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Arctic role

The Arctic Systems judgment has helped clarify the position for many similar cases left hanging in the balance

Last week, I closed with Lord Hoffman’s conclusion that the exemption from the settlement provisions in section 660A(6) ICTA 1988 would be available in connection with the arrangements made by Mr and Mrs Jones in the Arctic Systems’ case. This would mean that Mrs Jones’s dividends would not be assessed on her husband.

Lord Hope added the following: “The rights which attach to shares in a company depend on the contractual relations between the holders of those shares as defined by the articles of association of the company. It is the articles of association that determine questions between ordinary and preference shareholders as to the right to income in the form of dividends and the right to the repayment of capital and to participate in the distribution of surplus assets in the event of a winding up of the company. They also determine questions as to the right to attend and to vote at general meetings of the company.

“The general rule is that the profits of a company belong to the ordinary shareholders, subject to the payment of any preference dividend. Then there is the question as to how surplus assets not required for the discharge of the company’s liabilities or the return of paid-up capital to the shareholders are to be distributed in the event of a winding up.

“The rights of the preference shareholders in any particular case will depend on what the articles of association provide. This is because the rights of the shareholders are determined by the terms of the bargain which they made with the company and with each other. The articles must be taken as a complete statement of the rights of the preference shareholders in the winding up: Scottish Insurance Corporation Ltd v Wilsons and Clyde Coal Co Ltd (1949) AC 462, per Viscount Maugham at p 481, Lord Simonds at p 488.”

So, all ended happily for Mr and Mrs Jones.

However, within a day of the judgment, our friends at HM Treasury had this to say in the form of a ministerial statement: “The Government acknowledges the judgment given by the House of Lords in the Jones v Garnett (Arctic Systems) case. The Government is committed to maintaining fairness in the tax system. The case has brought to light the need for the Government to ensure that there is greater clarity in the law regarding its position on the tax treatment of ‘income splitting’.

“Some individuals use non-commercial arrangements (arrangements that they would not reasonably enter into with an arm’s-length third party) to divert income (which would, in the absence of those arrangements, have flowed to them) to others. That minimises their tax liability and results in an unfair outcome, increasing the tax burden on other taxpayers and putting businesses that compete with these individuals at a competitive disadvantage.

“It is the Government’s view that individuals involved in these arrangements should pay tax on what is, in substance, their own income and the legislation should clearly provide for this. The Government will therefore bring forward proposals for changes to legislation to ensure this is the case. In the meantime, HMRC will apply the law as elucidated by the House of Lords and will be providing guidance in due course.

“The Government would not want commercial arrangements to be caught by any change to legislation. Consultation should help to ensure this.”

Since then, an HMRC release has made clear the position in respect of how cases that were left open pending the Arctic decision will be dealt with. It states: “We have been keeping open some similar cases to that in Jones v Garnett while we waited for the decision in the House of Lords. We will now review all these cases and will seek to settle them in line with the Jones v Garnett decision if appropriate.

“Not every case will be exactly the same as Jones v Garnett. We will consider each case on the basis of its individual facts but unless there are any additional factors which might cause us to take a different view, we expect that most cases where the settled property comprises ordinary shares in a company or an ordinary (that is, unlimited) interest in a partnership will be within the exemption for outright gifts between spouses.

“Self-assessment returns for 2005/06 had to be delivered to HMRC by January 31, 2007. We explained in guidance at that time that these 2005/06 returns should be completed in line with the Court of Appeal decision, which was in favour of Mr Jones, and suggested that the blank space in the return form could be used by the taxpayer to say that they had done this. Now that the House of Lords has also ruled in favour of Mr Jones, these returns will not need to be amended.

“Self-assessment returns for 2006/07 have to be delivered to HMRC by January 31, 2008. These returns should be completed in line with the House of Lords decision, which was in favour of Mr Jones.

“We are preparing new detailed guidance on the settlements legislation in line with the decision and will issue it this autumn in good time for people to be able prepare the 2006/07 returns.”


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