The High Court’s ruling on the Arctic Systems case may not be applicable to all family businesses, accountants said today.
Mike Warburton, senior tax partner at accountants Grant Thornton, said Mr Justice Park’s ruling left open the question of what would happen if the partner of a business doing the lion’s share of the work were paid a normal rate.
In the Arctic Systems case, the judge ruled that as Geoff Jones, an IT consultant, was paid a lower rate than he would have earned in the market as a whole, the Revenue’s case was stronger. But if that had not been the case, the Revenue might not have won, he said.
Warburton said: ‘It looks likely that the Revenue will use it against situations where salaries are low in order to allow dividends to be high.’
In the Arctic Systems case, Diana Jones, who carried out much of the administrative duties of the business, was paid higher dividends as she was a lower earner as a whole, and would thus pay lower tax on the dividend income received.
It also remained unclear, Warburton said, whether or not Revenue would attempt to use the judgment to claim retrospective tax from other family-owned businesses. In Arctic Systems’ case, it could not do so as it had lost the relevant files.
Arcitc Systems may now have to pay £6,000 in tax. If the bill had been retrospective, they would have to have paid £42,000.
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