Jervis and Partners - Accounts in Northampton

TIn the Pre Budget Report in October 2007, the Chancellor, Alistair Darling, announced a series of changes to the CGT regime for individuals and trustees. These changes included the abolition of taper relief and indexation relief and the introduction of a single rate of CGT of 18%.

On 24 January 2008, in response to pressure from the business community, the Chancellor announced a new ‘Entrepreneurs’ Relief’. The first £1m of gains qualifying for relief will be charged at an effective rate of 10%. Gains in excess of £1m will be charged at 18%. An individual will be able to make more than one claim for relief, up to a lifetime total of £1m of gains qualifying for relief.

Sarah sells her trading business and realises gains of £450,000 (before Entrepreneurs’ Relief). She has made no other claims to the relief and the whole of the gains are eligible for relief. If she claims the relief the gains of £450,000 will be reduced by 4/9ths (£200,000) and £250,000 of the gains will be liable to CGT (subject to deduction of any allowable losses and the annual exempt amount).

The conditions for the new relief will be based broadly on the old Retirement Relief but the new rules are designed to be simpler:

The relief will apply to gains arising on the disposal of the whole, or a part, of a trading business that is carried on by the individual, either alone or in partnership. Where a business ceases, relief will be available on gains on assets used in the business and disposed of within three years of cessation.

The relief will also apply to gains on the disposal of shares in a trading company, or holding company of a trading group, provided that the individual making the disposal:

The terms 'trading company', 'holding company' and 'trading group' will have the same meaning as they had for taper relief purposes.

Where an individual qualifies for the relief on a disposal of shares, relief will also be available in respect of any 'associated disposals' of assets which were used in the company, or group’s, business. A similar rule will allow relief on an associated disposal by a member of a partnership who is entitled to relief on the disposal of their interest in the assets of the partnership.

If a company director who owns the premises from which the company carries on its business sells the premises at the same time as he sells his shares in the company, the sale of the premises may count as an 'associated disposal' and any gain attract Entrepreneurs’ Relief. The relief due on an associated disposal will be restricted where the asset in question was not wholly in business use throughout the period it was owned.

Trustees will also be able to benefit from the relief if a beneficiary of the trust with an interest in possession relating to those assets is involved in carrying on the business in question, personally or as a partner. In the case of shares, the beneficiary must qualify as an officer or employee of the company in question.

The Arctic Systems case has been much talked about over recent years. The case involved a husband and wife who owned a company 50/50 and, broadly, took the profits out by way of dividends, again 50/50. HMRC attempted to tax the dividends solely on the husband, as he was performing most of the work which generated the profits of Arctic Systems.

Following HMRC’s defeat in this case, the government has published a consultative document which includes draft legislation to prevent a tax advantage being gained through what has become known as ‘income shifting’. This legislation will potentially apply from 6 April 2008 to:

It will not affect dividends from a quoted company or investment income from savings accounts or from rental property (as long as the rental income does not arise from a partnership business).

It is broadly designed to address the Arctic Systems sort of situation, where one spouse or civil partner generates most of the business profits but the other gets a proportion of the profit and, overall, the couple save tax into the bargain. However, the proposed rules are very widely drafted and may catch many owner-managed businesses involving husbands, wives and other family members, as well as businesses run by people who are living together but are not married.

The proposed legislation refers to an individual who shifts company dividends and partnership profits to another individual.

If these conditions are met, the individual who has shifted the income will be liable for the tax and any national insurance due on the income shifted.

This is an HMRC example of a situation in which the legislation would apply. Individual 1 and Individual 2 form a company, each owning fifty £1 ordinary shares. The business of the company is to provide the personal services of Individual 1. Individual 2 spends around five hours a week on back office duties for the business. In the first year they each receive a salary of £5,000 and dividends of £30,000. The salary received by Individual 2 is considered to be the market rate given the nature of the work done and time spent doing it. The company has no significant assets or liabilities.

