HMRC warned against 'knee-jerk' Arctic reaction

Advisers have warned the government not to make any ‘knee-jerk’ reactions to
losing the Arctic Systems tax case, including altering legislation to plug the
‘husband and wife’ decision by the House of Lords.

The Lords today ruled that Geoff and Diana Jones of Arctic Systems had
entered into a tax arrangement, but it fell into an exemption for a ‘gift’
between husband and wife.

Advisers welcomed the decision, which could have adversely affected thousands
of husband and wife businesses, but warned that the government could still look
to halt the exemption in the future.

‘The concern now is that HMRC might tinker with the legislation to plug the
gap,’ said Melissa Healy, solicitor at law firm Macfarlanes. ‘They might be
worried that advisers will see this as a green light for husband-and-wife or
civil partners’ businesses to avoid National Insurance contributions and higher
rates of tax.’

Francesca Lagerberg, chair of the ICAEW tax faculty Technical Committee, said
the result was a vindication of the way many owner-managed business were
operated, but called on the government to provide tax policy that was clear and
supportive of business.

‘We would urge the government not to make any knee-jerk reactions as a result
of this decision.’ said Lagerberg. ‘There is, however, a need for government to
ensure tax policy supports business and provides it with clarity and certainty.’

Grant Thornton senior partner Mike Warburton said he and others had been
telling HMRC that the case fell within the gift exemption rule, and the only way
to change the current status would be to change the law, a situation he
described as ‘unlikely to happen’.

‘If they removed the exemption it would be done at significant political
cost,’ said Warburton. ‘[The government] would be saying there should be a tax
on hard-working couples’ businesses.’

He also called on HMRC to compensate the Jones’s, as the tax battle had
effectively been a test case.

Further reading:

Arctic Systems: timeline and background on
the case

Taxpayers celebrate epic Arctic Systems
victory