Arctic: What is market rate?
On the 27 April 2005 Mr Justice Park delivered his judgement in the Section 660 Arctic case in which he found in favour of the Inland Revenue.
To give the Appellant Mr Geoff Jones of Arctic Systems Limited additional time to consider a further and final appeal, Mr Justice Park granted an extended period of six weeks until 8 June 2005 for a further appeal to be lodged. Carl Whittaker of Qdos Consulting looks at some issues from the judgment.
Carl Whittaker writes:
The Judge stressed that because Mr Jones took less than the 'market rate' as a salary, this constituted a beneficial gift as it allowed monies to be available to pay to Mrs Jones in the form of a dividend. This poses a virtually impossible question; what is 'market rate'?
No doubt each of us will have our own definition as will the Revenue. We look forward to receiving some guidance in this and other matters following this judgement.
Perhaps another starting point could be the value of the contribution of the 'subordinate contributor' and allocate the balance to the 'main contributor'.
If there is no appeal the Revenue will assess Mr Jones on the amount of dividends paid to Mrs Jones. There may be some recognition of the duties performed by Mrs Jones.
The Judge did however remark that, "...if Mr Jones' co-shareholder was not his wife but say his sister, he could not be taxed on her dividends."
Mr Justice Park did not consider any difference to the fact that Mrs Jones bought her share rather than it being gifted, neither was her standing as a director or secretary considered relevant.
Anyone who feels that they are in a similar position to Mr and Mrs Jones should review their own arrangements and particularly the ratio of monies received from the business by either spouse. They may also wish to re-arrange their shareholding to reflect their individual contribution to the business.
Qdos would be happy to review your particular arrangements and offer the appropriate advice. Please contact us.
Carl Whittaker cwhittaker@qdosconsulting.com