Husband-and-wife firms under IR scrutiny
Hundreds of thousands of high-net-worth couples, including expatriates, who share ownership of small...
Hundreds of thousands of high-net-worth couples, including expatriates, who share ownership of small UK companies could face retrospective tax bills after a decision by the Inland Revenue (IR) last month.
The changes have come about after an IR ruling in September against a husband-and-wife IT firm Arctic Systems, which stated the two owners should both pay tax on dividends at the higher rate, even though the wife's salary fell within the basic rate.
As they had equal shares in the company, the couple had been splitting annual dividends equally but the IR ruled because the husband brought in the lion's share of the income, it was just a means of making use of the wife's tax allowances. The case is being appealed.
Mike Warburton, senior tax partner at Grant Thornton, said: "This ruling is bad news for many husband-and-wife businesses that may now be facing a punitive retrospective tax bill.
"There are thousands of businesses potentially affected."
Gerry Brown, technical manager at Scottish Life International, added: "This legislation has been around for more than 50 years and has been applied in this way before.
"Most companies either paid up or got away with it. But it seems the IR is making a test case of Arctic."
According to Brown, one of the last times the ruling was applied was in the 1950s, when British film star John Mills was presented with a tax bill for the company he set up for the film fees of his actress daughter Hayley Mills.
He said it could also affect expatriates who set up such company structures in the UK, go abroad to work for a few years and then return to the UK.
implications of the inland revenue ruling
• Joint owners of small UK companies may face substantial retrospective tax bills on dividends income.
• If both owners receive equal dividends but one has little or no involvement in running the company, this may be interpreted as tax avoidance.
• Vulnerable firms are those deemed to have been created as a trust structure.
• All shareholders' dividends may be affected, including family members other than a spouse.
• Expatriates setting up UK companies while abroad may also be targeted.
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