At last, a bit of Christmas cheer! No, not
from Gordon Brown’s Pre-Budget Report
on 5 December, which contained more convoluted
ways of raising tax, (but we have come to
expect that from the Chancellor!) but from
the Court of Appeal.
On Thursday 15 December the judgment in the
Arctic Systems case was issued, which creates
a little more certainty for tax returns that
have to be filed by 31 January 2006. The decision
went in the taxpayers’ favour.
For those of you in need of a reminder, the
case hinged on whether dividends paid by the
company to the wife (who was not a higher
rate taxpayer) could be taxed instead on her
husband (who was a higher rate taxpayer).
In the High Court the Judge decided that they
could applying what he referred to as ‘well
established principles’ (namely legislation
relating to settlements and arrangements)
to the case. The Court of Appeal has overturned
the High Court’s decision. This is clearly
good news! The court has refused the Revenue
leave to appeal to the House of Lords. However
this does not mean that the Revenue may not
apply for leave to appeal and so we shall
have to wait and see whether or not this is
the end of the road.
You can read the full Court of Appeal judgment
by clicking on the link below, but in summary
the Court of Appeal made clear that the settlement
rules could only apply if there was an element
of ‘bounty’. The High Court had
argued that an intention to provide bounty
in the future was enough for the rules to
be applied but the Court of Appeal disagreed.
In essence, at the time the company was created
and Mrs Jones subscribed for her share, there
was no agreement as to the future income of
the company or indeed what would happen to
it by way of salary and/or dividend payments.
Quoting from the Court of Appeal judgment:
‘In the absence of any service agreement
between the Company and Mr Jones I am unable
to accept that the payment of modest salaries
to Mr Jones was any part of the arrangement.
Similarly the declaration of the dividends
was not arranged in advance; it was dependent
on the trading fortunes of the Company. Further,
as counsel for Mr Jones submitted, and, as
I accept, the fact that the structure being
set up might lend itself in the future to
some tax mitigation is irrelevant to the existence
of an element of bounty. ‘
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