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Business Matters: Back to the drawing board as Lords rule against the Revenue

Husband and wife businesses across the country face an avalanche of red tape following a House of Lords ruling, says Baker Tilly tax partner Bill Longe
Business Matters: Back to the drawing board as Lords rule against the Revenue
INITIALLY, the flags were out for husband and wife businesses following the conclusion of a landmark tax case in the House of Lords at the end of July.

The lawmakers ruled in favour of Geoff and Diana Jones, co-owners of Arctic Systems, an IT consultancy in West Sussex, who used an income-splitting arrangement to minimise their tax.

Geoff and Diana were originally taken to court by the Revenue four years ago over a dividend of £25,767 which had been paid to Diana in the tax year 1999-2000. It had been judged that Geoff had used dividend payments to his wife as a means of reducing his income tax liability.

Such a division of dividends had been viewed by Arctic Systems, as well as by thousands of other businesses across the UK, as a tax-efficient way for a spouse who is not a 40% taxpayer and who works far less hours in the business, if, at all, to make use of the annual tax-free personal allowance and lower rates of tax.

The income that is received is paid out as a dividend and is not taxed at the main earner's marginal rate of tax.

The reason the Revenue objected so strongly to this is that it claimed that such individuals were avoiding tax. In essence, the taxman believed the owner-manager was effectively passing on the profits of the business to his or her spouse to reduce taxable income.

Now that the lengthy and time-consuming four-year battle with HM Revenue and Customs has reached its ultimate conclusion, the Joneses' win lifts the threat of retrospective taxes for other husband and wife businesses in a similar situation.

However, news that the Treasury intends to change the law in the light of the Lords' ruling has left owner managers with a somewhat pyrrhic victory.

Any ensuing legal changes are likely to add to the current complications in our tax system and create more uncertainty for taxpayers.

bill.longe@bakertilly.co.uk
1 September 2007

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