Family Companies - Court Backs Revenue

Following a long-running battle with HM Revenue and Customs (HMRC), a test case decided recently could mean extra tax bills for thousands of companies in the UK.

Family companies in which spouses split the shares between them and both take dividends could be at risk following the decision, which involved a husband and wife company engaged in IT consultancy. Geoff and Diana Jones, who jointly ran IT services firm Arctic Systems Ltd., had arranged their affairs so that they both received dividends, but the majority of the work was done, and all the income generated, by Mr Jones.

In HMRC’s eyes, such arrangements can be considered to give rise to a tax advantage and it invoked anti-avoidance legislation to claim that Mr Jones had diverted some of his income to his wife, creating a tax saving. The Special Commissioners of Taxes agreed that the ‘saving’ in tax was assessable and so the couple appealed to the High Court, which backed HMRC’s claim. Mr Jones has announced that he intends to argue the case in the Court of Appeal.

As Mr and Mrs Jones have the backing of the Professional Contractors Group, the case could well end up in the House of Lords.

A final judgment in favour of HMRC in this case could result in extra tax bills for thousands of small business owners for whom incorporation with split shareholdings has traditionally been regarded as a tax-efficient business structure. It is not yet clear to what extent HMRC will pursue such claims, nor to what extent they will seek to make retrospective claims, but company directors who have such arrangements in force should seek advice if they have not already done so.

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