Couple claim victory in tax case

The Jones's faced a tax bill of about £50,000

A husband-and-wife business has won a landmark tax case against HM Revenue & Customs (HMRC) in the House of Lords.

Geoff Jones and his wife Diana successfully fought an HMRC ruling that they avoided tax by paying Diana through dividends from their firm.

Victory for HMRC could have seen retrospective tax bills being levied on tens of thousands of family firms.

The government has said it will now bring forward plans for changes to tax laws to ensure "fairness".

"The Government is committed to maintaining fairness in the tax system," a Treasury spokesman said.

"This case has brought to light the need for the Government to ensure that there is greater clarity in the law regarding the tax treatment of 'income-splitting' arrangements which are used by some taxpayers to achieve an unfair advantage over others," he added.

The Federation of Small Businesses and accountancy groups welcomed the House of Lords ruling.

"Clarity had been brought to this issue and it means small businesses will now be able to run their affairs without fear of being classed as tax avoiders," Chas Roy-Chowdury, head of taxation at the Association of Certified Chartered Accountants (ACCA) told BBC News.

Re-interpreted

The case relating to the Jones's IT consultancy firm Arctic Systems first started in 2003.

It arose when HMRC decided to re-interpret the well-established law on how joint and family-owned businesses should be taxed.

The authorities decided that where a low-earning or non-earning spouse, who is a co-owner of the business, received dividends from their company, that money should be taxed at their partner's income tax rate.

They argued that Mr Jones had reduced his own salary to an artificially low level, so that he could effectively give his wife a bigger slice of his own earnings, but paid as dividends.

The Joneses faced a tax bill of about £50,000.

The couple - from Pulborough in West Sussex - won their argument in the Court of Appeal in December 2005 but the HMRC appealed to the House of Lords.

The House of Lords ruling effectively ends the case, which started in 2003.