Most people will be aware of the potential effect of a tax case involving a company owned by a husband and wife.
The case concerned an information technology company (Artic Systems) where both husband and wife initially subscribed for shares in the company when it was formed but the husband did most of the work in the company. He was a director and his wife was the company secretary. The company had no other employees and the profits were paid out partly as salary but mainly as dividends in order to optimise their tax position. The Inland Revenue sought to tax the wife’s dividends as income in the husband’s hands, using the so called “settlements legislation” and thereby collect some extra tax.
The current position is that the Inland Revenue has won its case before the Special Commissioners but there has been an appeal and the case will be heard in the High Court in March 2005. It is also worth pointing out that the Special Commissioners case was a split decision which indicates how difficult it is to decide how this legislation is to be interpreted.
The Inland Revenue has issued a new publication on how it interprets the legislation called “The Guide to the Settlements Legislation for Small Business Advisers”. This guide makes it clear that the Inland Revenue thinks there are numerous scenarios caught by this legislation not just cases which mirror the Artic Systems case. For example where there has been a gift of shares between spouses and there was little capital value to the shares at the time of the gift or where there are other family members who do not do significant work for the company but have received shares. What the guide does make clear, however, is that by showing there is some capital value in the business it should be possible to offset any Revenue enquiry.
Clearly the continuing uncertainty surrounding the interpretation of this legislation is unsatisfactory and each case which could be affected by it needs to be looked at individually.
If you feel that this may affect you and would like to discuss the options open to you please contact us. We will then explain to you what actions you could take and the implications these will have for you and your business.
Clive Jones – Clifford Towers, Chartered Accountants
|
