Revenue must rethink ‘couple’s tax’.

And it takes a very important matter to bring such a group from the business tax community together to issue a joint press release and a detailed technical paper – but that is exactly what has happened in recent days. So what is the issue? It is the Revenue’s interpretation of the settlements legislation – or what has become known as the ‘husband and wife’ tax.

The settlements legislation itself is not new. Broadly, it seeks to catch situations where there is an ‘arrangement’ in place that splits an individual’s income in order to save tax. Those situations that are caught by the rules can be rectified by giving the Revenue the power to reallocate the income to the higher taxpaying individual and making them pay any tax due.

Various aggressive forms of income splitting, including using certain dividend waivers and different classes of shares, have been found by the courts to be caught by the settlements legislation and are duly known to be unacceptable.

In April 2003, the Revenue issued a tax bulletin providing further guidance on how it interpreted the rules.

Some of this was well-known information, usefully expressed. However, it also included a number of examples that appeared to most of tax advisers I have spoken with to go far further than any previous guidance made available.

These examples may well represent how the Revenue has always perceived the legislation to work. Nevertheless, this does not accord with the view of the tax representative bodies and many of their members, nor has it previously been communicated by the Revenue to taxpayers and tax advisers.

An example shows why this issue is so important. Assume Jack and Jill are a married couple who decide to form Hill Limited to exploit Jack’s skills in developing new pharmaceutical remedies. The couple own the shares in Hill Ltd equally; the net income of the company is £100,000, derived from Jack’s activities. Jill does some work for the company, such as taking phone calls, making bookings and generally supporting Jack.

Jack is paid a salary of £50,000 and Jill is unpaid despite her general advice and assistance; the net profit after tax of (say) £40,000 is then used to pay the two owners dividends of £20,000 each. Following the Revenue’s guidance issued in April, Jill’s £20,000 dividends are vulnerable to being recharacterised as Jack’s income and taxed at his higher rate of income tax. If Jack and Jill are tackled by the Revenue after six years of similar figures, an unexpected tax bill of some £30,000 could result, plus interest and possibly penalties.

This setup is very common, and the people involved are unlikely to have any inkling that their tax affairs will come under Revenue scrutiny. Yet they could find themselves with a very expensive tax bill, running into thousands of pounds.

Taxpayers require clear guidance and as much certainty as possible to ensure they fulfil their tax obligations, particularly when they are obliged to self assess their tax liabilities on their income tax return. The April tax bulletin, in some respects, was a worrying bolt from the blue that has raised great uncertainty in the minds of taxpayers who will struggle to try to determine if they can differentiate their situation from that found within the Revenue’s examples.

All these points were made by the representative bodies to the Revenue in a meeting last week. In addition, it was stressed that not only are there practical issues with the guidance, but also the representative bodies jointly reject a number of key technical issues that underpin the April bulletin.

These technical issues are set out in depth in a paper written by all the representative bodies listed below and which can be viewed on their websites. I will not repeat all the technical arguments here but, in particular, concerns were expressed about the Revenue’s view on the treatment of ordinary shares and its attitude towards partnerships.

The Revenue is considering the points raised in the technical paper and at the meeting. Some issues may have to be resolved in court. Some may possibly be dealt with by further guidance. There are no quick solutions here, but hopefully we are now in a dialogue that will help find a way forward that will give taxpayers the clarity they need.

  • Francesca Lagerberg is the National tax director at Smith & Williamson ( She attended the meeting with the Revenue outlined above in her as deputy chairman of the tax faculty of the ICAEW. Others represented included members of The Chartered Institute of Taxation, The Institute of Chartered Accountants in Scotland, The Association of Chartered Certified Accountants, The Association of Taxation Technicians, The Association of Accounting Technicians, the Federation of Small Business and Representatives of Working Together. Go to to see the response of the professional bodies.

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