Law rethink after tax regime ruling
The Government is to seek a change in the law following a ruling by the Law Lords giving the legal all-clear to a tax reduction system used by thousands of husband-and-wife small businesses.
The Lords’ judgment came in a test case involving IT consultant Geoff Jones and his company secretary wife, Diana, who took on HM Revenue and Customs (HMRC) after he received a £42,000 back tax demand in 2003.
After two initial defeats, Mr Jones won his case at the Court of Appeal in December 2005, striking a blow for an estimated 30,000 other firms run by couples who save on their tax bills by drawing a large part of their separate incomes in the form of share dividends on which less tax is payable than on salaries.
The House of Lords dismissed an appeal by HMRC, effectively crushing the taxman’s hopes of recovering an estimated £1 billion in back tax - and leaving the Revenue with a £1 million legal costs bill.
But a Treasury spokesman said later: “This case has brought to light the need for the Government to ensure that there is greater clarity in the law regarding the tax treatment of income-splitting arrangements which are used by some taxpayers to achieve an unfair advantage over others.
“The Government will therefore bring forward proposals for changes to legislation to ensure that the principle of fairness is maintained.
“The Government’s intention is that genuine and commercial business arrangements will not be affected by this legislation and we will consult to ensure this is the case.”
A written statement to Parliament on the issue is expected on Thursday.
Mr and Mrs Jones, who run IT consultancy Arctic Systems, were backed by the Professional Contractors Group representing small businesses and said they were “absolutely delighted” with the ruling.