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Last Updated: Thursday, 15 December 2005, 14:51 GMT
Tax win for husband and wife firm
Geoff Jones
Geoff Jones challenged a tax demand from the HMRC
A landmark court victory for a family business could cost the taxman hundreds of millions of pounds each year.

Thousands of similar companies were watching the case involving IT consultant Geoff Jones, his wife Diana, and their company, Arctic Systems.

HM Revenue & Customs objected to how the couple, of Pulborough, West Sussex, used their salaries and dividend payments to reduce their tax bill.

A Court of Appeal verdict overturned previous rulings in favour of HMRC.

Dividends shared

The company had a turnover of 91,000 for the year in dispute, derived from Mr Jones's activities.

He drew a salary of 7,000 and his wife drew a salary of 4,000 for administrative work.

This is a vindication for many small businesses in terms of their ability to arrange their affairs in a tax-efficient manner
Kevin Nicholson, PricewaterhouseCoopers

After expenses and corporation tax the couple shared the remaining 60,000 in dividends.

They paid less tax and national insurance because they took dividends rather than bigger salaries and a greater portion went to Mrs Jones to use up her lower tax rates.

HMRC ruled that income from company dividends, received by a non-earning or low-earning spouse who is co-owner of the business, should be taxed at the same rate as the main earner's income.

Lost revenue

Backed by tax campaigners, Mr and Mrs Jones took their case to a HMRC tribunal last year, then the High Court. When they lost, they took it to the Court of Appeal.

If necessary revised guidance will be released shortly to confirm the position for people filing self assessment returns in January
HMRC statement

"This is a vindication for many small businesses in terms of their ability to arrange their affairs in a tax-efficient manner," said Kevin Nicholson, UK head of enterprise for PricewaterhouseCoopers.

HMRC estimates that up to 30,000 family-run companies could have similar arrangements to the Mr and Mrs Jones, and that the ruling will cost a maximum of 240m in lost revenue.

However, the Professional Contractors Group, which funded the test case, thinks more companies will benefit and estimates the amount of lost tax revenue at about 1bn.

"We won't know the true amount until the dust settles," said John Whiting, tax partner at PricewaterhouseCoopers.

HMRC said that it was "considering the details of the decision alongside our options for the next steps".

"If necessary revised guidance will be released shortly to confirm the position for people filing self assessment returns in January."


SEE ALSO:
Small firms face higher tax bills
27 Apr 05 |  Business
Tax fear for UK small businesses
30 Sep 04 |  Business



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