Revenue appeal the Arctic Systems case

HM Revenue & Customs (HMRC) have confirmed that they have decided to petition the House of Lords for leave to appeal against the decision of the Court of Appeal in the case of Jones v Garnett (Arctic Systems Ltd.). This case affects many husband and wife owned contracting companies where one spouse earns the majority of the income.

The Jones v Garnett case concerns arrangements involving a company called Arctic Systems Ltd. and relates to the settlements legislation. HMRC won the original case heard by the Special Commissioners. The appellant (Mr. Jones) subsequently appealed to the High Court, and HMRC also won this hearing. However, HMRC lost in the Court of Appeal and are petitioning the House of Lords for leave to appeal.

The settlements legislation (Part 5, Chapter 5, of the Income Tax (Trading and Other Income) Act 2005) is a long standing piece of anti-avoidance legislation designed to prevent the avoidance of tax by, for example, a higher rate taxpayer transferring their income to someone liable at a lower rate. The legislation applies in a wide range of circumstances, including income from small companies and partnerships but it does not apply to income from those companies and partnerships that have normal commercial arrangements.

Contractor organisation, the PCG, released this press release in response to HMRC’s decision to appeal the case.