Husband-and-wife teams' tax fears

26 January 2006
Husband-and-wife teams' tax fears

Husband-and-wife businesses face higher tax bills if HM Revenue & Customs (HMRC) succeeds in overthrowing a court judgment made against it late last year.

HMRC will ask the House of Lords leave to appeal against the Court of Appeal's decision to throw out its case against small computer firm Arctic Systems.
If that fails, it could introduce legislation to change the law.

HMRC is targeting small firms where one party generates all the income and the other has little involvement. Typically, both are paid a small salary but share the company profits through dividends.

HMRC wants to tax the junior partner's income with that of the main breadwinner, which will be at a higher rate.

"It's put the fear of God into a lot of small-sized husband-and-wife companies who have followed what professional accountants have seen as legitimate tax planning," said Peter Davies of Vantis Tax.

He advised small firms to base their tax returns this month on the most recent court judgment in favour of Arctic Systems - but to indicate on the forms that this is what they're doing.

Vantis is also issuing new guidelines to small start-up firms based on elements of the Arctic Systems case (see panel).

Guidelines for start-up firms

  • Ensure shares are issued before the company has any prospect of income.

  • Both parties must subscribe for the shares; they must not be gifted.

  • The junior spouse should take a role in the day-to-day running of the company.

Source: Vantis

By Angela Frewin

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