If Individual 2 has no capital in the business and bears no risk the whole of the £30,000 would be treated as shifted income because Individual 2 is already receiving a market rate for the work done, has no capital in the business and bears no risk.

Of course, if Individual 2 does contribute more to the business than in the above example, then some or all of the income will not be treated as shifted income.

Please note that this is not yet legislation and is subject to a consultation process.

The Construction Industry Scheme (CIS) was significantly changed from 6 April this year when monthly returns were introduced for contractors. The CIS300 return details the payments made to subcontractors and any tax deducted from those payments. The returns have to be submitted to HMRC by 19th of the month.

Since the new CIS was introduced in April HMRC have not been imposing penalties for the late submission of the monthly returns but have advised that they will charge penalties for late returns from October 2007.
The penalties will apply not only to returns submitted late from October onwards but also to any outstanding returns for previous month’s which have not been received by HMRC by ‘close of business’ on 19 October 2007. HMRC have confirmed that they will not be issuing retrospective penalties for returns which, although made late, were received by 19 October 2007.

HMRC guidance states that where a contractor missed filing their return for May 2007 no penalty will be issued for missing the monthly deadlines in June, July, August and September, but a penalty will be charged for the return not being filed by 19 October and will continue each month until such time as it is received by them.

The automatic, interim, penalty of £100 will be issued for each return that HMRC have not received by 19 October 2007. Further automatic penalties will be issued for each subsequent month until the return is received.

RThe national minimum applies to nearly all workers and sets hourly rates below which pay must not be allowed to fall. It helps business by ensuring companies will be able to compete on the basis of quality of the goods and services they provide and not on low prices based predominantly on low rates of pay. The rates set are based on the recommendations of the independent Low Pay Commission.

The minimum wage is a legal right which covers almost all workers above compulsory school leaving age. There are different minimum wage rates for different groups of workers as follows:

It is important to note that these new rates only apply to pay reference periods beginning on or after the date they came into law.
From 1 October 2006, the Employment Equality (Age) regulations abolished the Older Workers Development Rate and remove the age limit on the apprenticeship exemption.

The Government accepted the Low Pay Commission's recommendations for a new rate for 16 and 17 year olds (above compulsory school leaving age)* in their 2004 report.
£3.00 per hour from 1 October 2004. This increased to £3.30 in October 2006 and £3.40 on 1 October 2007.
NB: 16 and 17 year old apprentices are exempt from the young workers rate.
*Compulsory School Age

Revenue & Customs still owes tens of thousands of small employers their promised incentive for filing their tax returns online. And it has admitted that some employers may not be paid until December.

But a Revenue spokesman said that the majority of small employers 'self-serve' the incentive payment by deducting it from their PAYE payments. 'Over 50,000 employers have received 2006/07 incentive payments - significantly more than at this time last year,' he said.

He added that less than 10% of the 1.3m employers who qualify for the incentive are still waiting for a cheque. The Revenue had offered £150 tax-free payments for employers with fewer than 50 employees who filed their P14s and P35 for 2006/07 electronically.

Revenue & Customs has warned that the VAT registration bottleneck is unlikely to ease before autumn. Delays in routine registrations continue to cause cashflow problems for businesses and frustration for practitioners. Speaking at an ICAEW Tax Faculty event last month, Theresa Middleton, a Revenue director, said the problems were being urgently dealt with but she warned delegates it would be autumn before they saw much of an improvement.

The Revenue's website has been asking practitioners not to chase applications sent less than six weeks ago and said the average processing time stood at 38 days, although some practitioners report delays of more than double this.

Causes of the delays include the carousel fraud crackdown, incorporations resulting from the new managed service company rules and Revenue staffing issues.

The ICAEW's Tax Faculty has published a new report suggesting the Revenue should compensate affected businesses and make operational improvements.

John Arnold, chairman of the faculty's VAT committee, which produced the report, said: 'What we are looking for is immediate action from the Revenue to compensate business for the delays and longer term action to speed up procedures.'

