Tens of thousands of married couples in business together breathed a sigh of relief this week when the House of Lords rejected the attempts by HMRC to tax dividends to one partner as if they belonged to the other. HMRC had used an old legal provision, Section 660, to argue that dividends paid to Diana Jones, who co-owned IT consultancy, Arctic Systems Limited, really belonged to her husband, Geoff - a higher rate tax payer.
The landmark case has been closely watched by small businesses and their advisors for six years, as Arctic Systems, supported by several small business organisations, battled their way through the courts. They suffered two defeats on the way, but when the case finally came to the House of Lords, the law Lords agreed unanimously that HMRC did not have a case.
There can now be no attempt by HMRC to impose additional taxes for past years.
However, the government has already announced its intention to bring in new legislation to correct what it perceives to be an unfair advantage for husbands and wives in business together. The ministerial statement, issued on 26 July 2007, reads as follows:
"The Government acknowledges the judgement given by the House of Lords in the Jones v Garnett (Arctic Systems) case.
The Government is committed to maintaining fairness in the tax system. The case has brought to light the need for the Government to ensure that there is greater clarity in the law regarding its position on the tax treatment of "income splitting".
Some individuals use non commercial arrangements (arrangements that they would not reasonably enter into with an arms-length third party) to divert income (which would, in the absence of those arrangements have flowed to them) to others. That minimises their tax liability, and results in an unfair outcome, increasing the tax burden on other tax payers and putting businesses that compete with these individuals at a competitive disadvantage.
It is the Government's view that individuals involved in these arrangements should pay tax on what is, in substance, their own income and that the legislation should clearly provide for this. The Government will therefore bring forward proposals for changes to legislation to ensure this is the case. In the meantime, HMRC will apply the law as elucidated by the House of Lords and will be providing guidance in due course.
The Government would not want commercial arrangements to be caught by any change to legislation. Consultation should help to ensure this".
We occasionally write about recent events and legislation, expressing our opinion and keeping you informed. New articles will be published here, so check back regularly.
Budget 2008 report
13 March 2008
Capital Gains Tax climbdown announced
24 January 2008
Capital Gains Tax reforms - how will they affect you?
15 October 2007
Pre-Budget Report 2007
10 October 2007
New Rules for Directors
1 October 2007
Victory for Husband and Wife businesses
26 July 2007
Would you like to say something to the taxman?
22 June 2007