Arctic Systems - House of Lords ruling

August 2007

The long awaited House of Lords decision in the case known as Arctic Systems has been announced and their Lordships decided by a unanimous decision to back Mr. & Mrs. Jones in their battle against HM Revenue & Customs. HMRC had tried to override the separate taxation of husband and wife by claiming the dividend income Mrs. Jones derived from the company on her 50% shareholding should be recharged to Mr. Jones. In simple terms the taxman asserted that as Mr. Jones effectively earned most of the profit for the company, it was unjust for half of this income to be allocated to Mrs Jones as a dividend. In legalise it represented a bounteous settlement from Mr. to Mrs. Jones. If the Revenue had been successful they would have assessed Mr. Jones, as if he had received his wife's dividend income.

Husband and wife companies that have a similar set-up to the Arctic Systems case are now safe from attack based on current legislation and case law. However it is likely that the Revenue will now legislate to change the relevant law - such a change if it occurs is unlikely to be retrospective.

We will keep a watching brief on this area of the law and advise you if future changes are forthcoming.