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The House of Lords has ruled in favour of the taxpayer, Mr Geoff Jones, in the landmark tax case Jones v. Garnett (also knows as “Arctic Systems”).

The law lords rejected HMRC's appeal to tax Mr Jones on dividends paid to his wife, Diana. The judgment marks the end of the long and well-covered tax case that has kept accountants and small business owners enthralled for the last four years and dominated all recent SME tax planning. No further appeals are possible under UK law.

If the decision had gone against Mr and Mrs Jones, many married couples would have faced a very large tax and NIC cost, going back over the last six years. 

In their judgment, the lords ruled that Mr and Mrs Jones were creating an arrangement in the nature of a settlement when they subscribed for one share each, and set up their company Arctic Systems Ltd. However, the exemption for gifts between spouses also applied and dividends paid to Mrs Jones were therefore not income arising under a settlement.

The resulting decision means that Mrs Jones (rather than Mr Jones) was assessable on the dividends she received from the family company even though most of the profit was as a result of Mr Jones’s efforts for the company.

In response to the decision, Anne Redston, Chartered Institute of Taxation (CIOT) spokesperson, says: “The CIOT is delighted that, after such a long battle, the House of Lords has confirmed that HM Revenue & Customs were wrong to attack husband and wife businesses in this manner. The CIOT has always considered that HMRC were wrong to use this obscure legislation against small businesses like the Jones’s, and the House of Lords has now agreed with us.”

Chas Roy-Chowdhury, head of taxation at the Association of Chartered Certified Accountants (ACCA), says of the victorious ruling: “Mr and Mrs Jones must be delighted. But importantly, clarity had been brought to cases that mirror Arctic Systems. It means similar small businesses will now be able to run their affairs without fear of being classed as tax avoiders.”

Roy-Chowdhury concluded: “What the Jones’ were doing was a well-used practice within such businesses. The argument has been rather esoteric, and the case cuts across the whole idea of the independent taxation of husband and wife, which is widely agreed to have been a healthy development in the tax system in recent years. But caution is still needed because we wonder whether this will be the last of the matter and whether we can expect legislation from government.” 

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Chartered Institute of Taxation

Association of Chartered Certified Accountants

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