Husband and Wife Companies (including partners registered under the new Civil Partnership Act)

Arctic Systems Judgement

Some of you may have heard of this recent judgement in favour of the Inland Revenue regarding a husband and wife team who have been deemed to owe tax relating to their relative salaries and dividends and how they were declared on their tax returns.

Basically the husband was paid a salary below the market rate for the work he did in the business. This facilitated additional payments being made to his wife, in the form of salaries and dividends, which were excessive if commercial rates of remuneration were applied to their respective roles. The Revenue have powers to treat this excessive remuneration as belonging to the husband in this case, and to adjust their relative tax positions accordingly.

If you are a husband and wife team and wondering whether this will make a difference to you we must wait for a definitive judgement. This case may be taken to the Court of Appeal.

Certainly it would seem sensible to review cases where the underlying commercial value of respective remuneration packages, is out of sync with the salaries and dividends actually being taken. The judge in the recent case suggested that where a true market salary was being paid, then the Revenue would be unlikely to launch an investigation. But this whole concept of market salary raises more questions than it answers!

Please call if you have questions to ask on this topic, but do bear in mind that until the matter is finally settled in the courts we can only address unresolved interpretations of the law.

More on this as and when the possible appeal is decided.