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Clients may have seen reports, in the 'serious' newspapers or in trade
magazines, of the
High Court's decision in the Arctic Systems case. In that case, the Judge
held that, where
a business is carried on by a husband-and-wife company, but one partner
(say the
husband) actually does the work that earns the money, then dividends paid
to the wife
can be taxed as if they were the husband's income. This would be significant
where, for
example, the husband pays tax at the higher rate and the wife at the basic
rate.
The decision has caused a great deal of concern, with many family businesses
wondering how it will affect their own tax situation. We think that, in
practice, relatively
few will be affected.
Arctic Systems itself concerned a freelance computer programmer who worked,
as a
member of a project team, on clients' premises. Had he been paid direct
by his clients,
rather than through the husband-and-wife company he had set up, it would
at least have
been arguable that he was the clients' employee, not an independent contractor.
The
Judge was at pains to emphasise that his decision applies only where the
husband-and-
wife company exists only to exploit the husband's (or the wife's) earning
potential and
the other partner plays at most a support role (for example by dealing
with VAT Returns
and other administrative matters).
The Judge went on to say that his decision has no application to the situation
where an
independent business is carried on as a genuine joint venture by husband
and wife - for
example, where the company runs a shop in which both partners work. There
is no
suggestion that, in such a case, dividends have to be paid to husband
and wife in
proportion to the hours they work, or to the contribution each makes to
the business,
provided that each is doing enough to play an active role in the enterprise.
The final point is that the Arctic Systems case is going to the Court
of Appeal, so the
Judge's decision is not yet final. No-one is seeking to extend the Judge's
decision: the
question is whether, and to what extent, it should be cut down to limit
its effect on cases
where the facts are similar to Arctic Systems itself. It is expected that
the Court of
Appeal's decision will be announced towards the end of this year and that
HM Revenue
& Customs will then discuss its practical effect with the Accountancy
Institutes and
other professional bodies and publish revised guidance.
If you feel you may have a problem with this issue and wish to discuss
it call
Stuart Atkinson on 01482 226791
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