Tax experts pity the plight of Arctic Systems

Fears from business experts that the taxman's decision to fight a verdict from the UK's most senior appeal judges would prolong uncertainty for self-assessment taxpayers have been realised.

Rather than learn the fate of Arctic Systems in January, as many had hoped, the House of Lords says it will not hear HMRC's appeal in the case of Jones V Garnet until June 2007.

Tax experts yesterday said they were dismayed at the ongoing uncertainty for the Sussex-based IT entrepreneurs, Geoff and Diana Jones, but also for thousands of other similar businesses.

"By the time this appeal is heard, it will have been 18 months since the Court of Appeal ruled on it in December 2005. Two [income tax] self-assessment filing dates will have passed," said Roger Sinclair, legal consultant at Egos Ltd, a tax and IR35 specialist.

Similarly the PCG, which has backed Arctic Systems in its battle against HMRC, had hoped the legislation at the heart of the case, s660A, would be clarified before taxpayers next declare their incomes.

Simon Juden, the then-chairman of the group, expressed his "profound disappointment" at the tax authority's decision in January to appeal the Court of Appeal ruling in the House of Lords.

At the time, he warned the move would "exacerbate" and "prolong" uncertainty for thousands of family-run firms which, like Arctic Systems, sourced their income through split dividend payment.

Under the-then Inland Revenue's interpretation of s660A, a retrospective tax bill of £42,000 was owed because dividends drawn by Diana Jones wrongly took advantage of her lesser tax status.

Although the bill was later reduced to £7,000, the Jones family said the demand nearly cost them their home, amid legal wrangling in the courts which 'made them feel like criminals.'

News that the final verdict of their case won't be reached until weeks after the scheduled June 3 hearing in the Lords will deal another blow to the couple, experts close to the case said yesterday.

"My heart goes out to Geoff and Diana who have suffered the agony of waiting for so long, but they are fighters, and by now they probably feel totally divorced from proceedings," said Nichola Ross Martin, a freelance tax expert and editor of Accounting Web.

Looking back over the four-year saga, it was "a real pity that the Revenue did not accept defeat and move on," she said.

Asked yesterday about the extraordinary length of time the landmark case has taken to reach a conclusion date, a PCG spokesman said: "I'm afraid it's just how long these things take. It's frustrating for all concerned, but there we have it."

Egos Ltd said that having to wait until June for the official word on acceptable tax practice for splitting dividends would cause more than just inconvenience for taxpayers.

"It's not just a question of disappointment – the continuing uncertainty has a real effect on the way people plan their lives," Mr Sinclair said.

"Oversimplified, the substance of the Court of Appeal decision was that those couples who had equal interests, joint control, and flexibility to take decisions year-by-year rather than locking themselves too much into any specific arrangement, would have the best chances of avoiding being caught by s660A.

"That may well remain the case after this final appeal is heard, but we will have to wait and see."

One freelance IT consultant, who operates a husband & wife partnership, says his type of company feels "persecuted" in light of the treatment of Arctic Systems.

The worst thing, he said, is that a £42,000 tax demand was made of an IT firm that, like his, was practicing a tax structure which - at the time of the demand - was endorsed by the government.

His concern was echoed, in part, by Nichola Ross Martin. She told Contractor UK: "It was a shame that there was not a judicial review of the Revenue's conduct regarding the operation of s660A.

"It makes for a bad system where one party applies rules as and when it feels like it. The Jones' could have avoided all this is HMRC had properly publicised its change of policy in the 1990s."

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