LAWFUEL – The Law Newswire – Tens of thousands of “husband and wife” businesses face a rise in their tax bills, after the UK Treasury said it would block a widely-used form of tax planning following an expensive legal defeat in Britain’s top court, the Financial Times reports.
Plans for legislation are being drawn up to meet the government’s commitment “to maintaining fairness in the tax system”, it said. The move followed a decision by the House of Lords in favour of Geoff and Diana Jones, co-owners of Arctic Systems, a small IT business.
The ruling has ramifications for many business couples because the corporate arrangements at the heart of the case are widely used. By drawing low salaries and splitting corporate income between spouses who fall in different tax brackets, business owners have saved hundreds of millions of pounds of tax.
The Treasury said: “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.”
Mike Warburton, of Grant Thornton, said the increase in tax bills resulting from the new legislation could top £100m a year. “I am disappointed they feel it is necessary. It would have the effect of cutting away one of the essential points of independent taxation. It will make life more difficult for a lot of small businesses.”
Chas Roy-Chowdhury, of the Association of Chartered Certified Accountants, said the Treasury might attempt to introduce an “arms length” rule to ensure that small businesses did not attempt to funnel dividends to lower rate taxpayers.