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Last Updated: Tuesday, 5 June 2007, 08:27 GMT 09:27 UK
Tax case reaches House of Lords
Tax return
The Jones's may have to pay nearly 50,000 extra tax
A case that could affect the taxation of tens of thousands of husband and wife business partnerships will be heard by the House of Lords on Tuesday.

Geoff Jones and his wife Diana are fighting a ruling by HM Revenue & Customs that he avoided tax by paying her in dividends from their firm.

The case of their IT consultancy Arctic Systems first started in 2003.

Victory for HMRC could see retrospective tax bills being levied, going back six years.

Artificial?

In 2003, 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 main rate of income tax.

They had been concerned 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.

"Effectively they are saying I had not paid enough tax," said Mr Jones.

"They are saying that it was a mechanism or an arrangement to avoid tax by paying some of it to my wife."

Risk 'shared'

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

If the couple lose, they face a backdated tax bill of nearly 50,000 and many other husband and wife teams, thought to be about 30,000, will be in the same boat.

John Whiting, a senior tax partner at PricewaterhouseCoopers, said the Jones's set up was very common, and one that had been allowed under the tax rules for many decades, because it was a genuine arrangement.

"Mrs Jones was sharing the risk," he said.

"She subscribed for her shares in Arctic Systems, they ran the business together, she does some work for it - it's a very usual situation," he added.


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