Background

On 25 July 2007 the House of Lords gave its judgement in the case of Jones v Garnett (also known as “Arctic Systems Ltd”). HMRC had previously lost this case in the Court of Appeal and as a result had appealed to the House of Lords. The case concerned dividends payments made by a company to Mrs Jones through which Mr Jones provided IT consultancy services. HMRC's view was that the settlements legislation deemed the dividends received by his wife to be Mr Jones’ for income tax purposes. The House of Lords, however, has now ruled in favour of Mr Jones.

Ministerial Statement

On 26 July 2007 the Exchequer Secretary to the Treasury, Angela Eagle made a Written Statement to Parliament:

“The Government acknowledges the judgement given by the House of Lords in the Jones v Garnett (Arctic Systems) case.

The Government is 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 tax payers 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.”

How Cases will now be Dealt with Following the House of Lords Decision

Open cases

We have been keeping open some similar cases to that in Jones v Garnett whilst we waited for the decision in the House of Lords. We will now review all these cases and will seek to settle them in line with the Jones v Garnett decision if appropriate. Not every case will be exactly the same as Jones v Garnett. We will consider each case on the basis of its individual facts, but unless there are any additional factors which might cause us to take a different view, we expect that most cases where the settled property comprises:

• ordinary shares in a company, or
• an ordinary (ie unlimited) interest in a partnership, will be within the exemption for outright gifts between spouses.

Returns for 2005/2006

Self Assessment returns for the tax year 2005/2006 had to be delivered to HMRC by 31 January 2007. We explained in guidance at that time, that these 2005/2006 returns should be completed in line with the Court of Appeal decision, which was in favour of Mr Jones, and suggested that the blank space in the return form could be used by the taxpayer to say that they had done this. Now that the House of Lords has also ruled in favour of Mr Jones, these returns will not need to be amended.

Returns for 2006/2007

Self Assessment returns for the tax year 2006/2007 have to be delivered to HMRC by 31 January 2008. These returns should be completed in line with the House of Lords decision, which was in favour of Mr Jones. We are preparing new detailed guidance on the settlements legislation in line with the decision and will issue it this autumn in good time for people to be able prepare the 2006/2007 returns.