The Arctic Systems case, more formally Jones v Garnett, attracted considerable attention as it made its way through the UK Courts, but was finally decided in the House of Lords in July. While the decision was in favour of the taxpayer, it may not have effect for long.

Arctic Systems, almost uniquely among anti-avoidance cases, was distinguished both by the banality of the arrangements and the relatively small amounts of money involved. At the risk of oversimplification, Arctic Systems was a £2 professional services company, owned jointly by husband and wife, but in effect a vehicle for the husband's profession as an IT consultant. Rather than extract money via salary, the company's profits were paid out as dividends. HMRC cried foul, because in their view the wife was in effect receiving what should have been the husband's salary, and benefiting from her otherwise unusable allowances and tax bands to the tune of £7,000 per annum.

The House of Lords finally determined that the arrangement was caught by the Income Tax (Trading and other Income) Act 2005, Part 5, which would make the husband liable for tax on the wife's dividends under the settlement rules of that Part. Equally however, the arrangements qualified for the let-out rules for certain types of settlement between husband and wife, so the taxpayers won.

The UK Treasury has been quick to respond. In a statement, the exchequer secretary to the Treasury commented that “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.”