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HMRC issues revised guidance after Arctic Systems case

Tuesday, 27 November 2007

HM Revenue and Customs has released revised guidance about the application of the settlement legislation to cases similar to Arctic Systems.

Shortly after the House of Lords rejected HMRC’s appeal in the case of Jones v Garnett - the “Arctic Systems” case -, Revenue issued interim guidance.

When the interim guidance was issued it promised to issue further, more detailed, guidance in the autumn. This guidance is now available in the Trusts Settlements and Estates Manual at TSEM 4000 onwards.

HMRC said that the online version will be available shortly, although the text is already available as an electronic document.

Helpsheet 270 which accompanies the Trusts pages of the Individual self-assessment return has also been revised. The new version will be available with the 2007-08 Return but, in advance of that, HMRC has made it available as an electronic document.

The Arctic Systems case centred on a split-income tax structure commonly used by married business couples. The legal battle, which ran since 2004, was won by HMRC at the Special Commissioners and High Court, but by the taxpayers on appeal to the Court of Appeal. It finally concluded at the House of Lords in July, who ruled 5-0 in favour of the Jones's.

In the Artic Systems case HMRC had challenged husband and wife, Geoff and Diana Jones’ remuneration structure in which they formed a family company - called Artic Systems - and paid themselves a low salary and a relatively higher dividend payment in order to maximise tax efficiencies.

The particular element on which the case was dismissed was that, while the court agreed that if a husband made a “gift of income” to his wife, he should be taxed on it in full; if there was a transfer of an actual share in the company - which there was in Mr and Mrs Jones’ case -, the dividend income associated with that share is taxable only on the wife.

Following the appeal case, the government said that it intended to change the law to ensure there is "greater clarity in the law regarding its position on the tax treatment of 'income-splitting'". It said that in the future, such arrangements should result in the "true earner" being taxed on the income.

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