue using its victory in the Arctic Systems case to its advantage.