The great majority of husband and wife companies need not panic following last week's tax ruling in the Arctic Systems case, according to tax experts at BDO Stoy Hayward.
A tax commissioners hearing ruled that, under certain circumstances, the Inland Revenue should be allowed to collect tax from the joint income of a husband and wife received from their company at a higher rate paid by one spouse, even when the other spouse had been receiving income that fell within their basic rate of income tax.
We consider that relatively few families will be affected....
Stephen Herring - BDO Stoy Hayward
Stephen Herring, tax partner at BDO Stoy Hayward says: "We consider that relatively few family companies will be affected and that the Revenue's stance has not in fact changed. We want to reassure family companies that, in general, they need not be concerned about the ruling."
"The ruling will primarily affect people who significantly restrict their own income so as to transfer income to their non-working spouse. I consider the scale of this issue has been blown out of all proportion."
BDO Stoy Hayward have put together a list of circumstances under which the Revenue may investigate a family company:
- If one of the spouses in a husband and wife company is taking a salary which is substantially lower than would be expected for the job undertaken, this may alert the Revenue to investigate, particularly if the shortfall is paid out to the other spouse merely to make use of their personal allowances and basic rate band.
- If the spouse is receiving a salary or benefits for a job which greatly exceeds the market rate for the work carried out, this may also be cause for investigation.
- One sensible way of checking if your arrangements are likely to be considered avoidance is to ask yourself if you would enter into a similar arrangement if the individual were an independent third party rather than your spouse.
The majority of husband and wife companies are unlikely to be in danger of unexpected tax bills as a result of this recent ruling. This is because the best tax advice would be to ensure that payments made to spouses broadly reflect their level of responsibility and involvement in the business.
Source: BDO Stoy Hayward
Editors note (Feb 2012):
The original settlements legislation dates back to the 1930s and was subsequently updated first in 1988, when it became the more familiar Section 660. It was changed again in 2005 when it was updated and rewritten into its current form as Section 624 of the Income Tax (Trading and Other Income) Act (ITTOIA) 2005. See more information on the current settlements legislation.