Landmark win for business couples

By THIS IS MONEY
Updated: 07:59 EST, 15 December 2005

A ground-breaking court victory for a husband and wife business team could cost the taxman an estimated £1 billion a year.

Thousands of similar companies were awaiting the ruling of the Court of Appeal in a test case brought by IT consultant Geoff Jones, his wife, Diana, and their company, Arctic Systems.

The landmark win overturns previous rulings upholding the HM Revenue and Customs objection to the way the couple used their salaries and dividend payments to reduce their joint tax bill.

The Chancellor of the High Court, Sir Andrew Morritt, and two Lords Justices, allowed the couple's appeal.

They ruled, in effect, that a company share dividend paid to Mrs Jones could be not assessed for tax under Mr Jones's income.

Mr Jones, 48, from Pulborough, West Sussex, said after the ruling today: 'We are both delighted. I was astonished when I received an income tax demand for £42,000 over and above the usual assessment.'

He said the amount he saved would be repeated in thousands of similar husband-and-wife companies throughout the country.

The Professional Contractors Group, which funded the test case, said about £1bn in annual tax revenues depended on its outcome.

Sir Andrew, explaining the background to the case, said Mr Jones and his wife set up their company in 1992 with Mr Jones the sole director and Mrs Jones as company secretary.

'The business of the company prospered and by 1997 it was paying dividends to Mr and Mrs Jones in addition to the remuneration it paid them for their respective services.'

The dividends for the year 1999/2000 were £25,767 each.

An Inspector of Taxes assessed Mr Jones over the dividend paid to Mrs Jones on the ground that the way they had set up their company constituted a settlement within the scope of the Income and Corporation Taxes Act. The taxman said the dividend paid to Mrs Jones was the income of Mr Jones and he must pay tax on it.

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The tax rule was devised to stop people passing across assets and income to family members in an effort to reduce their tax liabilities. But it had not been applied to company dividend payments until recently, when the Revenue began to claim that the rule applied where a company director has his non-fee earning spouse as a joint shareholder. It became known as the 'married couples' business tax'.

Mr Jones took the case to the Special Commissioners and then to the High Court, with no success. Sir Andrew Morritt, finding for Mr and Mrs Jones, said in his written judgment that the case could not have arisen until the tax demands for married women and their husbands began to be assessed separately in 1990.

He said the tax rule 'may appear anachronistic' but must be taken into consideration.

But he said this did not mean that the court should 'ignore the increasing tendency for married couples to be involved in the business of each other on a commercial non-bounteous basis.'

'Though one spouse may generate the income of the firm or company, the services of the other may be just as commercially important in providing the essential administrative, accounting, support and back-up services.'

He ruled that the tax rule did not apply to the dividend received by Mrs Jones. The Revenue, who must now pay the legal costs of the entire case, were refused permission to appeal to the House of Lords.