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Last Updated: Thursday, 30 September, 2004, 10:12 GMT 11:12 UK
Tax fear for UK small businesses
Geoff Jones
Geoff Jones challenged a 42,000 demand from the Revenue
An Inland Revenue ruling may mean bigger tax bills for family-run firms.

The Revenue's Special Commissioners have ruled it was right to stop a couple from reducing their tax bill by sharing their tax liabilities.

Family-run firms, where the couple share tax liabilities, have an unfair advantage if the income is mostly generated by one spouse, it said.

Accountants have warned small businesses not to panic, as the ruling may not apply in all situations.

Landmark ruling

The Special Commissioners' judgement concerned the case of Arctic Systems, an information technology business run by Geoff and Diana Jones from Pulborough in West Sussex.

The case centres on an unexpected tax bill of 42,000 for tax on dividends accumulated over a four-year period.

You need to discuss what your position is with your accountant
Chas Roy-Chowdhury, accountant

It is common practice for husband-and-wife businesses to minimise their tax bills by drawing income through dividend payments equally - even if one spouse generates all or most of the business's income.

This allows them to reduce their overall tax bill by making use of the non-working spouse's personal tax-free allowance and lower tax bands.

The Revenue, which used 1930s legislation to support its case, however believes that if the dividend payment exceeds the person's contribution to the company, then dividends should be treated as if they are all the working spouse's income.

The Revenue has since dropped its claim for three of the four years.

The Professional Contractors' Group, which supported the Jones's case, said it was taking legal advice about whether to appeal against the decision.

Chas Roy-Chowdhury, head of taxation at the Association of Chartered Certified Accountants advised small businesses to consult their accountants but not to panic.

"You need to discuss what your position is with your accountant. This ruling may have no effect, for example, if both husband and wife are actively involved in the business," he said.

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