'Husband & Wife' companies under attack?
The House of Lords ruled on the
vital Jones vs Garnett tax
case in July 2007. The case
revolved around Mr and Mrs
Jones who set up a small
company (Arctic Systems Limited)
and, in doing so, both husband
and wife had one share each in
the company. This structure was
then used to save tax, which
HMRC contested in the courts.
Background
Mr Jones provided most of the
services the company sold.
However, the salary and, crucially,
the dividends were paid to both
spouses equally.
HMRC argued that Mrs Jones
received her dividend by virtue of
her husband's work and this was
artificially reducing the tax due because she was not a
higher-rate taxpayer. By doing so the taxpayers
ensured far more of the income was
taxed at the basic rate of income tax
than would have been the case had it
all been paid to Mr Jones.
So, HMRC argued that Mrs Jones's
dividends should not be included as
her income but added to her
husband's income.
The decision
The House of Lords ruled in favour of
the taxpayer and said that the
dividend paid to Mrs Jones was
legitimately her income and should
not be added to her husband's.
The future
This is a major case affecting many
small companies where the husband
and wife are the sole shareholders.
For now, it means dividends paid to a
shareholder cannot be transferred by
HMRC, for tax purposes, to one of
the other shareholders.
Change of legislation
However, shortly after the case the
Government announced that it will
be making changes in the law,
subject to consultation, to prevent
what it regards as 'income splitting"
or diverting income with the objective
of reducing tax bills. It says that
commercial arrangements will be
unaffected by this change.
This change in the law will affect
many small 'husband and wife'
businesses and Appletons will be pleased
to advise you on how this might
affect your tax situation.
