New tax legislation on the way for family firms
The outcome of the landmark 'Arctic Systems' case last July left husband-and-wife team Geoff and Diana Jones relieved that HM Revenue and Customs (HMRC) could not prevent them from reducing their tax and National Insurance bill by splitting the income generated by their business.
This followed a seven-year 'David and Goliath' struggle, during which HMRC questioned the validity of the Jones's arrangement, which saw the nearly £100,000-turnover business pay them a total of £11,000 in salary, splitting the remainder, minus tax and expenses, in dividends.
Now, however, family firms are anticipating changes to the legislation which may result in them paying more tax in future.
A Treasury statement released immediately after the House of Lords found in favour of Mr and Mrs Jones highlighted the need for fairness in taxation matters, saying: "This case has brought to light the need for the Government to ensure that there is greater clarity in the law regarding the tax treatment of income-splitting arrangements, which are used by some tax-payers to achieve an unfair advantage over others.
"The Government will therefore bring forward proposals for changes to legislation to ensure that the principle of fairness is maintained. The Government's intention is that genuine and commercial business arrangements will not be affected by this legislation and we will consult to ensure this is the case."
The new legislation is likely to be aired in the 2008 Finance Bill, leading the Institute of Chartered Accounts' Tax Faculty to call for reflection "before rushing to legislate."
According to Francesca Lagerberg, Chairman of the Tax Faculty's technical committee, "It appears the tax authorities will seek to separate out 'commercial' situations from those where they believe dividends are being passed to lower-rate taxpayers primarily to keep down the tax bill.
The reality is that most businesses do not fall into such neat categories. There is a danger that rushed legislation will result in unworkable legislation, plunging thousands of taxpayers into yet more uncertainty about their tax position."
Even when basking in the immediate glow of victory, Geoff Jones spoke of his anger that the case had ever come to court, let alone dominated his life for seven long years.
Before new legislation is passed, ensuring the efficiency and legality of a family business's tax arrangements can be a complex and involved process. If you are concerned that your firm may attract the unwanted attention of HMRC inspectors, please ask to speak to one of our solicitors as well as your accountant.
Call Tony Forster on 0117 9290451 or email tforster@metcalfes.co.uk
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