Both AccountingWEB and ContractorUK have the scoop on the Appeal Court's decision in favour of the Jones' in the Arctic Systems case. For those that want to analyse the case the official judgment is available at the Court of Appeal Decisions website.
As some commentators have already noted, Gordon Brown is not the best loser. Neither is HMRC. So while the case is won for the time being, don't expect government to take this on the chin without considering what it means for the future of OMBs, contractors or tax payers generally. At present, it's looking like a PR disaster.
For me, the key points are where the Chancellor says:
"In the absence of any service agreement between the Company and Mr Jones I am unable to accept that the payment of modest salaries to Mr Jones was any part of the arrangement. Similarly the declaration of the dividends was not arranged in advance; it was dependent on the trading fortunes of the Company. Further, as counsel for Mr Jones submitted, and, as I accept, the fact that the structure being set up might lend itself in the future to some tax mitigation is irrelevant to the existence of an element of bounty"
Keene LJ takes a wholly pragmatic standpoint:
"What happened in practice was therefore dependent on subsequent decisions made by the appellant as the sole director. It is difficult to regard such a Protean state of affairs as capable of being part of an arrangement in the sense used in the legislation. Furthermore, for the same reasons the element of bounty also was too speculative when viewed as at the date of the alleged settlement."
Carnwath LJ raises the point of general principle that:
"The lack of a clearly ascertainable legislative purpose underlines the need for caution in extending the concept of settlement beyond the scope of existing jurisprudence. The Revenue's position in this case seems to me a significant extension. For the first time, they seek to apply the concept to what has been found to be a normal commercial transaction between two adults, to which each is making a substantial commercial contribution, albeit not of the same economic value. Such a difference, by itself, is not enough to my mind to take the arrangement into the realm of "bounty", as it has been understood in the existing cases. If the legislature wishes such an arrangement to be brought within a special regime for tax purposes, clearer language is necessary to achieve it."
At this juncture common sense has prevailed. And in my experience, that makes for the most effective law. But substantive points remain:
- Why is government rushing through legislation and then seeking to clarifying it in the courts or through other appeal processes? IR35 may have caused many scares but it has proven to be largely without teeth.
- How will HMRC respond? In the summer, it was cock-ahoop at winning a bunch of landmark cases. It now ends the year having lost both M&S and Arctic Systems. they must be bruised, and a bruised animal is a dangerous beast.
My sense is that HMRC and Government need to sit down and figure out where they go to next with a tax system that is clearly creaking under Government's need to hike the overall tax take but which is politically constrained by top line Income, Corporation Tax and VAT rates.
In the meantime, Happy Christmas Mr & Mrs Jones - you stood up and were prepared to risk everything to prove an important point of law potentially affecting millions of ordinary people. That takes guts, spirit, passion and determination. Few would have been prepared to do that. It makes you heroes.
I'm sure Nichola's take will be illuminating