Date of issue: 8th March 2004

Tax Alert for 'Husband & Wife Companies'

Chartered accountants Clement Keys, Birmingham is warning that partnerships and small limited companies 'employing' the main income earner's spouse could face huge tax bills following revisions to the settlements legislation.

In the forthcoming Budget Statement the firm expects Chancellor Gordon Brown to announce a change in the law, giving the Inland Revenue powers to clamp down on companies owned by married couples.

"The settlements legislation is intended to prevent someone from gaining a tax advantage by diverting their income to either a non tax payer or someone who is liable to tax at a lower rate," says Phil Cook, partner and head of the specialist taxation division at Clement Keys, Birmingham.

"Where one spouse is the main profit earner within the company yet they both take dividends, the Inland Revenue asserts that all of the couple's income from the business should be taxed on the profit-earning spouse alone."

The Inland Revenue initially used the settlements legislation to attack husband and wife arrangements after independent taxation was introduced, although this was largely unsuccessful because of conflict with the Companies Act and stiff opposition from financial advisers. More recently, the law has been used on a case-by-case basis, with the Inland Revenue seeking unpaid tax plus interest, and possibly a penalty, in proven cases.

Clement Keys says a change in the taxation of dividends would work against all husband and wife businesses, leaving them with tax bills which could run into thousands of pounds.

"The Chancellor has successfully improved the regulation of small firms by introducing advantageous corporation tax thresholds designed to encourage them to become limited companies," adds Phil Cook.

"If, as looks increasingly likely, he updates the taxation treatment of dividends later this month, it will have a considerable impact on couples in business, effectively taking away many of the benefits they have gained by incorporating.

"We are keen to raise awareness of this potential development and strongly recommend that husband and wife companies seek professional advice, especially regarding the allocation of salary and dividends."