Case Summary:

 Jones v Garnett (2005)

 Court of Appeal, 15 December

The Inland Revenue successfully sought in the High Court to have the bulk of the profits of a limited company, in which a husband and wife (Geoff and Diana Jones) held one share each, treated as taxable solely as the husband's income, as he was the only fee-earner.  The Inland Revenue relied upon long-standing aspects of tax law, relating to trusts and settlements, in which one person arranges for another to receive income, without the latter providing anything in return.  

he Inland Revenue's victory in the High Court has been overturned by the Court of Appeal.  The reasons are complex, but the main points influencing the Court were:

• When the company was formed, Mrs Jones paid for her share with her own money; it was not a gift from Mr Jones.  The amount may have been only 1, but to that extent her investment in the company was exactly the same as that of her husband.

• The Inland Revenue had argued that in reality Mrs Jones' share represented a 'right to receive income', provided by Mr Jones.  Yet in the first two or three years of trading Mr Jones paid all the profits to himself and Mrs Jones received nothing.  He was not legally bound to work for the company, and its level of income was always unpredictable.  The Court felt that this arrangement was too vague and indefinite to amount to a 'settlement' by Mr Jones upon Mrs Jones; there was no guarantee that she would ever get anything at all.

• Mrs Jones had previous experience in business management.  She dealt with the administration and bookkeeping of the company, working about five hours a week.  In some years she received a small salary as well as her share of the dividend income, but again nothing was fixed or guaranteed.  Although Mr Jones was the sole fee earner, it was clear that Mrs Jones made an active contribution to the business as well.

While this decision is excellent news for Mr and Mrs Jones, it would be unwise to assume that the matter is closed and a clear precedent set.  In particular, limited companies in which one partner plays no part at all in the business, has no other income, but receives a considerable dividend, should review their arrangements.  It remains the intention of the Government to establish a 'level playing field' in which tax considerations do not significantly encourage small businesses to incorporate; and at the time of writing, the Inland Revenue has announced that it is seeking leave to appeal to the House of Lords.

 Full Citation: Jones v Garnett (2005) EWCA CIV 1553