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Britain’s small and medium enterprises are bracing themselves for a landmark tax ruling that could force thousands of ‘husband and wife’ enterprises to pay out millions in retrospective tax. Arctic Systems, a Sussex-based IT consultancy, will go to court today - fighting the Inland Revenue’s 1936 regulation on tax treatment for husband and wife partnerships, unearthed in light of Arctic’s hearing. Geoff Jones and wife Diana, the entrepreneurs behind Arctic, are in the dock over a £42,000 tax bill taken out of the business over a six-year period. The IR enforces that income paid through dividends - received by a non-earning partner - should be taxed under the collector as the main fee-earner’s income. In the case of Jones, the couple are listed equal shareholders but Mr Jones - over the past six years - is identified as generating the most income while his wife tended to the administrative side of the business thereby making a saving on tax familiar to many established SME. The stand made by Arctic is supported by the Professional Contractors Group (PCG), which insists such a structure is commonplace for thousands of companies operating in the UK. Accountants are warning of the heightened tax charge to SME if the 1936 rulings are applied in the Jones/Arctic case. Roger Williams, tax partner at Williams Kennedy, said: “If the decision goes the Revenue’s way it could be used to attack thousands of other small businesses structured in a similar manner.” “The ruling will apply retrospectively so the Revenue could be looking to collect hundreds of millions in unpaid tax. The companies that will be hit if the Revenue wins the case will in many cases be those that incorporated to take advantage of the nil rate band that was effectively abolished in this year’s Budget.” Further concerns focus on sweeping legislation hitting firms already struggling with red tape as well as joint partnership enterprises having approved practices suddenly outlawed. “This is the case not only for future income but potentially also for past arrangements previously accepted by the Inland Revenue. Our concern is that innocent family companies could become victims if there is a general clampdown.” A host of professional groups have rallied the PCG's stance for Arctic, such as the Federation of Small Business, the Chartered Institute of Taxation and the Association of Certified Chartered Accountants. The Inland Revenue said it would not comment on the Jones case until a decision had been announced but a spokesman indicated tough times ahead for small business in a brief statement. “The legislation was enacted in 1936 and has been applied consistently.” Speaking before the trial, Mr Jones, reflected: “I feel I am fighting for survival. The case hasn’t affected my business but from a personal point of view, it has been an immense strain on myself and my family. The money the Revenue wants is enormous for a business this size.” Accountants said the move was seized upon by a local tax initiative and expects to net the government an extra £1bn in Revenue collection. Previous Page
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