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Widespread attack on small family companies 'could be imminent'

"The companies that could be hit in any forthcoming clampdown 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. Taken together, these two measures could see the typical small family business paying thousands in extra tax."

"A lot of husband and wife companies have structured their tax affairs perfectly legitimately and are not abusing the dividend system. Our concern is that innocent family companies could become victims if there is a general clampdown."

"The Revenue’s concern is that too many small family businesses were making dividend arrangements with the sole purpose of saving tax."

Background to case

The ‘Husband and Wife’ test case involved a small IT consultancy called Arctic Systems, owned by Geoff Jones and his wife Diana.

In such companies a husband and wife may, for example, each own an equal number of shares with one of them the main fee-earner and the other responsible for relatively little or no fee income. By paying out the profits by way of dividend, income earned by one of the couple can be partly received and taxed on the other resulting in an overall saving on tax.

Which small companies will the Revenue go after?

According to Wilkins Kennedy, the "husband and wife" companies most at risk of being targeted by the Revenue will be those viewed as openly abusing the dividend system.

They say companies at risk will be those where:

  • Main fee earner is taking a notably low wage so that higher dividends can be paid out to other lower tax rate shareholders.

  • Waivers are made on dividends to one shareholder in circumstances where other shareholders paying tax at the lower rate may benefit.

  • Dividends on certain classes of shares to benefit shareholders paying tax at the lower rate.

  • Purchase of shares by one spouse at nominal value, which is followed by a substantial dividend. For example, £1 worth of shares that gives immediate access to dividends worth £30,000.

  • Shares issued to lower tax bracket relatives or friends that only have income rights but lack a claim on the company’s capital or voting rights.

    The company believe the Revenue is most likely to investigate small family companies dependent on the personal services of one person and with a low asset base. In particular they are interested in where the main earner does not draw a market value salary and dividends are paid to shareholders paying tax at lower rates.


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