The House of Lords has found in favour of Geoff Jones in the landmark tax case Jones v. Garnett (also knows as “Arctic Systems”). The law lords rejected HM Revenue and Customs’ appeal to tax Geoff Jones on dividends paid to his wife, Diana. The judgment marks the dramatic end of a tax case that has gripped accountants and small business owners for the last four years and dominated all recent SME tax planning. No further appeals are possible under UK law.

The Jones created an arrangement in the nature of a settlement when they planned, and subscribed for one share each, and set up their company Arctic Systems Ltd
However, the exemption for gifts between spouses also applied and so dividends paid to Mrs Jones were therefore not income arising under a settlement.

HM Revenue and Customs took the case to the Lords in an effort to reverse an earlier judgment made by the Court of Appeal in favour of Arctic Systems, the business owned by Geoff and Diana Jones.

The case arose because Mrs Jones, although not as involved in the running of the business as her husband, had been paid a low salary for administrative work and had received dividend payments as well. Mr Jones also received a low salary and dividends.

HMRC argued that Mr Jones’ low salary helped to raise Arctic’s profits while Mrs Jones was able to take an artificially high level of dividend payments. As dividends attract a lower rate of tax than a salary, HMRC said that the arrangement was a mechanism to avoid tax and that the couple owed £42,000 in unpaid liabilities.

Following two High Court judgments that went in favour of HMRC, the Court of Appeal ruled last year that Mrs Jones was allowed to be paid in dividends.

HMRC had been seeking to overturn the Court of Appeal ruling.

However, the House of Lords has now decided in favour of Arctic Systems.

It is thought that thousands of small family businesses manage their tax affairs in this way and could have been facing significant retrospective bills had HMRC won the case in the Lords.

But according to the City law firm which represented the HMRC in the case, the government may yet act to change the system.

A lawyer from the firm said: “It is very possible that the government will introduce legislation to close this loophole in a future budget.”

Firms are being urged to speed up their claims for tax relief on capital spending ahead of a cut in the rate next year. The Treasury is cutting the amount of spending on plant and machinery that a firm can claim against tax each year from 25% to 20%. This will improve its own cash flow at the expense of the private sector. From next year, it will take firms considerably longer than it does now for substantial capital expenditure to be claimed in full against a company's tax bill. The Treasury is also cutting from 25% to 10% the annual rate against which capital equipment 'embedded' in buildings, such as fire alarms, can be claimed. In the case of investment covered by the new 20% rate, 2007-2008 represents firms' last chance to claim at the old, higher rate. But in the case of the embedded equipment, any spending in this area that is claimed before the end of this financial year will continue to attract a 20% rate indefinitely.

As as a result of provisions in the Health Act 2006, enclosed public places and workplaces have to be smoke free from Sunday 1 July 2007. This date applies to England only.

According to a survey published by the Department of Health a smoky atmosphere is the main reason for avoiding a pub or bar. The survey also showed a high level of support for smoke free legislation.

The results of the survey of 1,700 adults are interesting. 36% of people gave a smoke-filled atmosphere as the main deterrent for going to a bar or pub and 67% of people would rather spend the evening in a smoke free venue, than one where smoking is allowed. 91% (including 83% of smokers) now consider smoking in a non-smoking place unacceptable.

Public Health Minister, Caroline Flint, recently said:
"With only 50 days to go until England goes smokefree our aim is to ensure that everyone is aware of the new law, how it will affect them and what they need to do to prepare. Our snapshot survey shows that the majority of people know that smokefree legislation is coming, but almost half the population are not aware it comes into effect on 1 July.”
Employers, managers and those in charge of smokefree premises and vehicles will need to:

- display 'no-smoking' signs in smokefree premises and vehicles
- take reasonable steps to ensure that staff, customers/members and visitors are aware that premises and vehicles are legally required to be smokefree
- remove any existing indoor smoking rooms
- ensure that no one smokes in smokefree premises or vehicles
You may also want to take these supportive measures:
- remove ashtrays from smokefree areas
- develop a smokefree policy in consultation with staff
- offer staff training to help them understand the new law and what their responsibilities are
- provide your staff and customers with support to quit smoking
The Government has produced an official guide which explains everything you need to know about the new law and what you will have to do to comply with it.

