S660 – What next?
As the dust settles on the now infamous ‘S660 – Arctic Systems’ win, we look at the implications of the House of Lords (HoL) judgement on the small business sector.
Last Wednesday, on 25th July, five Law Lords unanimously agreed in favour of the Jones’, albeit for slightly different reasons. This result vindicated thousands of family run businesses and their accountants. The wider implication, if the Government had won, would have had a huge knock on effect on tens of thousands of small businesses who would have been staring down the barrel at large tax bills with many accountants reading the small print on their P.I policies!
However, 24 hours after celebrating this landmark victory, the Government has decided to spoil the party by announcing that it will be making changes to the tax law, particularly relating to husband and wife businesses. Angela Eagle, Exchequer Secretary, said:
" The Government acknowledge the judgement given by the House of Lords in the Jones v Garnett (Arctic Systems) case.
"The Government are committed to maintaining fairness in the tax system. The case has brought to light the need for the Government to ensure that there is greater clarity in the law regarding its position on the tax treatment of ‘income-splitting'.
"Some individuals use non-commercial arrangements (arrangements that they would not reasonably enter into with an arms-length third party) to divert income (which would, in the absence of those arrangements have flowed to them) to others. That minimises their tax liability, and results in an unfair outcome, increasing the tax burden on other taxpayers and putting businesses that compete with these individuals at a competitive disadvantage.
"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.
"The Government would not want commercial arrangements to be caught by any change to legislation. Consultation should help to ensure this."
Now that the Government have indicated their next move is to change the law, this gives all family operated business clearer warnings as to the Revenue’s intentions, allowing them to structure their financial affairs to comply with the intended legislation. This is what the taxpayers and their advisers would have accepted from the start of this debacle, but it has taken four years and thousands of pounds in costs to achieve what seemed a pragmatic approach to begin with.
You would therefore be forgiven for thinking that the Revenue’s thinking has always been ‘Heads we win, Tails you lose’. They tried to play the ‘game’ by the rules, but when they lost, they decided to change the rules! Win or lose, the law would have eventually said what the Government wanted, so why the charade of harassing Geoff and Diana Jones for so long!
PCG chairman David Ramsden sums it up by saying: “When husbands and wives began to be taxed independently in the 1980s, it was always intended that they should be encouraged to go into business together in this way. We question why the Government suddenly wishes to jeopardise the UK’s vibrant small business sector by reversing this well-established policy.
“We are also dismayed that new legislation is on the cards, given that HM Revenue and Customs consistently refused to acknowledge that the Arctic Systems case was a test case – if it did not test any significant new point of law, why does the law suddenly need changing? And if the law needs changing, why did the Government not just do that to begin with, instead of chasing Geoff and Diana Jones to the House of Lords?
"This development clearly shows that the Government should have been honest and legislated in the first place, so that we could have had a proper debate about how small businesses should be taxed. “ It is the Government’s prerogative to introduce new legislation, but that legislation must be clear, workable, and fair. The Prime Minister and Chancellor frequently say they wish to encourage small businesses in Britain, but this legislation risks having the opposite effect.”
PCG further state that ‘It is not clear how the Government will be able to isolate the companies it wishes to target from others which it does not wish to tax more heavily. Nor is it clear how it is deciding which companies to hit with a new tax, and which to leave alone – it has said only that 'commercial arrangements' will be unaffected”.
The Government still refuses to accept this as a test case. Costs were awarded against HMRC, so maybe they could explain why they risked and spent hundreds of thousands of pounds of taxpayers’ money to chase what ended up as a £6,000 tax bill, if it did not have wider implications!
The defeat of the Government clearly has greater public significance than just benefiting Geoff and Diana Jones. It will now be very difficult for the courts to ignore this judgment and virtually impossible for HMRC inspectors to push this point again. The biggest fear, of retrospective tax demands, has been removed. However, it can be assumed with confidence that any new proposals will be securely targeted at couples that jointly own a business where one partner is the major fee earner by providing his or her services, but going forward, not backward.
What now for Geoff and Diana Jones? Geoff has said that after they have finished their TV and radio interviews, they are looking forward to a relaxing drink with those who have supported them - and then back to a life of anonymity again and running their business as usual!
