Arctic Systems case (Jones v Garnett)

Great news for small businesses!!

The House of Lords has found in favour of the taxpayer in the long running Arctic Systems case. HMRC’s appeal was rejected by the law lords meaning that the dividends paid to Mrs Jones cannot be taxed as income of Mr Jones. No further appeals are possible under UK law.

In the judgment, it was ruled that, although the Jones were creating an arrangement in the nature of a settlement when they subscribed for one share each in their company Arctic Systems Ltd, the exemption for gifts between spouses also applied and dividends paid to Mrs Jones were therefore not income arising under a settlement.

HMRC will now have to review and substantially re-write its guidance on settlements and review its guidance on outright gifts.