Great News For Small Businesses!

A couple wins a vital tax ruling in the House of Lords, which is terrific news for 250,000 small, family and private companies.

If you and your spouse run a small business together, then pay attention, because we have some good news for you. HM Revenue & Customs today lost a crucial tax case in the House of Lords which means that husband-and-wife businesses will not face higher tax bills and backdated tax demands.The tale goes like this: married couple Geoff and Diana Jones together ran a private limited company called Arctic Systems. Geoff and Diana both worked for this IT consultancy, drawing small salaries in order to minimise their liability to income tax and National Insurance Contributions.The Joneses each owned one share in Arctic Systems and paid out most of the company's profits in the form of dividends to shareholders. Thus, as they each owned half of the company, the Joneses each received half of any dividends distributed. So far, so good. However, HM Revenue & Customs (at that time, HRMC was known as the Inland Revenue) took offence at the Jones's tax-saving scheme, because Geoff and Diana both received the same reward from the company, even though Geoff did the lion's share of the work.Hence, in 2003, HMRC challenged the Jones's financial arrangement. The taxman argued that Diana's 'excessive' dividends were, in effect, Geoff's income. Furthermore, as Diana was a basic-rate taxpayer and Geoff was a higher-rate taxpayer, it presented Geoff with a backdated tax demand for £42,000. With support and some funding from trade body the Professional Contractors Group, Geoff and Diana decided to challenge HMRC's claim. Although the Joneses lost the first round in the courts, they won their case at the Court of Appeal in December 2005. HMRC then appealed to the House of Lords for its ruling, but this appeal was dismissed today by the Law Lords, handing final victory to the Joneses.So, congratulations to Mr and Mrs Jones for having the courage to pursue their three-year legal battle. Had they lost their case, then the expense of going to court would probably have cost them their home. What's more, if the taxman's appeal had succeeded, then it would have chased other family-run firms for an estimated £1 billion a year in extra tax.Of course, this news will be greeted with delight by around 250,000 husband-and-wife businesses which use similar arrangements to lower spouses' combined tax bills. Indeed, I keenly awaited the decision from the Law Lords, as my own employment follows similar lines.My wife and I are directors of a modest little company whose revenues come from my work as a freelance writer. Although we jointly own the company, my wife holds but a tiny fraction of the shares. Furthermore, Mrs D is a higher-rate taxpayer, so it makes no difference in tax terms whether the company pays dividends to me or to her.Hence, we don't make use of the Jones's family tax arrangements, although I do pay myself a low salary and take most of my remuneration as dividends, which are more tax-friendly. Then again, although I have a limited exposure to personal taxes, my company pays tens of thousands of pounds a year in Corporation Tax and Value Added Tax, so I think that the taxpayer does well from my business efforts.In summary (and please forgive the pun), this is one occasion when it's definitely worth keeping up with the Joneses!More:Earn 8% In Your Business Bank Account | Best Buy Accounts For Businesses