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Arctic Systems tax ruling is victory for family businesses

Keeping up with the Joneses

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A husband and wife have won a landmark victory against the taxman, as appellate judges have thrown out the government’s attempt to force small, family-run firms to pay thousands more in tax.

Geoff and Diana Jones of West Sussex convinced the Court of Appeal to overturn previous rulings against them.

HM Revenue and Customs (HMRC), which took issue with tax arrangements they used in running their IT company Arctic Systems, has pursued the couple since 2001.

Despite a turnover of nearly £100,000, Mr. Jones paid himself a salary of £7,000 for running the business, while his wife drew just £4,000 for administrative work.

The couple then shared the remaining amount, less tax and expenses, in dividends, which allowed them to pay less tax and national insurance.

Mrs. Jones received more in dividends to take advantage of her lower tax rates.

Judges in the Court of Appeal ruled that Mrs. Jones’ dividends did not constitute tax avoidance because they were dependent on the company’s performance.

Accountants warned the Joneses and other firms with similar arrangements in 2001 that Inland Revenue was not happy with their tax situation and would begin to crackdown.

The Joneses brought their case to an HMRC tribunal last year and lost and had their appeal to the High Court also rejected in April of this year. Both ruled that income from a non- or low-earning spouse who co-owns a business should be taxed at the same rate as the main earner.

The case has created headlines for the potential impact either ruling would have on thousands of small firms across the country.

Small, family firms could have faced tax bills of up to £9,000 each under the HMRC campaign. But now they appear to have been given a reprieve after appellate judges warned HMRC it was going too far.

“This is the best Christmas present for the UK’s small family businesses,” said Simon Juden, chairman of the Professional Contractors Group (PCG).

“It means proper recognition for the hundreds of thousands of people who choose to run their own businesses, share the burdens and the hard work with their partners, and rightly expect to share the profits of their efforts.”

The case was originally scheduled for January but was brought forward so as to give guidance to taxpayers before the 31 January deadline.

Copyright © 2005, Startups.co.uk

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