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HOME >> Latest News >> Tax victory for small businesses may be short lived!
Tax victory for small businesses may be short lived!
The Revenue had argued that by setting up their business through a limited company, (something that hundreds of thousands of husband and wife teams have done for many years), and each getting a share in the profits in the form of salary and dividends, the Joneses were unfairly avoiding income tax and national insurance contributions. The Revenue argument was based on the premise that Geoff Jones did most of the consultancy work for the company whilst Diana was engaged in a mainly administrative capacity and so Geoff should have been paid the lion’s share of the profits, a specious argument which ignores the essential difference between family run businesses and others; i.e. that they each contribute according to the capacities and the whole is thus greater than the sum of the parts.
In an interesting and quite technical judgement their lordships decided that the use of a company by Mr and Mrs Jones was indeed a “tax motivated” structure and there was little doubt that it was being used for tax mitigation purposes. However their Lordships also decided that the use of the structure, which in effect involved Mr Jones making a gift to his wife of entitlement to some of his future income, was not caught by the special anti-avoidance legislation which relates to trusts or settlements, because there is a long-standing exemption from these rules for outright gifts between spouses where the gift is not “ substantially a right to income”. Crucially their lordships decided that share ownership entails much more than just a right to the possibility of future dividends where the share concerned are ordinary shares.
The key point therefore is that the use of these company structures has been declared
safe from Revenue attack by the House of Lords, (unless of course the shares concerned are preference shares or shares with restricted rights etc). It now seems most unlikely that any clients with such structures using ordinary shares will face a challenge from the Revenue in the short term.
However, whilst this is a victory for commonsense which will be welcomed by many of our clients and by similarly organised small businesses up and down the country, it is not all good news. Unfortunately the current favourable situation is not going to last. In a brief ministerial statement issued almost straight away after the judgement the government has announced that it is to change the law soon. The statement included the following words:-
“It is the Government’s view that individuals involved in these, (company), 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.
Thus although the ruling has been welcomed almost universally by the small business and tax advisory community there seems little doubt that the Revenue will be back to this particular battlefield armed with new legislation soon, probably in 2008. It is interesting to note that whilst all the way through this lengthy court process the Revenue argued strenuously that the Jones’ case was “not a test case” as soon as they finally lose they indicate that they will change the law.
If you need advice or have any questions about the case or your business structure do not hesitate to ring us on 0800 234 6978.
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