Arctic Systems verdict due 'within weeks'

It has already taken four years to resolve but a landmark tax case that yesterday began its final three-day hearing in the House of Lords may not be settled for at least another six weeks.

The House's judicial committee has been asked to define a point of the Settlements law (s660A), after HM Revenue & Customs (HMRC) challenged an Appeal Court ruling in favour of the taxpayer.

Issued in 2005, the verdict from the country's most senior judges gave the all-clear for small firms run by couples to minimise their tax bills by drawing both dividends and small salaries.

But making its appeal to the Lords yesterday, the taxman implied that the structure practiced by Arctic Systems Ltd, the firm at the centre of the case, was tantamount to tax evasion.

HMRC argue that its founder Geoff Jones – and thousands of other IT contractors – deliberately paid himself a salary under the 'market rate' in order to pass a large share of profits to his wife, Diana, via dividend.

Reflecting before the hearing, he told Tuesday's edition of the BBC's Today programme: "Effectively they [HMRC] are saying that I have not paid enough tax.

"They're saying this was a mechanism, or an arrangement, for me to avoid tax by giving some of it [income] to my wife."

The mechanism, which Jones was advised to use by accountants following the Revenue's own guidance, is today practiced by up to a quarter of a million small husband and wife businesses.

Little wonder then that tax experts and the PCG, which is supporting the Joneses, see the Lords as debating a 'test case,' because it will set a precedent on the taxation of small firms, particularly those with no asset base.

Speaking just moments after attending the first day of proceedings in the Lords, David Ramsden, the PCG's founder, said: "This is a desperately important case not just for the PCG and not just for the Joneses, but for over a quarter of a million small family businesses all of which are anxiously awaiting the outcome."

Unlike Jones V Garnett, test cases are normally funded by Revenue & Customs. The tax authority failed to respond to an immediate request for comment as to why the Joneses have received no financial help, other than from their supporters.

A husband and wife firm facing the IT industry which, like Arctic Systems, followed the Revenue's guidance on splitting dividend payment across both shareholders, said no monetary aid for the Joneses was proof that their type of business was being "persecuted."

A well-placed source close to the case added the costs to the Joneses had been "substantial," as the couple have been in front of the Special Commissioners, the High Court, the Court of Appeal and now the House of Lords.

Supporters of the Joneses hope that a decision by the Lords whether or not the couple, and thousands of other similarly structured businesses, owe a retrospective tax bill of up to £40,000 will be issued promptly.

But a mainstream press report claims the announcement may not come until the end of the year.

This means it could be months before there is clarification on "the application of s660A and the misleading guidance that has hitherto been issued and relied on by the Inland Revenue," said Roger Sinclair, legal consultant at Egos Ltd.

Yet Mr Ramsden, of the PCG, reassured: "One thing we can almost guarantee is that we will get a decision out of the Lords before they go on their summer holidays in July."

A spokesman for the House of Lords confirmed it was unlikely that the Lords will not issue their judgement until the end of the year.

Brendan Keith, head of the judicial office at the House of Lords, said: "The appeal [by HMRC] is still being heard and is not due to end until Wednesday.

"Judgement is usually given within six weeks of the end of the hearing."

Most tax and legal advisors believe that the Court of Appeal's judgement on Jones V Garnett was coherent and logical, and seemed to represent a correct interpretation of s660A.

Supporting their claims, Chris Bryce, director of the PCG, said: "PCG think that the Revenue's interpretation of the law is wholly wrong, but if they are successful then we'll obviously have to consider the position."

"[When the case is resolved] we would like to be celebrating the outcome. Obviously we want to win the case and we want Geoff and Diana to win the case, and we think that they should."

The Joneses have reportedly said the Revenue's demand of a £42,000 tax bill nearly cost them their home, further to legal wrangling in the courts which 'made them feel like criminals.'

Bill Knox, tax chairman of the Federation of Small Businesses, came down hard on the Revenue's decision to pursue the Joneses relentlessly.

In a statement issued yesterday, the FSB said: "HMRC's conduct towards a family-run business in this case is utterly shameful. They refused to respect the decision of the Court of Appeal, which delivered a decisive and authoritative ruling in favour of the taxpayer.

"Hounding hardworking small business owners in this way sullies the good name of HMRC and will not instil confidence in the UK small business community as a whole, which rightly expects to be treated proportionately and fairly by the tax authorities.

Knox added: "The craven decision to pursue the case further will be at the expense of the taxpayer and will result in a damaging loss of confidence in HMRC's record with small businesses."

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