Income shifting ― where are we now?

Produced by Tolley

The following Personal Tax guidance note Produced by Tolley provides comprehensive and up to date tax information covering:

  • Income shifting ― where are we now?
  • The Arctic Systems case
  • Facts
  • Judgment
  • What about partnerships?
  • Where are we now?

Income shifting ― where are we now?

To answer this question, we need to review the Arctic Systems case on the settlements legislation. As a result of the 2007 decision in this case (which the taxpayer won), it was announced that HMRC would introduce legislation to counter ‘income shifting’ between spouses and civil partners. So far, this has not occurred.

The settlements legislation is discussed in detail in the Income shifting guidance note and it is suggested that you familiarise yourself with that note before reading on.

The Arctic Systems case

HMRC’s approach in applying the settlements legislation to businesses was tested in the case of Jones v Garnett (often referred to in practice as Arctic Systems, which was the name of the company). The facts in this case are straightforward and common to many other small companies.


Mr Jones was an IT Consultant. He ran his own computer consultancy business via a company called Arctic Systems Ltd. His company was established for bona fide commercial reasons rather than to reduce tax liabilities and so he was not caught under the personal service companies anti avoidance provisions, see the Personal service companies ― overview guidance note.

The company had an issued share capital of two £1 ordinary shares. Mr Jones had subscribed for one £1 share. Mrs Jones (his wife) had subscribed for the other £1 share.

Mr Jones was the sole director (although he did not have a formal service contract) and his expertise generated the income of the company. He drew a small salary in return for working full-time.

Mrs Jones was the company

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