A note on husband and wife businesses

The landmark tax case involving husband and wife IT business Arctic Systems finally reached a conclusion in July 2007, following several years of debate.

The case of Jones v Garnett (commonly known as 'Arctic Systems') had centred on the issue of whether Mr Jones's salary was set at an artificially low level, and whether the dividends received by Mrs Jones should have been treated for income tax purposes as Mr Jones's.

HMRC had attempted to use the settlements legislation to argue that the dividends paid to one partner were really earned by and belonged to the major fee earning partner, a higher rate tax payer. It is a business structure that is currently used by thousands of married couples who jointly own a small business.

However, although Arctic Systems eventually won the case after a series of appeals, shortly after the ruling HMRC pledged to introduce legislation to close what it considers to be a 'tax loophole' allowing income splitting.

HMRC has since issued guidance on how cases should be dealt with ahead of any future changes in the law and draft legislation to be introduced in April 2008.

Cases, which are currently still open, will be settled in line with the decision in Jones v Garnett where the facts indicate that this is appropriate. Returns for 2005/06 and 2006/07 should be completed in line with the House of Lords' decision.

 Contact us for information on the possible implications of the ruling and the draft legislation for your business. You should always seek professional advice before taking any action.