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The House of Lords has found in favour of Geoff Jones in the landmark tax case Jones v. Garnett (also knows as “Arctic Systems”). The law lords rejected HM Revenue and Customs’ appeal to tax Geoff Jones on dividends paid to his wife, Diana. The judgment marks the dramatic end of a tax case that has gripped accountants and small business owners for the last four years and dominated all recent SME tax planning. No further appeals are possible under UK law.
In their judgment, handed this morning, the lords ruled that:
* The Jones created an arrangement in the nature of a settlement when they planned, and subscribed for one share each, and set up their company Arctic Systems Ltd
* However, the exemption for gifts between spouses also applied and so dividends paid to Mrs Jones were therefore not income arising under a settlement.
The Jones were jubilant after the landmark decision, which was not totally unexpected by HMRC, (the Court of Appeal had previously and unanimously found in favour of the taxpayer), but Geoff Jones said that he is "extremely angry" about HMRC's failed "stunt".
HMRC will now have to review and totally re-write its guidance on settlements and also review its guidance on outright gifts. Small business taxation is somewhat topical as the Muirless Review on the subject expected this Autumn, and there is speculation as to what view the new chancellor will take on small companies and their dividend policy.
In a statement released today, HM Revenue and Customs say that they "are currently considering the details of the judgement and a further statement will be made later."
Concerns about the long term outcome of the case have already been voiced by Francesca Lagerberg, Chair of the ICAEW Tax Faculty Technical Committee, who urges the government "not to make any knee-jerk reactions as a result of this decision." She suggests instead that there is "a need for government to ensure tax policy supports business and provides them with clarity and certainty.”
Analysis and summary of judgment By Nichola Ross Martin.