Tax victory for family businesses

Date: 27 July 2007

A LANDMARK House of Lords ruling could benefit thousands of family-run companies in the North West, according to a leading tax specialist.

The House of Lords has ruled in favour of a husband-and-wife team in a judgment that has removed a significant tax threat from family businesses across the country.

Michael Needham, a tax manager at Mitchell Charlesworth Chartered Accountants and business advisors, says the ruling will prevent the Revenue levying retrospective tax bills on many family-run companies.

He said the rejection of the HMRC attack on companies that are jointly owned by one revenue-earning partner and one non-earning partner was a victory for family-owned businesses. It also means that couples that co-own a business can make the most of the non-earning spouses’ personal tax free allowance and lower and basic rate tax bands.

Michael said: “This will be great news for small owner-managed businesses where spouses are director-shareholders in the company”

“The ruling not only draws a line under the long-running case but it also brings clarity to the whole issue and businesses will basically be able to plan their remuneration or dividends between spouses more effectively and efficiently.

“It will also mean that small businesses will be able to run their affairs without the fear of being classed as tax avoiders from the application of this obscure settlement legislation.”

The case relating to Geoff and Diana Jones’s IT consultancy, Arctic Systems Ltd, started in 2003 when the HMRC re-interpreted the well-established law on how joint and family-owned businesses should be taxed.

HMRC decided that where a low-earning or non-earning spouse, who is a co-owner of the business, received dividends from their company, that money should be taxed on their partner. The House of Lords ruling effectively ends the case.

Michael added: “It will leave HMRC needing to review its guidance on settlements and I would not be surprised if at some stage the new Chancellor seeks to revisit small companies and their dividends policy.”

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