Taxing matters

ARCTIC SYSTEMS—THE FINAL SOLUTION

The House of Lords has now delivered judgment in Arctic Systems—otherwise known as Jones v Garnett (Inspector of Taxes) [2007] UKHL 35, [2007] All ER (D) 390 (Jul) and it makes interesting reading.
Mr and Mrs Jones each had one share in a company which provided computer consultancy services. Mr Jones did all the work with the clients; Mrs Jones did all the back room admin work; they took small salaries and had large dividends thereby minimising their liability to tax and national insurance contributions. HM Revenue & Customs (HMRC) said that it was not a commercial arrangement for Mr and Mrs Jones to hold one share each and to pay dividends in this way—it was an arrangement conferring bounty on Mrs Jones and therefore a settlement within the Income and Corporation Taxes Act 1988, s 660A (now the Income Tax (Trading and Other Income) Act (ITTOIA 2005), s 624) so that the whole of the income could be taxed on Mr Jones.

Settlement v