News : Valerie Moore

Arctic Systems is a limited company involving a husband and wife who owned a company 50/50 and took the profits out by way of dividends on a broadly 50/50 basis.

The company provided the services of the husband, an IT consultant, to its clients and his wife undertook the necessary admin work. The Revenue argued that as the husband generated most of the profits then dividend income should be the husband’s and tax accordingly – some at the higher rate of 40%.

For many years accountancy advice was for husband and wives (and civil partnerships) to “income shift” (quite legitimately) to be tax efficient. This case has been rumbling on for so long that this has made such taxation advice quite difficult.

The government proposed legislation to apply from 6 April 2008 to cease this practice.

However – buried deep in the small print of the budget – Chancellor Darling has done another “u” turn and decided to postpone the legislation until 2009 (or we hope never).

Any legislation would no doubt go beyond husband/wives and civil partnerships to family members and business run by unmarried partners and would apply to private company dividends and profits from partnerships. Thousands of small family businesses will have to be able to prove the extent of the spouse’s involvement in the business to justify their income. A point that The Times on Saturday 15 March pointed out “This goes against family law, which says that a non-working spouse contributes enough to a marriage to justify a 50% share of an asset upon divorce”.

Another case of where a small business, whilst trying to do the right thing, may well fall foul of legislation that may or may not occur.

There is a government consultation document at http://www.hm-treasury.gov.uk/consultations_and_legislation/income_shifting/consult_income_shifting.cfm

· Seek advice from your accountant and
· maybe lobby your MP and
· sign an online petition at http://petitions.pm.gov.uk/incomeshifting1/

For further news stories on this case just “Google” “Arctic Systems”