Income Shifting Legislation

The House of Lords has ruled in favour of Geoff and Diana Jones of Arctic Systems Ltd, and rejected HMRC's attempt to introduce a tax hike for thousands of family businesses.

The Joneses have spent the past three years battling the Revenue's efforts to reinterpret the law retrospectively and mount a tax raid on companies that are jointly owned by one revenue-earning partner and one non-earning partner.

Geoff Jones said: "Diana and I are delighted that the Law Lords have vindicated our position, and confirmed that we have done nothing wrong. This has been a terrible ordeal for us, which looked like it could cost us our home at one point. We're relieved it's all over, but I am still extremely angry that the Government tried to pull this stunt in the first place."

Professional Contractors Group chairman David Ramsden commented:

"This is an enormous relief for family businesses throughout the UK, who had been facing a tax rise from a previously obscure bit of law. We will now be working to ensure that HMRC respects this decision and does not attempt to penalise family businesses unfairly."

"I'd also like to pay tribute to Geoff and Diana Jones, who have conducted themselves with dignity throughout and battled on for the good of thousands of other small businesses, when others might have thrown in the towel and paid up."

Nelsons and national specialist tax consultancy, Accountax advised Geoff and Diana Jones, the joint owners of a small West Sussex IT business, Arctic Systems Limited, in their case against the Revenue, which received backing from the Professional Contractors Group.

Partner and head of litigation at Nelsons' Leicester office, Chris Greenwell said:

"My clients have today won their long-running battle with the Revenue in an attempt to force the couple to pay back-taxes of £42,000 for the financial year 2000/2001."

"The Revenue argued that husbands and wives who both draw dividends should be taxed as if the income was all the breadwinners' earnings, thus preventing the spouse from making use of his or her personal allowance and lower rates of income tax. We're delighted the Law Lords ruled in favour of Mr and Mrs Jones, who, we contended, had lawfully used salary and dividend payments to reduce their tax bill."

The Joneses arranged their affairs so that in 2000/2001, Mr Jones paid himself a £7,000 salary and his wife received almost £4,000, from the £91,000 turnover. After expenses and corporation tax, the couple shared the remaining £60,000 equally in dividends.

The Revenue, which won a tax tribunal and High Court ruling but lost an appeal by the Joneses to the Court of Appeal last year, had argued that Mr Jones had not drawn an adequate salary and because he was solely responsible for the income generated by the couples' company, he should have received a greater share of the profits. Being a higher-rate taxpayer than Mrs Jones, it claimed he would then have been subject to tax at a higher rate.

Anne Redston, Chartered Institute of Taxation spokesperson, said:

"The CIOT is delighted that, after such a long battle, the House of Lords has confirmed that HM Revenue & Customs (HMRC) were wrong to attack husband and wife businesses in this manner. The CIOT has always considered that HMRC were wrong to use this obscure legislation against small businesses like the Jones's, and the House of Lords has now agreed with us."

If the decision had gone against Mr and Mrs Jones, many married couples would have faced a very large tax and NIC cost, going back over the last six years.

Bill Knox, FSB Taxation Chairman, said:

"HMRC's conduct towards a family-run business in this case has been utterly shameful. Hounding hardworking small business owners in this way 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."

"The family tax arrangement that the Jones' had in place has been around for years and for HMRC to suddenly decide to clamp down without warning was totally unjustified."

"We are very pleased with the House of Lords' decision, which totally vindicates the Jones' position. Hopefully HMRC will now realise this type of aggression towards honest taxpayers is unacceptable."