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Businesses Need to Prepare for Impact of Arctic Systems Ruling

August 2007

Businesses should start seeking expert advice now to prepare for the fallout from a landmark legal ruling in favour of husband-and-wife businesses.

The warning comes from Sutton Coldfield-based accountants Weatherer Bailey Bragg, following the House of Lords ruling in favour of Geoff and Diane Jones, who run an IT company called Arctic Systems, on 25 July.

The couple’s victory marked the end of a six-year battle with HM Revenues and Customs over whether Mrs Jones’ share of the profits of Arctic Systems, paid to her as a dividend – on which no National Insurance is paid, and which is taxed at a lower rate – should be taxed as part of her husband’s income, resulting in a bigger tax bill.

Following the ruling, treasury secretary Angela Eagle said the government would introduce legislation to clarify the tax position on income splitting, as the system used by the Jones is known, and that there would be consultation to inform this.

Alan Weatherer, senior partner at Weatherer Bailey Bragg, said: “At this stage, we do not know whether the new legislation will simply close the income splitting loophole or introduce more far-reaching reforms. Although we welcome consultation, we hope that thousands of small, family-owned businesses do not suffer uncertainty concerning their future tax liabilities for any longer than necessary.

“In the meantime, we advise anyone who believes their future tax position may be affected as a result of the government’s intentions to seek advice from a qualified professional, such as an accountant, on their business structure and tax efficiency.”

Until new legislation is introduced, HM Revenues and Customs will apply the law as decided by the House of Lords in the Arctic Systems case and will publish further guidance, expected in the autumn.

For more information, call Weatherer Bailey Bragg on 0121 355 1901.