House of Lords rules in favour of small firms
Jul 26 2007
A decision by the House of Lords in a family tax case that could have landed thousands of small businesses with huge tax liabilities, has been welcomed by small business owners.
The four-year battle over a tax avoidance scheme known as 'income splitting' centres on a family-run business, Arctic Systems, which used dividends from the business to pay IT consultant Geoff Jones and his wife Diana, the shareholders.
HM Revenue & Customs (HMRC) argued Mr Jones had unfairly transferred some of his income to Mrs Jones to benefit from her lower tax status and that the dividends should be taxed as part of his income.
Yet the House of Lords ruled that the Joneses should not have to pay thousands of pounds in back-dated taxes and, following the landmark ruling, tax laws could be changed in favour of husband-and-wife businesses.
A Treasury spokesman said income splitting 'undermines the principle of independent taxation’ and could ‘lead to the unfair situation in which some businesses are able to pay less tax than others simply because of personal circumstances'.
Bill Knox, taxation chairman at the Federation of Small Business, described HMRC’s conduct towards a family-run business as ‘utterly shameful’, saying that ‘hounding hardworking small business owners sullies the good name of HMRC and will not instil confidence in the UK small business community as a whole, which rightly expects to be treated proportionately and fairly by the tax authorities’.
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