Arctic: Dismay from experts

The landmark Section 660 Arctic Systems case has received wide-spread coverage in the national and specialist press.

Earlier this week, IT consultancy Arctic Systems lost its appeal in the High Court. The Court ruled in favour of the Revenue's approach to Section 660. The Revenue had argued that the dividends received by Diane Jones, who owned the company with her husband Geoff, should be treated, for tax purposes as if they had been paid to Mr Jones.

Daily Telegraph - 'black day'

The Daily Telegraph's headline described it as a 'black day for small business' and stressed that two hundred thousand husband and wife firms could owe an extra £9,000 in tax under the High Court ruling.

Mr Justice Park had emphasised the issue that Geoff Jones from Arctic Systems did not pay himself the 'market salary' for his skills. Mike Warburton, senior partner of Grant Thornton, told the Telegraph that the ruling undermined the independent taxation of spouses' income, established by former Chancellor Norman Lamont.

He said: "Now effectively, it's only acceptable if you don't take a depressed salary."

Court ruling is 'black day for small business' - Daily Telegraph

BBC 'bigger bills'

The BBC also warned the ruling may mean bigger tax bills for thousands of small, family-run businesses.

The judge supported the Revenue's contention that Mr Jones was transferring income in the form of Arctic Systems shares, which then produced a dividend, to his wife. That income would then be taxed at Mrs Jones' lower income tax rate. However experts were divided about how wide-reaching this would be.

John Whiting, tax partner at PricewaterhouseCoopers told BBC News that many small family-run businesses had similar tax arrangements to Mr and Mrs Jones.

He said: "What Mr and Mrs Jones did was not out of the ordinary. There will be tens of thousands of family-run businesses that will be caught out by this."

However, BDO Stoy Hayward tax partner Stephen Herring said the case was unusual and businesses should not panic. He pointed out that the investigation was prompted by more than just the sharing of the tax liabilities and that Mr Jones had accepted a greatly-reduced salary, severely limiting his income, so he could share increased dividends with his spouse.

Mr Herring said: "The facts of this particular case are, arguably, extreme. Accordingly, it was understandable why (HMRC) chose to take action.

"We consider that very few family companies should be affected as a result of this High Court decision, provided that HMRC is consistent and only applies the ruling in such extreme cases."

Small firms face higher tax bills - BBC

ACCA - 'major implications'

The Association of Chartered Certified Accountants (ACCA) believed the case could have major implications for as many as 200,000 small businesses.

Glenn Collins, Head of Business Advisory Services at ACCA, said: "This will now mean that any husband and wife companies where shares have been transferred between them and dividends paid out could be subject to an Inland Revenue enquiry. Many have legitimately carried out these transfers in organising their company structures and also their tax affairs - these could now be overturned completely given the outcome of this case.

"Regardless of the rights or wrongs of the tax issue at stake - and it is worrying that the Court has effectively dismissed a wife's contribution to the business in this way - the main problem is that tens of thousands of businesses have been advised by their accountants to set up their operations in this way because the Revenue has always accepted it. Businesses must have stability and clarity in the tax system in order to plan - if the rug can be pulled from under their feet so easily it makes things very difficult for small companies to work."

Forum for Private Business - 'shock waves'

The Forum for Private Business (FPB) reacted with dismay to the ruling, which it said could have serious and expensive consequences for thousands of husband and wife firms.

The Forum of Private Business, (FPB), Head of Research Andy Mowlah said the decision would send shock waves across husband and wife businesses.

Mr Mowlah said: "Businesses will be extremely worried about the implications of this decision. Business owners will now be looking over their shoulder to see if the Inland Revenue are now going to come and knock on their door. The concern will be that the Inland Revenue will be asking complicated and searching questions about what justifiable contribution the wife or husband has made to the firm. If the decision then goes against the firm they could be stung with a backdated tax bill going back up to six years. This could be a mortal blow to many firms. It must be remembered that a spouse often shares the risk but not the reward of the business."

Mr Mowlah said it is critical the Government took a more sensible pragmatic approach to settlements legislation.

He added: "There is a real lack of clarity about this legislation. There is no clear idea of what a market salary is, what sufficient working hours are and what an adequate capital contribution is. Moreover is it really worth the Inland Revenue pursuing such businesses for small sums of money and seeking to impose a complex tax regime based on the uncertainties that surround settlements legislation?"