My legal case gets to the House of Lords!

Well not exactly *my* case, but a case that I indirectly helped to fund, has finally reached the highest legal court in the land. First it was the Special Commissioners, then the High Court, then the Court of Appeal and now 5 law Lords from the House of Lords have been hearing the case for the last 3 days.

What’s it about? Well the short version is that the Tax Man / Inland Revenue / Hector / Her Majesty’s Revenue and Customs / HMRC (whatever name you care to use) decided to “reinterpret” an ancient tax law, one that was made before women were even considered able to have separate tax affairs from their husbands! The effect of this reinterpretation was to attack small family businesses, typically where the husband and wife worked as a team and had shares in the family company, and so to deem all the income, that of the husbands for tax purposes, and so ignore the wife’s tax allowances. Basically, the tax man decide to issue large back dated tax bills to small hard working family business, out of the blue! It’s become known as S660, after the section number in the Act that the law comes from. It’s the ultimate Gordon Brown and New Labour stealth tax.

However, I belong to an organisation called the Professional Contractors Group (or PCG) and one of the many good things this brings, is a community of small businesses who are prepared to stick up for one another and fight the corner of like minded small businesses. As such, I contributed to the War Fund, originally setup to fight another similar attack on small business called IR35, but I digress. Basically, the PCG is funding with cash and expertise, the legal test case of one of our members who one morning over breakfast, was issued a S660 tax demand for £42,000 . You know, that would have really spoilt my day!

This is an excellent overview of the case by Richard Robson, reproduced here with his permission:

A postman comes knocking

Was it really autumn 2001 when the Jones received that first crucial letter from the Inland Revenue? No one likes brown envelopes and contractors know they rarely contain pleasant surprises, but imagine how you’d feel to receive a completely unexpected demand for £42,000 additional taxes whilst pouring your cornflakes. Geoff and Diana felt angry and they’ve stayed angry for 6 years so far; what a good thing for so many husband and wife business partnerships that they have too. Their now infamous S660 issue made no sense to them at the time and it seems it has made very little sense to anyone else outside ranks of officialdom since (eg enter Arctic and search Accountingweb articles).

What is S660?

The Arctic case springs from part of the 1988 Finance Act which passed onto the statute books in 1989 (the Budget was late in the year in those far off days). It was intended to supplement and clarify long standing legislation to prevent highly paid actors and company bosses syphoning off funds to their less industrious relatives and exploiting their unused tax allowances. It was not intended to disrupt the harmony normally expected between husband and wife and contains an explicit exclusion allowing outright gifts between one and the other. In fact it pre-dates the current taxation climate which allows spouses to be taxed separately and could hardly have presumed the now common situation where husband and wife jointly own and run micro businesses with one out at the sharp end and the other providing precious back office support. Nonetheless, when the public wised up to Gordon Brown’s many early stealth taxes and rendered further ones politically undesirable, the Inland Revenue decided that a creative approach to existing legislation might reap rewards. S660 was deemed fit for purpose and it is alleged that a small experiment began out of a Bootle tax office which had already been testing the boundaries of this particular law for some considerable time.

Early days of the Arctic Systems case

An angry Jones has proved to be a very determined Jones. They dug in their heels, they contacted their MP who was the contemporary Shadow Chancellor: They consulted experts and engaged the services of Qdos Consulting who explored the conventional negotiation channels for them; They declined an early Revenue hint that they might compromise on the contents of their deposit account plus six months to pay a nominal additional balance; They joined the PCG .

Arctic first appeared on the official PCG radar during 2002 and we maintained a watching brief whilst correspondence dragged on and on into 2003. During my own spell as PCG Director responsible for Case Law we formally adopted the case and worked with the Jones, Qdos and other partners to determine the best strategy. Geoff and Diana were clearly up for a fight and following the involvement of Accountax and the battle hardened Dave Smith our newly appointed Legal Director (Dr) Simon Juden announced to the PCG and the wider world that PCG would be backing Arctic in taking the case to the Inland Revenue Special Commissioners.

The rest is history

Arctic lost at the Special Commissioners, following a highly controversial use of the casting vote. 29 Sep 04

We appealed to the High Court and lost again when Mr Justice Park apparently ignored every significant argument. 16 Mar 05 (no link, IMO the case is irrelevant)

We appealed again and three Court of Appeal judges found in favour of Arctic Systems. Such was the joy at the time that even Simon Juden was rendered almost speechless. Subsequent analysis of the judgement shows that the judges found unanimously against the Revenue on every single point of substance. It wasn’t just a victory, it was a whitewash and we sat back and waited for common sense to prevail and the Revenue announcement that this was the end of the line. How wrong we were…

The House of Lords appeal

The Revenue have chosen to take this case to the highest possible court and up to three days of legal debate commence at 10:30 Tuesday 5 June 2007. With such a stunning result at the Court of Appeal, the odds must be stacked in favour of the minnows, but the House of Lords is unbroken ground for PCG and noone knows what surprises lie in store. For those of us who have been involved from the outset, those three long days will be fascinating and PCG representatives will be there in strength to support and report on your behalf. I’ve unearthed the rules for those that care to join us there:

An Appellate Committee usually consists of five law lords (but sometimes seven or nine). Proceedings are much less formal than in the lower courts.The five law lords sit round a horseshoe table and the senior law lord present acts as Chairman.They do not wear robes. Counsel appear in wig and gown at the Bar across the centre of the room, at which stands a lectern. Counsel for the Appellant is heard first, then counsel for the Respondent and finally counsel for the Appellant in reply.There are frequent questions from the law lords as arguments are developed and challenged.The length of hearing varies but the average is two and a half days.

Anyone may attend judicial business without prior arrangement. A person interested in seeing the law lords at work should tell the policeman at the public entrance to the Palace and, if the law lords are sitting, they will be directed to the right place. A notice at St Stephen’s entrance shows what judicial business is going on each day; as does

Basically, the appeal has been heard now, and we wait with baited breath to see if common sense has prevailed and Her Majesty’s Revenue and Custom, God bless them, are given the verbal roasting they deserve over this. My heart goes out to Geoff and Diana Jones, who must have gone through a shocking 6 years to get to this point, I can’t help but admire their courage and tenacity and I feel honoured, in some small way, to have been a part of their fight.

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