Nelsons seals tax victory for family businesses

East Midlands-based law firm Nelsons has scored a landmark victory that could stop HM Revenue & Customs (HMRC) from forcing thousands of small family firms to pay more tax.

The Revenue sought to use rules dating back to before World War II to stop husbands and wives using company dividends to reduce joint tax bills.

HMRC brought proceedings against husband and wife Geoff and Diana Jones, who run small Sussex-based IT company Arctic Systems, seeking to force the couple to pay back-taxes of £42,000 for the financial year 2000-01.

The duo had arranged their finances so Mr Jones paid himself a £7,000 salary and his wife received almost £4,000 from the £91,000 turnover.

After expenses and corporation tax, the couple shared the remaining £60,000 equally in dividends.

HMRC argued that Mr Jones had not drawn an adequate salary and, because he was solely responsible for the income generated by the couple’s company, he should have received a greater share of the profit. This, however, was dismissed by the House of Lords.

The battle was watched by around 100 family businesses, which had their cases stayed pending the outcome of Arctic.

The victory, however, may be short-lived, as the Government has announced that it plans to seek a change in the law.

The Joneses were repre-sented by Nelsons head of litigation Chris Greenwell, who instructed Malcolm Gammie QC of One Essex Court as lead counsel.

Michael Furness QC of Wilberforce Chambers acted for HMRC, which instructed the Treasury Solicitor’s Department.