26/07/2007 -
Small businesses were celebrating victory yesterday after the House of Lords dismissed an appeal by HM Revenue & Customs in a landmark tax case, and gave the legal all-clear to a tax-saving arrangement used by thousands of husband-and-wife operations.
HMRC was asking the Lords to overturn a Court of Appeal ruling on its dispute with Arctic Systems, a small IT contractor run by Geoff and Diana Jones.
The husband and wife team took on HMRC after receiving a £42,000 bill for back tax in 2003 - which the couple argue they should not have to pay. The unanimous decision comes at the end of a four-year legal battle in which HMRC pursued the couple for what it claimed was unpaid tax.
The case concerned the tax treatment of income from a company owned by a married couple; Mr and Mrs Jones worked through a limited company in which they both owned one share.
They drew small salaries but for the years in question distributed the majority of their income in the form of a dividend, which they shared equally reflecting their holding in the company. Mr Jones was a higher-rate taxpayer but his wife paid tax at a lower rate; she played a lesser role in the company.
HMRC argued that the scheme was not permitted under tax regulations - saying that the dividend being received by Mrs Jones was in reality income that should have been taxed upon her husband - and sought to claim the difference.
HMRC used legislation known as 'settlement provisions' and sought to reallocate the divided from Mrs Jones to Mr Jones to recover the tax due. At the end of 2005, the Court of Appeal found in favour of Mr and Mrs Jones and ruled that Arctic had been legally entitled to pay Mrs Jones in the form of a dividend.
Yesterday's decision in the House of Lords in favour of the taxpayer confirmed the company had been paying the right amount of tax. The outcome was crucial because a large number of small businesses are set up in a similar way, and have organised their finances in an identical fashion. Many could have faced demands for back tax if the couple had lost their case.
Francesca Lagerberg at accountants Grant Thornton said the victory was a 'welcome relief' for around 250,000 small businesses which operate in a similar way. 'This ruling clears up several years of uncertainty and a great number of husband-and-wife businesses will now know exactly where they stand tax-wise,' she said. 'This is a vindication of the way many owner-managed businesses have been set up.'
She added that while this was not a test case, it does set a precedent and will provide useful guidance on how the legislation applies.
Source: Independent