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Untitled Document
Court of Appeal backs 'Husband and Wife' company
The Court of Appeal has supported tax payer in its judgement, delivered just before Christmas, in the Arctic Systems case concerning the taxation of profits from a 'Husband and Wife' company.
Mr and Mrs Jones set up a company in 1992 through which they proposed to run a consultancy business. The company was set up with Mr and Mrs Jones each taking 1 share of £1. Mr Jones was appointed as sole director whilst Mrs Jones acted as company secretary.
Mr Jones provided the consultancy services and Mrs Jones took responsibility for administration and book-keeping. The Jones admitted that the structure had been designed to enable them to mitigate tax in the future, by allowing some dividend payments to be made to Mrs Jones. The structure had been established on the advice of their accountant.
The Inland Revenue sought to charge to tax the dividend paid to Mrs Jones as if it had been received by Mr Jones. The tax claim was based on settlement legislation found in the Income and Corporation Taxes Act 1988.
Mr Jones appealed against this tax assessment to the Special Commissioners, where the two Special Commissioners fundamentally disagreed over whether the Inland Revenue was right to charge the dividend to tax in this way. The chairman of the Special Commissioners had a casting vote and found in favour of the Revenue.
A further appeal to the High Court against the decision was unsuccessful, but the case was appealed to the Court of Appeal where the Jones received some good news.
Reversing the decision of the High Court, the Court of Appeal agreed that there was no settlement in this case and therefore the HMRC was not entitled to charge Mr Jones to tax on dividends received by Mrs Jones.
In coming to this conclusion the Court of Appeal noted a number of factors about this case:
- That the case could not have arisen if Mr and Mrs Jones lived together without being married as the settlement legislation on which HMRC was relying related only to spouses and not to co-habitees.
- The court could not ignore the fact that increasingly married couples are involved in business together on a commercial and "non-bounteous" basis.
- It was noted that although one spouse may generate most of the income of the firm or company, the contribution of the other in providing administrative or back up services was just as commercially important. Mrs Jones' contribution to the business could not be overlooked.
- In this case, Mrs Jones had acquired her share for full value; it was the same type of share as that held by Mr Jones and carried the same rights to income, capital and voting. In addition, the method of extraction of the profits of the company was not fixed – there were no service agreements in place with either Mr or Mrs Jones, and whether salary or dividends were paid was dependant on the trading position of the company when the payment was made. All of these factors allowed the court to distinguish a long line of cases relating to the existence of a settlement within the provisions of ICTA88 and determine that no settlement existed in this case.
HMRC has decided to contest further this decision by appealing to the House of Lords, so the position of these types of companies is not yet completely settled.
It should be noted that one of the factors that influenced both the Special Commissioners and the earlier courts was that Mr Jones was the sole director, and therefore it was his sole decision as to whether dividends or salary would be paid, despite Mrs Jones assertion that she would have been happy to be a director but had been advised against this by her accountant. It may therefore be prudent, in order to avoid this sort of contention, to appoint both spouses as directors if this form of structure is being used.
For the full text of the court of appeal judgement click here.
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