Small business tax test case told of HMRC's 'shameful' conduct
Wednesday, 6 June 2007
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Lawyers acting for HM Revenue & Customs yesterday began the final stage of a four-year legal battle that could lead to thousands of small businesses facing retrospective demands for tax.
HMRC is asking the House of Lords to overturn a Court of Appeal ruling on its dispute with Arctic Systems, a small IT contractor run by Geoff and Diana Jones, who argue they should not have to pay a £42,000 bill for back tax presented to them in 2003.
In December, judges ruled that Arctic, which is run by the married couple, had been legally entitled to pay Mrs Jones in the form of a dividend, rather than a salary. Mrs Jones owns half of Arctic, but is less involved in the day-to-day work of the company.
HMRC has argued that Mr Jones deliberately took a lower salary in order to boost Arctic's profits and that Mrs Jones was then able to claim an artificially high dividend pay-out. Since income tax is payable at a lower rate on share dividends than on wages for paid work, the arrangement was to the couple's advantage.
Michael Furness, QC, acting for HMRC, told the panel of five law lords: "Permitting such arrangements would be tantamount to facilitating, for those couples whose circumstances allowed them to take advantage of it, a new form of voluntary joint taxation."
HMRC has been seeking extra tax from the Joneses since 2003 in order to make up for the income tax it argues the arrangement artificially avoids. The tax authorities won two High Court judgments backing this stance, before the Court of Appeal ruled in the couple's favour last year.
The case is crucial because tens of thousands of small businesses set up in a similar way have organised their finances in an identical fashion, often on the advice of accountants. Most will face demands for back tax if the Joneses lose their case.
For this reason, Arctic has won the support of trade bodies representing small businesses, particularly in the IT sector, which has been atarget of HMRC.
"HMRC is wholly wrong, both morally and in law to penalise small businesses with a retrospective reinterpretation of tax law," said Chris Bryce, a director of the Professional Contractors Group, a trade body that has paid some of the Joneses' legal costs.
"Geoff and Diana took on the risks and responsibilities of owning and running Arctic Systems together, and are entitled to share in the rewards together."
Bill Knox, chairman of taxation at the Federation of Small Businesses, accused HMRC of heavy-handedness in taking the legal action to the House of Lords.
"HMRC's conduct towards a family-run business in this case is utterly shameful," Mr Knox said.
The House of Lords hearing is expected to conclude tomorrow, though a judgment is unlikely for several months.
