Tax specialist Chiltern says IFAs should take a case by case approach to their clients if affected by a key Court of Appeal ruling issued yesterday on small businesses co-owned by spouses.
That case involved tax claims by HMRC on an IT consultancy business co-owned by a husband and wife team who relied on income through dividends to reduce their income tax bill.
Paula Tallon, head of direct tax at Chiltern says although many such businesses will already have submitted tax returns on the basis of previous advice from accountants derived from a previous High Court ruling that found in favour of HMRC, it may be the case that such returns can be resubmitted, although including new disclosure to take advantage of the new ruling.
Those who have not submitted returns will now be in a much clearer position with regard to this taxation issue, but it will be important for IFAs and accountants to ensure their clients are aware of the implications of the ruling, she says.
IFA and accountants need to treat “each case on its own merit as not every husband and wife businesses are the same.”
“It’s not a broad-brush thing.”
In general terms yesterday’s ruling found that HMRC should not be able to take a bigger bite out of income derived via dividends to the lesser-working party – often, but not always, the wife.
The High Court previously ruled that HMRC did indeed have this right in the case of Arctic Systems, a company where the husband and wife owners each held one share.
The Revenue had argued it had a right to tax the dividend paid to the wife at the same rate as the husband after each had derived some £25,767 in dividend income in the 1999-2000 business year.
The Court of Appeal disagreed, and additionally refused HMRC leave to appeal to the Lords. Its decision has been based on different interpretation of what constitutes a “settlement” between the business owners in this case, and whether the wife’s share was acquired on the basis of providing “bounty”.
“In this case there can be no doubt but that the arrangement was or included the acquisition by Mrs Jones of her share in the Company,” lord justice Keene said in the judgement.
“Equally there can be no doubt that the acquisition on its own was for full value in the context of a joint business venture to which both parties made substantial and valuable contributions. If the arrangement is confined to such acquisition then I would agree with counsel for Mr Jones that it cannot constitute a settlement for the purposes of s.660G(1) [Income and Corporation Taxes Act 1988]”
Later in the judgement, Keene adds: “Accordingly for the reasons I have given I conclude that:
- 1. the dividends paid to Mrs Jones on her share in the Company were not income arising under a settlement as defined in s660G(1);
- 2. if contrary to my view such share was property comprised in a settlement as so defined, s660A(6) did no disapply to s660A(1) because
- a) there was no outright gift of the share from Mr Jones to Mrs Jones, but if there had been,
- b) the share was not substantially a right to income.
- 3. the appeal on the casting vote point does not raise any important point of principle or practice, nor does it have any real prospect of success.”
Some early estimates are HMRC could lose up to £1bn annually in revenue, but it is also seen as too early to tell how the ruling will affect revenue collection through the next fiscal year.
“It will be interesting to see how many people make disclosures in their self-assessment,” says Paula Tallon.
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Jonathan Boyd on 020 7484 9769 or email [email protected].IFAonline
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