Some of you may recall this case. Low rates of corporation tax over recent years, combined with the fact there this is no national insurance due on dividend payments, have meant that many smaller businesses that have been traditionally self-employed have incorporated and made substantial tax savings.
These savings could be enhanced by introducing a spouse as a shareholder and diverting some dividends to them, utilising that spouse’s personal allowance and lower rates of tax.
HMRC have become concerned about this method of tax planning. They announced in April 2003 that they were intending to attack such arrangements by using rules originally introduced in the 1930s and known as the ‘settlements’ legislation.
Since that date, a test case, known as Arctic Systems, has been making its way through the legal system. The taxpayers, Mr and Mrs Jones, are currently winning their case but it has now been announced that the case will be heard in the House of Lords in June 2007. We will keep you updated as to the outcome and implications of the case.