Date set for Arctic Systems Court of Appeal case

The landmark Section 660 case involving Arctic Systems has been set for appeal in the Court of Appeal on January 17 and 18 2006.

The case, which concerns Section 660, the so-called 'married couple's business tax', has huge implications for thousands of small family businesses. It relates to Geoff and Diana Jones and their company, Arctic Systems, and has been deemed by the Master of the Rolls as one of significant importance. This means that the hearing must include the Vice-Chancellor, who sits in the Court of Appeal only for the first three days of any given term.

The Professional Contractors Group (PCG) who is supporting the case, claims that about £1bn in annual tax revenues depends on the outcome.

It had been hoped that the result of the case would be known before the 31 January deadline for income tax self-assessment returns, but the appeal for expedition was refused.

Arctic Systems

The Arctic Systems case was originally heard by the Special Commissioners in June 2004 and appealed at the High Court in March this year. Both decisions went in favour of the Revenue although the Special Commissioners disagreed with each other with the senior of the two exercising 'a casting vote'.

The High Court agreed with the views of Special Commissioner Dr Nuala Brice, who had asserted that Diana Jones's dividends were in fact income arising under an arrangement and that the exemption in Section 660A (6) should not apply. It also focused on the issue of market rate salaries.

The High Court defeat sent shock waves through the small business community who feared that tens of thousands of husband and wife businesses could face huge tax bills, as the Revenue sought to treat dividends paid to one party as income received by the major fee-earner.

Test case

The Arctic Systems case is seen as a test case for thousands of husband and wife businesses who could each face tax bills of tens of thousands of pounds.

James Kessler QC said: "As a tax lawyer, I strongly believe that the HMRC argument in the Arctic case is simply wrong in law as well as unfair. Although the sum at stake in this, or any similar case, is not sufficiently large to justify an appeal, without a test case to clarify the law, for the benefit of everyone, then bad tax law results."

PCG Chairman Simon Juden said: "We have always argued that this case is of clear and significant public importance, making it unfortunate that we have had to resort to a public appeal to fund it, so it comes as no surprise to us that the Master of the Rolls has taken this view. Unfortunately, however, his stance does mean that we will not have a result in time for the 2004/5 self-assessment deadline.

"This is deeply troublesome for hundreds of thousands of taxpayers and their advisers who will face further uncertainty about the classification of income and calculation of tax due. We call upon HMRC urgently to issue new guidelines regarding the completion of self-assessment returns, and as always our services are on offer to help them draw up such guidelines and mitigate the potential uncertainty for taxpayers.

"Like leading tax barrister James Kessler QC, who has generously supported this appeal, we believe that family businesses are being put in an impossible situation. We would like to see a simple tax system which encourages entrepreneurs and small businesses, including family businesses. We will continue to campaign for clarity, consistency and common sense in regulation and legislation. The prevailing uncertainty does nothing but undermine the self-assessment tax system and erode our competitiveness."