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THE REVENUE GETS TOUGH
Many franchisees operate their franchise businesses through limited liability companies. Often the shares in such companies are owned 50-50 by husbands and wives or by partners in long term relationships even though one of the shareholders, in fact, does little to participate in the business.
The reason for the 50-50 structure was that there were substantial tax advantages in adopting this structure which switches income from one party (the higher tax rate payer) to another party (the lower tax rate payer). All this is set to change following a decision of the Inland Revenue’s Special Commissioners on Wednesday 29 September 2004. The Special Commissioners decided that Geoff Jones, an information technology consultant and his wife Diane had lost a three year battle with the Inland Revenue over a tax bill of approximately £42,000. Most un usually the two Commissioners were split in their decision, but the presiding Commissioner’s view prevailed and he held that the Inland Revenue were entitled to claim unpaid income tax under an obscure clause in tax settlements legislation.
Like many small businesses Mr and Mrs Jones each had a 50% shareholding in their company, Arctic Systems Limited. They both drew salaries and dividends but the Inland Revenue claimed that what the Jones’ were doing was avoiding tax because the dividends had been taxed at Mrs Jones’ basic rate of income tax rather than at Mr Jones’ higher rate. As a rough estimate if a spouse has no income apart from the dividends received from a business and was able to use his or her full tax allowances, he or she could save up to £9,000 a year in tax.
It is unclear the extent to which the decision of the Special Commissioners will be appealed to the High Court but certainly the Treasury is under pressure to pass legislation to change this approach because of its potentially serious impact on many small businesses.
Franchisors should be aware of this development not only for their business but also for their franchisees’ businesses, monitor any future appeals and warn their franchisees of the danger of adopting a 50-50 company structure.
Hamilton Pratt
6.10.04
For further information please contact:
John Pratt
Tel: 0870 351 4900
Email: john.pratt@hplaw.co.uk
This note does not constitute legal advice and specific legal advice should be taken before acting on any of the topics covered.