Lawyers acting for HM Revenue & Customs yesterday began the final stage of a four-year legal battle that could lead to thousands of small businesses facing retrospective demands for tax.

HMRC is asking the House of Lords to overturn a Court of Appeal ruling on its dispute with Arctic Systems, a small IT contractor run by Geoff and Diana Jones, who argue they should not have to pay a £42,000 bill for back tax presented to them in 2003.

In December, judges ruled that Arctic, which is run by the married couple, had been legally entitled to pay Mrs Jones in the form of a dividend, rather than a salary. Mrs Jones owns half of Arctic, but is less involved in the day-to-day work of the company.

HMRC has argued that Mr Jones deliberately took a lower salary in order to boost Arctic's profits and that Mrs Jones was then able to claim an artificially high dividend pay-out. Since income tax is payable at a lower rate on share dividends than on wages for paid work, the arrangement was to the couple's advantage.

Michael Furness, QC, acting for HMRC, told the panel of five law lords: "Permitting such arrangements would be tantamount to facilitating, for those couples whose circumstances allowed them to take advantage of it, a new form of voluntary joint taxation."

HMRC has been seeking extra tax from the Joneses since 2003 in order to make up for the income tax it argues the arrangement artificially avoids. The tax authorities won two High Court judgments backing this stance, before the Court of Appeal ruled in the couple's favour last year.

The case is crucial because tens of thousands of small businesses set up in a similar way have organised their finances in an identical fashion, often on the advice of accountants. Most will face demands for back tax if the Joneses lose their case.

For this reason, Arctic has won the support of trade bodies representing small businesses, particularly in the IT sector, which has been atarget of HMRC.

"HMRC is wholly wrong, both morally and in law to penalise small businesses with a retrospective reinterpretation of tax law," said Chris Bryce, a director of the Professional Contractors Group, a trade body that has paid some of the Joneses' legal costs.

"Geoff and Diana took on the risks and responsibilities of owning and running Arctic Systems together, and are entitled to share in the rewards together."

Bill Knox, chairman of taxation at the Federation of Small Businesses, accused HMRC of heavy-handedness in taking the legal action to the House of Lords.

"HMRC's conduct towards a family-run business in this case is utterly shameful," Mr Knox said.

The House of Lords hearing is expected to conclude tomorrow, though a judgment is unlikely for several months.

The service provided to small businesses by banks is still not good enough, the Federation of Small Businesses (FSB) has said.

The claim was made in a new report which examined progress made since the Cruickshank Review of 2000 and the recommendations of the 2002 Competition Commission inquiry following a referral of the banks to the Commission by the Office of Fair Trading.

The study found that although the majority of small businesses were satisfied with their bank, when the service goes wrong, it goes badly wrong. Switching accounts, overcharging and poor customer services were the main areas of complaint with a major cause the lack of understanding of small businesses by bank staff.

The FSB also claimed that banks are not fulfilling their commitment to the Competition Commission to offer free banking or pay at least 2.5% interest on business current accounts and to publicise these services to their customers.

Mike Cherry, from the FSB, said: "Banking services for small businesses have improved over the last few years. However, there is a long way to go before small businesses get the quality of service from their banks that they need and deserve.

"There has to be a culture change within the banks so that they understand the needs of their small business customers and can then deliver even better services for them. The current profit levels of the banks demonstrate that they have the capability to do this.

"The Competition Commission found that the major banks were making £2bn per year in profits from small business banking. We call on the banks to live up to their undertakings to the Competition Commission or, if they fail to do so, for the regulators to make them."

Companies House is being targeted by fraudsters filing false information in order to appear legitimate so they can set up trading relationships with other businesses.

