HMRC views it as ‘unfair’ that a person
can reduce their tax liability on business earnings
by paying dividends to a nonworking spouse
or civil partner – the issue at
stake in the Arctic Systems case. The
Pre-Budget Report indicated that the new rules would
work alongside existing rules on business
deductions and settlements, and would
only apply to income in the form of dividends
or partnership profits. Employment and
savings income would not be affected.
It was the settlements legislation that
HMRC invoked in the Arctic Systems case. The changes will not affect any income arising
in 2007/08 or earlier. HMRC is now reviewing
all cases kept open while awaiting the
House of Lords’ decision, and will
settle them in accordance with the ruling.
However, HMRC has pointed out that not
all arrangements are exactly the same
as in the Arctic Systems case, and has
therefore promised to publish detailed guidance
well before the 31 January 2008 deadline for
the submission of 2006/07 tax returns. The guidance should
also help in deciding on dividends to be paid
in 2007/08.
The House of Lords rejected HMRC’s argument
that Mr Jones, the company director in
the case, was taxable on dividends paid
to his wife who only worked for a few
hours per week in the company. Nevertheless,
they considered – in contrast to
the Appeal Court – that the incorporation
of Arctic Systems Ltd was a ‘
settlement’ within the anti-avoidance rules,
because its purpose was to share income
and therefore reduce tax. However, Mr
Jones could not be taxed on dividends paid
to his wife because of the exemption for
an outright gift of property between spouses.
The House of Lords then rejected HMRC’s
argument that the ordinary share held
by Mrs Jones was only a right to income – and
therefore outside the exemption – because
the share also conferred voting and other rights.
Some commentators have suggested that the
exemption might be lost if dividends are
paid into a joint bank account, because the
donor’s access to the income would mean
there had not been an outright gift. Holding
separate bank accounts is therefore a sensible precaution.
|
