Arctic Systems - A Winter's Tale...

From time to time a tax case hits the headlines. Such is the fate of Mr and Mrs Jones and their company Arctic Systems. The case is still progressing through the courts and is now on its way to the Court of Appeal. We would not normally bring you news without a happy (or unhappy) ending but wanted to update you on the story so far.

Mr and Mrs Jones owned and ran an IT company. They were the founder shareholders. He was a director and she was the company secretary (but not a director). There were no other employees. Mr Jones was responsible for earning all the income of the company whilst Mrs Jones dealt with the administration and worked on average a few hours each week. Mr Jones drew a very modest salary and the balance of the profit was paid out to the couple as dividends - each taking 50%.

The Revenue argued that the corporate structure whereby Mr Jones earned all of the income whilst a substantial part of the profits was paid to his wife as a dividend was an ‘arrangement’. Therefore they had the power under the ‘settlements’ legislation to treat the dividends paid to Mrs Jones as belonging to Mr Jones for income tax purposes. As she was not a 40% taxpayer whilst he was, additional tax could be collected.

The case potentially has far reaching implications for many husband and wife companies but the position is far from clear leaving a whole host of questions unanswered. You can rest assured that we will be keeping a very close eye on developments. In the meantime please get in touch if there are any issues you would like to discuss with us now.