Business Articles

16th December 2005 - Nelsons acts in landmark Tax ruling

Derby law firm, Nelsons has acted for Geoff and Diana Jones, the joint owners of a small West Sussex IT business, Arctic Systems Limited, in a successful appeal to the Court of Appeal which ruled last week that the couple had lawfully used salary and dividend payments to reduce their tax bill.

On 15th December 2005, three Court of Appeal judges overturned an earlier High Court ruling against the Joneses after HM Revenues and Customs had attempted to force the couple to pay back-taxes of £42,000 for the financial year 2000/2001. The decision will spare small businesses back-tax bills amounting to millions of pounds in total revenue.

In their landmark ruling, the judges warned that the Revenue was pushing its interpretation of the law too far. Sir Andrew Morritt, Vice Chancellor of the High Court sitting in the Court of Appeal said: "Though one spouse may generate the income of the firm or company the services of the other may be just as commercially important in providing the essential administrative accounting support and back up services."

The Joneses arranged their affairs so that in the year in question, Mr Jones paid himself a £7,000 salary and his wife received almost £4,000, from the £91,000 turnover. After expenses and corporation tax, the couple shared the remaining £60,000 equally in dividends.

The Revenue had successfully argued in the High Court in April 2005 that husbands and wives who both draw dividends should be taxed as if the income was all the breadwinners' earnings. This would prevent the spouse making use of his or her personal allowance and lower rates of income tax.

Partner and litigation specialist at Nelsons, Simon Waterfield comments: "The Revenue's pursuit of this claim is a questionable use of tax payers' money. Our clients were entitled to plan their affairs tax efficiently and the Revenue's expressed intent to exhaust every avenue of appeal reflects poorly upon it."

The taxpayers were advised by Nelsons and a national specialist tax consultancy, Accountax. Their appeal was backed by the Professional Contractors Group.

Not given permission to appeal to the House of Lords, the Revenue has stated it may petition for permission or will draw up new legislation to address the issue.

In conclusion, Mr Waterfield says: "Family businesses seeking to organise their affairs tax beneficially should seek advice from suitably experienced accountants. For any couples who are facing action by the Revenue, they should get specialist advice from a lawyer with experience in defending clients in tax matters."

Nelsons Office Locations:

Web: www.nelsonslaw.co.uk - Email: enquiries@nelsonslaw.co.uk