Jones v Garnett
Dividends paid to a wife who held shares in her husband's one man company fell within the settlements legislation, but were exempt because they arose from an outright gift between spouses.
Facts
Mr and Mrs Jones each held one share in Arctic Systems Ltd, a company through which Mr Jones provided his services as an information technology consultant. Mrs Jones did the company's administrative work for a few hours a week. Mr Jones was paid a low salary, and most of the profits were paid out as dividends to the two shareholders equally, so that Mrs Jones's share was taxed at her lower rate. HMRC argued that the arrangement was a settlement under the settlements legislation, so that the dividends paid to Mrs Jones should be taxed as Mr Jones's income.
Legal principle
The House of Lords held that the arrangement was a settlement, because it contained an element of bounty, in that Mr Jones had allowed the company to pay him less than a commercial rate for his services, so that more profits were available for distribution to Mrs Jones. However, the exemption for an outright gift between spouses applied, because the property given was the share in the company, which carried the right to dividends, and was not wholly or substantially a right to income. The dividends were therefore taxable as Mrs Jones's income. The case attracted much attention because of its importance for small family companies, and the government considered legislation in response.
Related cases on income and corporation tax: employment, trading and residence
- Edwards v Bairstow [1956] AC 14
- Hochstrasser v Mayes [1960] AC 376
- Mallalieu v Drummond [1983] 2 AC 861
- Marks & Spencer plc v Halsey (2005) Case C-446/03
- Pepper v Hart [1993] AC 593
- R (Gaines-Cooper) v Revenue and Customs Commissioners [2011] UKSC 47
- RFC 2012 plc v Advocate General for Scotland [2017] UKSC 45
- Shilton v Wilmshurst [1991] 1 AC 684
Studying tax law? Our tutors help you understand and apply cases like this in essays, problem questions and exams. Request a quote or browse our law notes.
This summary is for study and revision and is not legal advice. Although our case summaries are checked for accuracy, we do not guarantee that they are free from errors or omissions. Always read the full judgment for the court's reasoning.
