Revenue to fight Arctic again

Dismayed family-run firms and their advisors have learnt HM Revenue & Customs has decided to fight the unanimous ruling that Arctic Systems does not owe a retrospective tax bill of £42,000 (later reduced to £7,000).

The decision to appeal, announced late on Friday, reinforces the prospect of higher tax bills for thousands of other husband and wife partnerships, that draw modest salaries and dividends to reduce contributions to national insurance.

It also underlines the Revenue's ongoing bid to reinterpret the decades old 'settlements law' – or S660, to the routine decisions about profit sharing made year by year by married couples who have set up and operate a jointly owned company, in circumstances where the firm's revenue is generated by just one of them.

Tax and legal experts have condemned ongoing uncertainty for Geoff and Diana Jones, owners of Arctic Systems, as well as for tens of thousands of other similarly run businesses, facing the January 31 deadline for self-assessment.

Roger Sinclair, legal consultant at Egos Ltd, reminded that it is now up to the Appeals committee of the House of Lords to decide whether HMRC should be granted leave to appeal.

He told Contractor UK: "I find it disappointing that the Revenue seemingly lack the grace to accept the criticism expressed by the judges in the Court of Appeal, who made clear that it was for Parliament and not the Revenue to re-write the law in this area.

"The arguments put forwards by the Revenue were considered in detail by the Court of Appeal, and rejected by clear reasoning in the judgment. The continued uncertainty that will follow if the Revenue pursue this further will benefit no one – and is hardly likely to bring credit on the Revenue."

Lat week, taxpayers learnt self-assessment forms returned through the Revenue website could not be changed, in light of the Court of Appeal ruling, and the Revenue's announcement to challenge it.

"However, if a taxpayer has filed his or her return online and, in the light of the judgment, wishes to make an amendment, he or she can write to us telling us how the return is to be amended," a Revenue spokesman told Contractor UK on Friday, hours before the announcement.

"There is no need to re-submit a full paper return a letter will do. Taxpayers have until 31st January 2007 to amend their 2004/05 return."

Subsequent advice from HMRC recommends taxpayers use box 7.32 on their return to explain their tax planning, if deemed appropriate, The Daily Telegraph reports.

The PCG is still advising family-run firms and contractors to seek professional advice, but recommends making "a note on the white space stating you are relying on your circumstances being substantially similar to the Jones v Garnett case, and that reliance is being placed on the Court of Appeal ruling."

Simon Juden, its chairman, expressed "profound disappointment " at HMRC's move to appeal the Court of Appeal ruling in the House of Lords, saying it would "exacerbate" and "prolong" uncertainty for thousands of taxpayers including Arctic Systems.

HMRC was guilty, he said, of "moving the goalposts by changing their interpretation of the 1930s legislation and announcing that they were doing so only after the fact."

He added that three of the highest judges in the land had reviewed the Arctic case and returned the "common sense verdict," which he said was consistent with independent taxation of spouses, introduced in 1991.

"If the Government wishes to extend the scope of the settlements legislation to include these normal family businesses, the honest way to proceed would be - as the [Appeal] judges in this case stated - to legislate openly and clearly.

"HMRC has chosen to expose hundreds of thousands of businesses to yet more uncertainty, especially with regard to their self assessment positions."

James Kessler QC, the leading tax barrister who has helped PCG fund the case, believes that the Revenue argument in the Arctic case is not only wrong in law, but also very unfair to small family businesses.

"They are asking people to value the contribution of their spouse," he said.

"That is an almost impossible exercise and will vary from year to year, depending on individual circumstances. As a tax lawyer, I want to see the tax system operated in a way that is right in law, and fair and workable in practice. PCG and the Joneses have my full support."

Meanwhile, press reports claim that the Revenue only issued its decision when director, Dave Hartnett, received word from an accountant on Friday morning that no statement or guidance had been published.

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