Arctic row ‘will happen again’

The Arctic Systems row will happen again on other issues and with other
taxpayers, under the taxman’s new litigation strategy, a senior tax adviser has

The taxman outlined a new approach to litigation last week. The rules outline
what inspectors should do where there is a dispute over a point of law, but
there is nothing to indicate what they should do in relation to an obscure area
where HM Revenue & Customs has issued no guidance, Anne Redston of the CIoT

‘It would be good if the guidance included something to the effect that “if
appropriate and clear guidance has not been given to taxpayers on the point at
issue, this should be provided before any legal challenge is made, and cases
should not be taken for years prior to the provision of that guidance”,’ said

The Arctic System tax battle was heard in just a day and a half in the House
of Lords last week, despite being scheduled for three days.

HMRC is fighting the married couple
through the courts over the way they split their salaries and dividend earned
from their business.

The result is not expected to be known for six to eight weeks, with thousands
of other husband-and-wife companies’ tax situations hanging on the outcome.

HMRC came out battling in the case, saying that allowing the situation to
continue would be tantamount to admitting a system of ‘voluntary joint

The case relates to historic legislation. The set-up is being challenged
under settlement rules, which deal with circumstances where someone has given
something away purely for tax reasons while effectively retaining it. The case
has annoyed advisers since the tax authorities had never previously used the
rules in such a case.

Chris Bryce, director of the Professional Contractors’ Group, warned against
reading anything into the quick conclusion of the final leg of the tax battle
through the courts.

‘I’m reasonably positive about the way the outcome will go, but can’t read
into the hearing finishing early,’ said Bryce.

Redston said the law lords were ‘well informed about the ins and outs’ of the
case, which sped up the process.

Redston said that if the judges decide the Jones’ tax affairs were set up in
advance and designed to give something to the wife/husband, the law lords might
then conclude that the couple were exempt of tax under gift exemption rules.

‘This would, in effect, narrow the tax arrangement rules, which HMRC could
consider a partial victory, but allow husband and wife businesses with more
beneficial tax treatment as fought for by the Joneses,’ she said.

‘HMRC is wholly wrong, both morally and in law to penalise small businesses
with a retrospective reinterpretation of tax law,’ said Bryce.

Related reading