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HMRC loses landmark tax ruling

Taxman fails to keep up with the Joneses

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A husband and wife team has beaten the taxman in a landmark ruling that could put a smile on the faces of small business owners throughout the UK.

Arctic Systems' long-running legal battle came to an end yesterday, following the House of Lords' decision to reject an appeal from HM Revenue and Customs (HMRC) which had been pursuing the married couple for what it claimed was unpaid tax.

HMRC had asked the Lords to overturn a Court of Appeal ruling on its dispute with the small Sussex-based IT firm, which is run by husband and wife team Geoff and Diana Jones.

But, in a landmark case, the Lords ruled yesterday in favour of tax-saving arrangements used by thousands of husband and wife operations.

Chris Greenwell, whose law firm Nelsons represented the couple, said: "The revenue's expressed intent to exhaust every avenue of appeal has been a questionable use of taxpayers' money.

"This is confirmed by today's ruling, which marks good news for all family businesses that are entitled to plan their affairs tax efficiently."

The Arctic Systems case began in 2003 when the Joneses disputed a £42,000 tax bill that had been slapped on their IT consultancy firm by HMRC. And, in late 2005, the couple convinced the Court of Appeal to overturn previous rulings against them.

Despite this, HMRC continued to doggedly push for the Lords to overturn its decision.

HMRC had argued that the couple had avoided tax on earnings at the firm by paying themselves a small salary (£7,000 for him and £4,000 for her) from Arctic's 2000/2001 turnover of nearly £100,000. The amount was then divvied up equally, less tax and expenses, in dividends.

The financial arrangement between the pair meant they paid less tax and national insurance, with Diana Jones receiving more in dividends to take advantage of her lower tax rates.

Yesterday's ruling in favour of the taxpayer was seen as a crucial victory by the Professional Contractors Group (PCG), which has supported the couple throughout its battle with the taxman.

PCG chairman David Ramsden said: "This is an enormous relief for family businesses throughout the UK who had been facing a tax rise from a previously obscure bit of law.

"We will now be working to ensure that HMRC respects this decision and does not attempt to penalise family businesses unfairly."

The "obscure bit of law" referenced by the PCG dates back to before the Second World War and was intended to stop married couples using company dividends to reduce their joint tax bills.

Responding to the ruling, exchequer secretary to the treasury Angela Eagle said in a statement: "It is the government's view that individuals involved in these arrangements should pay tax on what is, in substance, their own income and that the legislation should clearly provide for this.

"The government will therefore bring forward proposals for changes to legislation to ensure this is the case. In the meantime, HMRC will apply the law as elucidated by the House of Lords and will be providing guidance in due course." ®

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