Good News for Husband and wife businesses.
Lords rule in a favourable result for husband and wife business Arctic Systems,
an IT consultancy owned and run by Geoff and
Diana Jones.
Like thousands of other couples with similar enterprises, the structure of their business is such that both parties have shares and responsibilities in the company, with Geoff as the major fee earner and Diana providing administrative support.
Dividends paid according to their shareholdings.
The case has centred on the issue of whether Mr Jones’s salary was set at an artificially low level, and whether the dividends received by Diana should have been treated for income tax purposes as those of Geoff, a higher rate taxpayer.
HMRC had used an old piece of legislation, Section 660, to argue that the dividends paid to one partner were really earned by and belonged to the major fee earning partner. This meant a retrospective tax bill for Arctic Systems of £42,000. The uncertainty over the case has left similar businesses concerned that they too could face large and potentially crippling tax demands.
The case ensued with many angles, going through the Special Commissioners and the High Court (with the Joneses losing in both) and then the Court of Appeal, where HMRC lost a unanimous ruling before finally appealing to the House of Lords. The Lords’ ruling is now final, since no further appeals are possible under UK law.
Implications
Although the Government has not said that Arctic Systems will be a test case, in practise it will be difficult for the lower courts to ignore the Lords’ judgment. Similar husband and wife businesses are therefore highly unlikely to be hit with retrospective tax bills like the one originally issued to the Joneses.
However, businesses such as these must be aware that the Government have stated that they are to bring forward proposals to change the legislation going forward.
We can advise you on all your tax planning needs, including the most appropriate structure for your business.