Graydon, a leading credit reference agency, said it was uncovering more of this type of fraud - called long firm fraud - after closely examining accounts filed at the public register. The warning comes as Experian, a business information specialist, has reported that identity fraud rose by almost 70pc in the second half of last year, with business owners a particular target.

A separate survey of members of the Institute of Directors by CPP Group found that 71pc were concerned about the threat of corporate identity fraud but only 17pc had policies in place to deal with it. The "long firm frauds" appearing at Companies House involve a chain of dummy companies that set up to establish credit ratings, which can then be used to secure lines of credit with other unsuspecting businesses. Goods are then ordered that are sold on and the directors of the fraudulent companies disappear.

In January, the Department of Trade and Industry (DTI) investigators and police officers raided 30 companies across the Midlands in one of the biggest ever crackdowns. The companies involved were alleged to have defrauded legitimate businesses of more than £10m.

The DTI said that over the past three to four years fraud cases involving "the hijacking of companies or the use of false identities" had increased. "We have noticed that more 'long firm fraud' cases coming through involve these types of issues," said a spokesman.

A Metropolitan Police officer seconded to Companies House in Cardiff to improve the way these cases are identified and handled has just returned to London having acted on 900 cases that included "fraudulent changes of registered office, false appointment and false resignation of company officials".

Gordon Brown chopped 2p off the basic rate of income tax this afternoon in his eleventh and final Budget. Families with children and pensioners were clear winners in the surprise move.

Some 600,000 pensioners will stop paying tax, said the Treasury, while 200,000 children would be lifted out of poverty.

But single people and those without children will be worse off. The small print revealed that although the Chancellor was giving £10bn with one hand to target voters, he was ruthlessly snatching the money back from other households.

The biggest sting was the abolition of the lowest 10p tax rate, a move that netted the Treasury £8.6bn in one fell swoop. It hit people earning from around £5,000 to £15,000 unless they qualify for a series of higher benefits and tax credits designed to help families with children and pensioners.

Drivers were also big losers - clobbered with a 2p a litre fuel rise and a £400 tax disc for gas-guzzlers. Motorists will pay almost £1bn more to the Exchequer. Other tax increases included a 50% on big casinos and ending tax relief for empty commercial properties, which raises £900m.
Mr Brown then cut the headline rate of corporation tax by 2p to 28p, paying for it with matching cuts in tax reliefs.

Millions of taxpayers will be left scratching their heads as to whether they gain or lose. Labour MPs cheered and gasped in amazement at the announcement of the 2p cut in the basic rate, which came at the very end of Mr Brown's Commons statement.

According to Treasury calculations the overall effect of his fiscal pyrotechnics was to give £100 a year more to the average household.
And officials said it would lift an average family with one earner and two children out of net tax on earnings up to £24,000, once higher tax credits and benefits are taken into account. At present, they would pay net tax from the £16,000 earnings level.

But shadow chancellor George Osborne said: 'This is not a tax cut - it is a tax con.'

Higher earners are not supposed to lose from the scrapping of the 10p band, according to the Treasury, because the threshold for the top 40p rate will rise to £43,000 from £38,000. But that will not happen until April 2009.

Mr Brown devoted his giveaways to Labour's traditional priorities in a political package designed to seal his claim to succeed Tony Blair.
Education was promised a 2.5% annual spending increase in the next spending round lasting to 2011 - a marked reduction in Labour's high spending years but by far the fattest slice from a smaller cake.
Other ministries were ordered to brace themselves for a spending Ice Age and efficiency savings of £26bn, however. Six departments including the Treasury and the Cabinet Office will face real terms cuts.
In his Commons response - a joke-filled attack on the Chancellor - David Cameron lampooned the tax cut as an act of desperation. 'He normally does it before a general election,' he said. 'But he is in such a deep hole he has done it before a leadership election.'

Then the cash announcements flooded in. Fuel duty will rise by 2p this year, though this will be deferred to October, and then by a further 2p next year and 1.8p in 2009.

Road tax will be cut by 30% with immediate effect for band B cars, going down from £50 to £35, with the lowest band remaining zero rated. Owners of gas guzzlers will see their vehicle excise duty rise by 30% to £300 this year and then to £400 next year.

