As reported in our previous e-mail newsletter, the 'Jones v Garnett', or the 'Arctic Systems' case as it is more widely referred to, has finally come to a conclusion in the favour of the tax payer.

Many small business owners who have structured their business in the same way as the Jones', with the company being owned by the husband and wife or civil partners, low salaries being paid to each and dividends being taken by both in accordance with their shareholdings, will breathe a sign of relief following the decision.  It is good news for all to receive confirmation that the settlements legislation should not be interpreted in the way HM Revenue and Customs were trying to do so in these circumstances.

However the decision made was based upon the specific circumstances of the case. Small business owners should not automatically rest easy on the presumption that they will not be questioned themselves, as the circumstances of the case were specific and not all business are arranged in exactly the same way. Many situations that have long been accepted as legitimate tax planning should be reviewed carefully as a precaution to ensure they do not fall foul of the settlements legislation.  This advice will be ignored at the taxpayer’s peril.

In a husband and wife/civil partnership shareholding situation, you should always be careful to ensure that both parties do actually contribute to the business and there should be a commercial reason behind all transactions and profit allocations so that the Revenue can not imply that the only purpose of the arrangement is merely to avoid paying tax.  It is wise to keep family business transactions within the realms of what HM Revenue and Customs would class as commercial reality and your accountant can advise you further with regards to this.

Even following the conclusion of this particular case, it is still important to get good advice about your specific circumstances.  We would always recommend speaking to your accountant and reviewing your situation on a regular basis to confirm whether it continues to be the best arrangements for you, as there are many hidden pitfalls that you could easily fall in to if you do not keep up to date.