Arctic Systems Case - Revenue have leave to appeal

April 2006

This case concerns a Mr and Mrs Jones who set up a limited company and are now resisting a claim by the Revenue that the dividends voted to Mrs Jones, 50% of the total declared, should be taxable as if allocated to Mr Jones!

The basis of the Revenue's claim is that as Mr Jones did most of the chargeable work, then he should be taxed on most of the dividends voted. The downside for Mr and Mrs Jones is that this switch from Mrs to Mr will increase Mr Jones' higher rate tax bill, and reduce Mrs Jones' standard rate tax bill - overall a gain for the taxman.

In December of last year the Court of Appeal voted in favour of Mr and Mrs Jones, however the court did grant leave to the Revenue to apply for permission to take the case to the House of Lords.

On Budget day this permission was granted and we will now have to wait for the case to be decided by the Law Lords. This is unlikely to be before the end of 2006.

For now we will have to keep a watching brief on the effects that this case has on the structure and salary/dividend policy of existing husband and wife run companies. At present the decision handed down by the Court of Appeal stands. We will keep you informed of progress with this case and let's hope that the decision reached in the Court of Appeal is upheld!