Overall, Vehicle Excise Duty will rise by £5 a year for the next three years, and £10 for band F vehicles.

To address global warming, the landfill tax will rise by £8 a tonne a year until 2011, the aggregates levy will go up next April from £1.60 a tonne to £1.95, and the climate change levy will rise with inflation. Zero carbon homes up to £500,000 will be exempt from stamp duty up until 2012.
With NHS trusts in financial crisis, Mr Brown issued an emergency cheque to the health service this year for £8bn.

Total government spending will rise to £674bn by 2010/11.
At the heart of Mr Brown's plans was his wish to be seen to favour children, pensioners and education. But he also found £400m more for the military in Iraq and Afghanistan, and £86m for counter terrorism.

Company incorporations boom, as managed service companies are ditched to avoid impending tax crackdown.

UK company registrations have soared due to impending tighter regulation of the tax rules surrounding managed service companies.

Workers operating within managed service companies (MSCs), who can benefit from lower tax bills, have moved to incorporate into their own business as a response to chancellor Gordon Brown's promise to crackdown on tax avoidance from last year's pre-budget report in December.

An extra 25,000 company registrations were filed between December 2006 and the first three weeks of February compared with a year earlier, according to Companies House figures.

But these new incorporations were moving into personal service companies (PSCs) and could still fall foul of the taxman. PSCs differ from MSCs in that the individuals become directors of the companies, which has been construed as making the PSCs tax compliant.

Running a company remains as popular as ever despite Government warnings that it remains concerned over the tax incentives of incorporation. Companies House figures show that during 2006 the country's stock of companies rose by 3,000 a week, adding more than 150,000 in total.

Another 44,711 businesses incorporated during January. Taking into account closures, the net gain was almost 14,000 companies. The annual rate of incorporations has risen from 236,000 in 2000 to 370,000 for the year to March 2006.

The figures reflect the growing appeal of incorporation for new and existing businesses, although the self-employed still outnumber companies by more than two to one.

Incorporation provides credibility and limited personal liability to the business, while the extra administrative costs are offset by tax advantages, including the ability to take money out of the business using dividends rather than salary, which allows business owners to reduce their employer's and employee National Insurance (NI) contributions.
The Government reiterated its concerns over this widely-used tax planning practice in this year's pre-Budget Report.

"[The Government] remains concerned about the tax-motivated incorporation of the self-employed, which involves businesses taking advantage of structural differences in the tax and NI contributions treatment that applies to companies," it said.

The Treasury will prevent one-person companies reducing their tax bills with managed service companies from April. It says the move will raise £1bn over the next three years in tax and NI.

Managed service companies are designed to pay the owner a mixture of dividend and salary to reduce income tax and NI liabilities. Although the owner is technically the sole owner of the company, its income and bank accounts are controlled by the scheme's provider, which also may establish the structure and administer the company.

Personal service companies, where control is retained, remain unaffected but they must comply with existing rules that determine if the owners will be treated as employees for tax purposes.

Uncertainty remains for tens of thousands of husband and wife companies who distribute profits by paying a minimum salary and full dividends to minimise their tax bills. The Revenue claims that in some circumstances sharing income equally between husband and wife shareholders to reduce their joint tax bill is illegal.

A case of a small IT company called Arctic Systems is to be heard in the House of Lords in June/July.

Taxpayers feel the Revenue squeeze H M Revenue & Customs (HMRC) is taking a tougher line with taxpayers it calls in for investigation as it comes under government pressure to pull in as much cash as possible.

The amount of tax squeezed out of taxpayers after investigation shot up 35 per cent last year, Revenue figures show. Inspectors netted an average £1,629 in extra tax from individuals in the 2005-6 tax year, compared with £1,206 in the year before.

HMRC has adopted an uncompromising approach to help plug a £3.6 billion hole in the public accounts.

