HMRC had fought a six year battle with Arcitc Systems, an IT consultancy owned by husband and wife Geoff and Diana Jones. The structure of Arctic was similar to tens of thousands of other businesses. The shares were divided between Geoff and Diana, both received dividends, Geoff was the major fee earner, while Diana supported the business through administrative work and general assistance.

HMRC had dusted off an old piece of legislation, known as Section 660, to argue that the dividends paid to Diana really belonged to her husband, Geoff - and should be taxed at his higher rate. Consequently, six years ago a tax demand for £42,000 arrived on their door mat.

The structure of their businesses was not unlike many others. In fact, accountants and even a Goernment web-site advised this practise. The implications for similar businesses were significant and a victory for HMRC would have brought a windfall of back-dated taxes for the Government.

Legal battle
Geoff and Diana, with the support of several small business organisations, including the Professional Contractors Group (PCG), fought their case through the courts.

Their first two hearing - at the Special Commissioners and an appeal to the High Court - ended in vicotry for HMRC. But the tide began to turn in the higher courts. The Court of Appeal found in favour of Arctic, but that was not the end of the matter as HMRC appealed the decision to the highest court in the lands, the House of Lords.

The final act in this long-running drama was played out this week when the law Lords found unanimously in favour of Arctic Systems.

End of the road?
Although HMRC refused to accept this as a test case - possibly as they would have had to fund the case, the implications are wide-reaching. It is highly improbable that the lower courts would ignore a Lords decision - and there is therefore little point in HMRC starting action against individuals under Section 660.

But the Government could still have the final say. Despite the Lords decision, it is the defeated party which holds thr trump card - the ability to change the law. And commentators are already discussing the possibility of a Budget announcement about 'closing a so-called loop hole'.

However, even if the law does change, it is still a victory for small businesses, as any new law would be for the future and small businesses will have the opportunity to change their operating procedures rather than being taxed for their previous - lawful - behaviour.

Further information
Hardhatter has written two articles summarising the events relating to Section 660:

• The case of the married couple and the taxman (1) - the background to Section 660
  
• The case of the married couple and the taxman (2) - Arctic Systems legal journey

You can also read more about the background and the issues at stake in Hardhatter's sister site, Shout99's Section 660 resource centre

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Susie Hughes
The Editor © Hardhatter 2007