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The House of Lords will give a concluding hearing in the case of Jones v Garnett ("Arctic Systems") this week.

This case focuses on whether dividends paid by the company (Arctic Systems Limited) to a working shareholder (Mrs Jones) consisted of income arising under a settlement as defined by ICTA 1988, s 660A(1) and so should be treated as the income of her spouse, who was a director and IT contractor.

This case is of particular importance because it examines whether, in a husband and wife company set up, paying low salaries and distributing the remaining profits by dividend creates a statutory settlement for the purposes of s 660A. It also looks at whether this situation can be described as an outright gift of property within s 660A(6) (exemption from settlement provisions for outright gifts between spouses).

In response to this announcement the Association of Chartered Certified Accountants (ACCA) expressed alarm at how the couple (Mr and Mrs Jones) have been dragged, seemingly unnecessarily, through the legal system. The case originally went to the Court of Appeal in autumn 2005, being won in December 2005. But HMRC appealed and the case has hung in limbo until this week.

Chas Roy-Chowdhury, Head of Taxation at ACCA, said: “The ‘Arctic Systems’ tax case has been hanging around for far too long. It seems the government is determined to prove a point by allowing HM Revenue & Customs to appeal against the Court’s decision back in December 2005. The delay in this legal ruling has left many family companies in a quandary about how to complete their tax forms with regards to dividend payments.”

Roy-Chowdhury added: “We really hope the Lords’ decision will fall on the side of Artic Systems. Geoff and Diana Jones have been through quite enough already. And the Jones’ being pursued through the legal system means the case will be costly to the UK taxpayer.

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Association of Chartered Certified Accountants