Arctic: Judge says Section 660 is not 'novel'

A leading tax adviser took issue with the Judge's comments in the Arctic appeal that it was nothing new and was unlikely to affect most businesses.

Exaggerated

Reading out his judgement, Mr Justice Park said: "The decision of the Special Commissioners in this case has attracted considerable attention among professional tax advisers. It seems to have caused much consternation. In my view, apprehensions that almost every case of a husband and wife company is going to be affected by this case are greatly exaggerated.

"If a husband and wife set up a joint company and run it together, for example the company opens a shop and the couple run and staff it, it does not follow from my judgement in this case that the husband is going to be taxed on the wife's dividend."

Mr Justice Park also made reference to the 'market salary'. He said: "It is also an important feature of this case that Mr Jones provided funds directly or indirectly for the purpose of the 'settlement'.. by working for Arctic Systems in return for a salary below his true earning power.

"It will be far harder for the Revenue to establish that there is a 'settlement' or 'arrangement' of which the husband is the 'settlor' if he is paid the going rate for employees carrying out the sort of work which he does."

He concluded by saying that he had given judgement at some length because of the 'widespread professional interest in the case', but added: "I don't think there is anything particularly novel or alarming in my decision. I believe it is a simple application of well established principles."

Black day

Leading tax adviser, Anne Redston from Ernst & Young, thought that the judgement left small businesses in a position of uncertainty and that many issues still needed clarification.

Anne Redston Speaking at the High Court, Anne Redston told UKTECH: "I am very sad by this decision. It is a black day for small businesses.

"I think it will affect a large number of small businesses and I'm not convinced by the Judge's idea that this is 'not novel'.

"There is no clear guidance from the Revenue. In the past the professional bodies have asked for clearer guidance and submitted a number of examples but the Revenue has refused to answer these questions. This has left small businesses in a great deal of uncertainty.

"The Judge placed emphasis on the fact that Mr Jones's salary was not 'the market rate'. But who is going to define the 'market rate'? Does this mean small businesses are now going to have to keep advertisements from the press over a period of time to show that they paid themselves 'the market rate'? Or is the Revenue going to have to start collecting records themselves?

"I can't see how it won't apply to many small businesses. What would the difference be if you jointly set up a small shop or an IT consultancy? When does the person's contribution to the business become 'enough'? That's the point, we don't know where the line is.

"It's a blow to the certainty one should be able to expect from a self assessment tax system. It's a sad day for the freedom for small businesses to be able to run their affairs as they see fit."

More information and protection

For more information about the Arctic Systems case and other Section 660 issues, see Section 660 information resource