The taxman has the power to launch a probe into any of the 9m self-assessment returns it receives each year. Last year the Revenue looked into the affairs of more than 160,000 individuals. One in ten inquiries is random but most are triggered by discrepancies on tax returns.

If you filed your 2004-5 return before January 31 last year, the Revenue has until the end of this month to launch an inquiry.

From that date it has 12 months to look into the 2005-6 tax return, which needs to be filed in the next 10 days. If you file your return late or amend your return, the Revenue gets extra time to launch a probe. Once an inquiry has begun, it can go back over the past five tax years or 20 in serious cases.

You should keep all documents, including bank statements, dividend declarations, pension reports and company accounts or invoices, for at least six years in case you come into the Revenue’s sights.

There are two types of probe: an “aspect” or a “full” inquiry.

Aspect inquiries focus on one or two parts of your return, such as income from buy-to-let properties, bank interest or expenses claims. Usually they are resolved over the phone or by post.

Full inquiries are more complex and usually involve face-to-face meetings.

HM Revenue & Customs has cut 7,500 staff, it said today, updating MPs on ithe progress of its job cut programme.

The department said it has to cut 5,000 jobs during the next 18 months to meet efficiency targets set by the government.

In today's scrutiny of HMRC's annual report 2005/2006, the Treasury sub-committee asked HMRC acting chairman Paul Gray if the department was on target to meet efficiency gains by 31 March 2008.
HMRC was set the deadline by the government in 2004 to lose a net 12,500 jobs at the department and make annual savings of £507m.
Gray said the department was on target to meet the efficiencies.
Another 12,500 jobs could go between 2008 and 2011 as further restructuring takes place at the department, although the figure was considered an estimate, Gray said.
He also confirmed that new carousel fraud figures would be released in the pre-Budget Report.
HMRC was also criticised at the meeting for not producing analysis of potential increases in tax take following implementation of the Varney review, which proposed tax clearance procedures for corporates.

The final installment of the long-running Arctic Systems case will be heard at the House of Lords in June 2007.

Centering on Geoff and Diana Jones' battle against HM Revenue & Customs over the use of tax planning of their wages and dividend to minimise their tax bill.

Revenue & Customs has re-issued guidance which pre-dated the Court of Appeal’s decision in the landmark case of Jones v Garnett, following last week’s announcement that its appeal to the House of Lords will not be heard until next June. HMRC has pointed out that the guidance does not reflect “the current view of the law”.

The guidance for small business advisers was prepared before the Court of Appeal decided the case in favour of the taxpayer in December 2005. HMRC subsequently added a note at the beginning of the guidance to take account of that decision. That note said:

“The Court of Appeal gave its judgement in the case of Jones v Garnett (“Arctic Systems Ltd”) on 15 December 2005. The judgement was unanimously in favour of the taxpayer. HMRC are lodging a petition for leave to appeal to the House of Lords, and the Court of Appeal decision cannot therefore be regarded as final.

“Meanwhile however the Court of Appeal judgement represents the law as it now stands. The contents of this Guide do not therefore fully reflect the current view of the law. The guidance will be revised when the case has been finally resolved.”

HMRC published the following “further statement” on its website last Friday, 24 November:

“Settlements Legislation for Small Business Advisors

“This guide brings together some new and existing guidance in one single publication
A guide to the Settlements Legislation for Small Business Advisors (PDF 178K)
“Jones v Garnett: Statement by HM Revenue & Customs

“The House of Lords will hear HMRC’s appeal against the decision of the Court of Appeal in the case of Jones v Garnett (Arctic Systems Ltd.) on 5 to 7 June 2007.

“The Jones v Garnett case concerns arrangements involving a company called Arctic Systems Ltd. and relates to the Settlements legislation. HMRC won the original case heard by the Special Commissioners. The appellant (Mr. Jones) subsequently appealed to the High Court, and HMRC also won this hearing. However, HMRC lost in the Court of Appeal. HMRC’s petition to the House of Lords for permission to appeal was granted and the appeal will be heard on the dates shown above.

