Arctic case: possible outcomes

Whilst we still await the decision on the Arctic Section 660 case, Anne Redston, tax expert with Ernst & Young considered the possible outcomes of the case relating to the so-called business tax between married couples.

Her comments were in an article for the Tax Faculty following some concerns expressed earlier. Anne is widely respected in the freelancing community as one of the country's leading experts on IR35 and Section 660. She attended the court hearing on the Arctic case and had sight of the documents made available to the Commissioners.

Anne Redston said:

There are three types of cases which the Revenue has attacked under Section 660.

• where the husband gives some shares to his wife
  
• partnerships where one spouse is active in the marketplace and the other is not;
  
• companies where both spouses subscribe at inception for a share and subsequently only one of the couple is active in the external market place but dividends are paid to both.
  These are set out as Examples 3-5 of the article in the April 2003 Tax Bulletin.

The Revenue says that it does not believe there is a material difference between them, and that they are all caught by Section 660A for the same reason, namely that the following steps, taken together, constitute a settlement:

• Incorporation of the company (or setting up of the partnership) as a vehicle for the working spouse’s expertise
  
• 50 per cent ownership of the shares (or the partnership) by the other spouse
  
• Provision of the services of the working spouse to the company/partnership at less than market value
  
• Payment of dividends/payment of profit share
  
• The Revenue therefore takes the view that it would make no difference which of the three types were being considered by the Commissioners. The Appellant’s Counsel, Malcolm Gammie QC, took a similarly broad approach, and argued that parliament did not intend that any of these arrangements should constitute a settlement.

It is nevertheless true that there are some differences in the arguments which can be deployed in each case:

• In a partnership it can be argued that the existence of unlimited liability for the non-working spouse means that his or her partnership share cannot be ’wholly or mainly a right to income’ and must therefore be covered by the relief set out in s660A(6).
  
• Where shares are subscribed from inception it can be argued that the shares were purchased at market value, and what follows subsequently is simply the consequence of that shareholding. In other words, there has been no settlement because the shares were purchased by the spouse.
  
• In the gifted shares situation the defence provided by s660A(6) is clearly very significant. This does not mean that it is irrelevant to the other scenarios.
  
• Since individuals falling within all three situations are under attack, it might have been ideal to have three cases in parallel. This was considered, but the logistics were considerable and in the final analysis, insuperable.

Given that only one case was taken, clearly the fact pattern could fit only one of the three types. Mr and Mrs Jones’ case was typical of Example 3 in the Revenue’s Tax Bulletin: Mrs Jones subscribed for her shares.

Three outcomes

Anne concluded that there are three possible outcomes from the Arctic Systems case:

• The decision is based on some factor which is wholly personal to the Joneses. This would be unfortunate, as the position of the taxpayers in Arctic Systems does mirror that of many other family companies, and the case was clearly intended by both sides to be a test case. But each situation has some individual characteristics, and it remains possible that the decision will be based on one or more of those. If this happens, it will not be a test case and it will be relevant only to the Joneses; or
  
• The decision is based upon a fact which relates only to Example 3 cases, eg the subscription of the shares, and does not help the other two. For instance, if the case depended on the share subscription, the role of s660A(6) would not be the deciding factor. The outcome would, however, be relevant to all those cases whose facts fit within Example 3, and there are many of them; or
  
• The decision is based upon a wider consideration of what constitutes a settlement and whether the Revenue’s argument (which applies to all of Examples 3-5) is correct. The decision would then have the widest application.

In any court case, the parties and the Commissioners are in fact considering only the particular facts before them, and have to work within those constraints. However, the Appellant’s Counsel sought to broaden the issues as far as possible.

It is worth noting that the arguments were complex and involved a review of many previous cases on Section 660A, as well as a detailed analysis of the purpose and structure of the legislation. Far from the Section 660A(6) being ’the only point of importance’, Counsel considered a number of issues and arguments, all of which are germane to this case and others. These points will, hopefully, be set out in the Commissioners’ decision.

Anne Redston noted that Counsel did discuss the exemption provided by Section 660A(6). In his closing submissions he explicitly argued (a) that there was no bounty involved in the arrangements and (b) had there been bounty, it would be covered by the exemption set out in s660A(6).

It is thus not the case that the only point worthy of consideration is the application of s660A(6), nor is it true that this point was not raised by the Jones’ Counsel. Finally, it is not true that if the decision is based on some other factor, that this will necessarily prevent this case from being a test case.

Whether the Special Commissioners do decide the case using Section 660A(6) or not, is of course as yet unknown.

Original article: S660A(6) - Arctic Systems case - Tax Faculty