Family firms will face taxing times

18 October 2004
Family firms will face taxing times

Family-run restaurants and hotels could be clobbered with larger tax bills, after the Inland Revenue won a landmark case last week.

The Revenue's Special Commissioners judged it had been right to query dividends paid to the husband-and-wife team at IT consultancy Arctic Systems.

The owners lowered their tax bill by pooling their personal allowances and making use of the non-earning partner's untapped quota, which reduced their overall bill. Income from the business was then distributed to the husband-and-wife team by equal dividends.

The Revenue successfully argued that personal allowances could not be combined in such a way when one partner clearly was not active in the company. This meant that the main breadwinner could be taxed at a higher rate if they exceeded their individual personal allowance. In this case, Arctic was stung with a £42,000 tax bill.

Alan Craddock, tax partner at Alan Backer Winter, said that this tax avoidance technique was common among small hospitality companies, and he warned them that the Revenue now had them in its sights.

"The Inland Revenue is taking a hard line on this," said Craddock. "It is going to pull people up and could attempt to recover lost tax historically. If the set-up of your accounts is similar, I'd advise you seek immediate advice, as you may be open to challenge."

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