“The Court of Appeal judgment represents the law as it now stands. It follows therefore that taxpayers whose circumstances are consistent with the situation in Jones v Garnett are entitled to self assess - or, within the time limits allowed, amend a self assessment - in accordance with that judgment. Clearly, each individual case is different and it is not easy to lay down a clear line which defines whether a case is consistent with Jones v Garnett. Because of that taxpayers will need to be guided by their advisers. If providing details using the ‘white space’ in a return is considered appropriate it would be helpful if the entry could be made at box 7.32 on the "Trusts etc" pages of the individual SA return.

“Where there are open enquiries into similar cases our intention is to keep them open pending finality. A taxpayer who considers that he or she is affected by this judgment may, of course, apply to the Commissioners for a direction requiring HMRC to issue a closure notice. In those circumstances it is our intention to oppose the application on the grounds that the appeal to the House of Lords constitutes reasonable grounds for not issuing a closure notice.”

HMRC have announced some changes in the way in which VAT on road fuel purchased by employees can be recovered by their employers - effective from 1 January 2006.

These changes come as a result of the conclusion of a recent European
Court of Justice case, which found that the current UK VAT recovery system infringed EU law.

There are several ways in which directors and employees can purchase fuel for business use. They can use fuel cards, company credit or debit cards, they can charge the cost to an account operated by the company at a filling station or they can pay for the fuel themselves and then be reimbursed by the company.

The ruling only concerns the last situation, where employees purchase the
fuel themselves and are reimbursed. The ruling now means companies are
required to obtain an invoice to support a claim for reimbursement of
fuel.

This ruling applies whether the reimbursement is on the basis of cost or a
mileage allowance. The invoice need not be a VAT invoice but it must be
dated on or before the date of the mileage claim.

VAT inspections will now include checks to ensure invoices are retained,
otherwise the recovery of VAT on the fuel purchased will be denied.

Where a director or employee has regular mileage claims, it may be beneficial to arrange an account at a filing station or obtain a fuel or company debit or credit card.

The Court of Appeal yesterday threw out government attempts to force husband and wife companies to pay thousands more in tax.

If successful, accountants estimated that tens of thousands of firms faced bills of up to £9,000 each.

But three Court of Appeal judges yesterday overturned an earlier High Court ruling against West Sussex IT services firm Arctic Systems, run by Geoff and Diana Jones.

The judges, led by Sir Andrew Morritt, chancellor of the High Court, warned that the taxman was pushing its interpretation of the law too far. They ruled that the dividends received by Mrs Jones for her secretarial services did not represent pre-planned tax avoidance because they were subject to the performance of business.

Simon Juden, chairman of Professional Contractors Group, which backed the Jones's appeal, said the decision was a "fantastic victory for common sense".

The Revenue was not given permission to appeal to the House of Lords, a decision Mike Warburton, of accountants Grant Thornton, said was "a pretty good indication that the Appeal judges don't think there's any point".

A Revenue spokesman said it would consider its options, including petitioning the House of Lords to appeal or legislating "to ensure the settlements legislation will be applied to the small number of companies who are unfairly exploiting the system to avoid tax". He added: "If necessary revised guidance will be released shortly to confirm the position for people filing self assessment returns in January."

Mr Jones said he was "delighted" by the judgment. "All we have done is run our business in exactly the same way we were advised by our accountants and also by the Government. There's been this attempt to punch us, but we always knew in our hearts that we were right."

The Joneses arranged their affairs so that in the year in question, Mr Jones paid himself a £7,000 salary and his wife received almost £4,000, from the £91,000 turnover. After expenses and corporation tax, the couple shared the remaining £60,000 equally in dividends.

The Revenue had successfully argued in the High Court in April that husbands and wives who both draw dividends should be taxed as if the income was all the breadwinner's. This would prevent the spouse making use of his or her personal allowance and lower rates of income tax.

But Lord Justice Carnwath said the Revenue wanted a "significant extension" of the rules that determine whether income is being illegally diverted to avoid tax.

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