Tax and the family firm

Small businesses can thank the House of Lords for guidance on how they can organise their tax affairs following a decision in the 'Arctic Systems' case. So what was it all about and how can husband and wife businesses use the decision to validate their tax planning?

The Jones v Garnett (Arctic Systems) case concerns the tax treatment of a husband and wife owned company, with HM Revenue & Customs (HMRC) claiming that unacceptable arrangements had been made to reduce the overall tax liability of the husband and wife concerned.

The company, equally owned by Geoff and Diana Jones, had a turnover of £91,000 for one particular year, derived from Mr Jones' activities. Jones drew a salary of £7,000, while his wife drew a salary for administrative work of £4,000, for which she worked approximately four hours per week. After expenses and corporation tax the couple shared the remaining £60,000 equally in dividends. As a consequence, the Joneses paid less tax and national insurance contributions on their income, because they took dividends rather than salaries, and a significant portion went to Mrs Jones to use up her lower tax rates.