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Revenue weighs up Arctic Systems appeal

Taxing issue

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HM Revenue & Customs (HMRC) is expected to announce this week whether it will appeal a court ruling which stopped the government from restricting the way in which married couples running their own business file their taxes.

It is believed that HMRC will release guidance indicating if it will appeal to the House of Lords following last month's landmark ruling by the Court of Appeal in favour of Arctic Systems, an IT firm owned by husband and wife Geoff and Diana Jones.

HMRC objected to tax arrangements the couple used in running their business.

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

Through a clause in the tax code, the couple shared the remaining amount 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.

The ruling could affect some tens of thousands of small, family businesses should the House of Lords reject the Court of Appeal's decision to allow their existing practice.

Equally, if the HMRC opts to go along with the Court of Appeal's decision, many firms could be entitled to tax refunds.

HMRC's forthcoming tax guidance is expected to clarify the way in which married couples running small businesses should file their taxes under Section 660A of the tax code, according to the Professional Contractors Group (PCG).

The PCG, which supported the couple's case, has issued advice for family business owners who must complete their self-assessment tax returns by the end of this month.

"If your circumstances are very similar to those outlined in Geoff Jones' case, then you should complete your return on the basis that you are not caught by S660A," said Dave Smith, the PCG's legal team member at Accountax Consulting.

"But a note should be made on the white space stating you are relying on your circumstances being substantially similar to the Jones v Garnett case and that reliance is being placed on the Court of Appeal ruling."

Jones also urged business owners to avoid formal arrangements and contracts of employment, make no pre-arranged policy on salary levels or dividends, make both spouses directors, maximise and document the efforts of the non fee-earning spouse and consider an outright gift of shares to the non fee-earning spouse before the business becomes profitable.

Copyright © 2006, Startups.co.uk

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