Arctic Systems: Two days in the Court of Appeal

The landmark Section 660 case involving Arctic Systems reached the Court of Appeal this week.

The two day hearing could pave the way for clarification of the controversial 'married couple's business tax'. To date, the Revenue have won in both the Special Commissioners and the High Court in what was described as a 'black day for small businesses'.

The small business community is hoping that the Court of Appeal case will redress the balance in their favour. If not, thousands of small businesses could be facing hefty tax demands.

The Judges reserved judgement although a decision is expected before the tax filing deadline of January 31 next year.

Accountant Nicola Ross Martin from Ross Martin Tax Consultancy Limited was in the Court of Appeal for both days. Her review of the events summarises the main questions being addressed:

• Was there an arrangement in the nature of a settlement?
  
• If so, then did the gift exemption in s.660A(6) apply in this case?

Nicola said that their Lordships made some observations which probably seem bog-obvious, but had somehow been overlooked in the earlier hearings:

• Arctic Systems Ltd was set up jointly, and Mrs Jones is a business woman in her own right, and made a defined contribution to the business.
  
• For a couple of years, Mrs Jones received no salary at all, because the couple erroneously believed that they were under the rules of IR35. By working for no salary (at all) in those years, surely Mrs Jones was also a settlor?
  
• If there are two settlors, and a joint business, can HMRC actually apportion income under an alleged settlement - there is nothing to say so in the legislation?
  
• There would be no case to answer if Mr Jones had set up the company on his own, and just given Mrs Jones half of it.
  
• Arctic may well be what HMRC describe as an income producing company, but its shares nevertheless carry a bundle of rights, to income, to future profits, and to assets. They cannot be described as property giving wholly, or substantially a right to income.

Nicola's full report is available on her website