Husband and wife limited companies
Discussion
I run a business with my good lady. I was forewarned that case was going before the IR commissioners trying to stop us paying ourselves in share dividends. The results are at: www.taxcafe.co.uk/november2004.html#TSCD
Inland Revenue 1, US 0 (Gordon Brown brought off in the 53rd minute)
The practice has tended to be that as joint divi share holders the couple take a small wages (around £4600 oddly) and take the rest as share divi. It seems complicated to me as a layman, but it seems that the IR are getting shirty with husband and wife businesses where one partner does the large majority of the work and the other still takes a large share dividend after paying their 19% company tax (sounds better than 40% plus Ni and employers NI). This means they pay relatively little income tax.
The result was a draw with the IR winning on a penalty shoot out. It ain't over until the fat lady at the High Court sings, but it looks like the IR want a fight so Mr Brown can spend more on child care cost so everyone gets to work and pay more tax.
Worth a read so that you can't be accused by GB of working the system.
I am making my wife work a full 80 hour week, just to be on the safe side!
Inland Revenue 1, US 0 (Gordon Brown brought off in the 53rd minute)
The practice has tended to be that as joint divi share holders the couple take a small wages (around £4600 oddly) and take the rest as share divi. It seems complicated to me as a layman, but it seems that the IR are getting shirty with husband and wife businesses where one partner does the large majority of the work and the other still takes a large share dividend after paying their 19% company tax (sounds better than 40% plus Ni and employers NI). This means they pay relatively little income tax.
The result was a draw with the IR winning on a penalty shoot out. It ain't over until the fat lady at the High Court sings, but it looks like the IR want a fight so Mr Brown can spend more on child care cost so everyone gets to work and pay more tax.
Worth a read so that you can't be accused by GB of working the system.
I am making my wife work a full 80 hour week, just to be on the safe side!
My accountant warned me last year this was on the horizon. Thankfully my wife is able to evidence she works full time for the business, and she is shown on contracts we have with central govt as working full time. I was told to make sure I had such evidence in case the Artic case went against us.
Section 660 can be applied even if the other spouse (doesn't have to be a wife) is being paid a salary. The IR could make a ruling based on the input into the business by the "other half" and whether the salary is justified by the actual level of involvement. This is a major "can of worms" area that the Revenue have snooped around before (there is a case on this subject as far back as 1940) but they have previously been forced to back off.
Hopefully they will suffer enough reversals at appeal level to send them off with their tails between their legs.
>> Edited by Eric Mc on Wednesday 17th November 21:41
Hopefully they will suffer enough reversals at appeal level to send them off with their tails between their legs.
>> Edited by Eric Mc on Wednesday 17th November 21:41
I saw a TV programme on the issue a few months ago, where some high profile entertainer had himself as a 'company' and paid his trophy wife a salary for her 'emotional support'. No wonder GB's IR army is racked off! My poor wife works all God's hours to make our business work and then fools like that draw attention to and begin to underline one of the few financial breaks of running your own business. I lived in Belgravia once (in a job flat I have to add)and the number of sports car driving empty headed neighbours' daughter and wives on the company books being paid to shop and lunch. even when they did have a 'proper' busness (usually art galleries and handbag shops) it didn't open until 10.30 and shut at 4 with a 2 hour lunch break. Are my labour heartland council estate roots showing!
The big issue is whether the Inland Revenue have a right to dictate to business owners how much they should pay relatives who work for them in these businesses and how much involvement such related workers must have to warrant the income they receive. In my opinion, these are matters purely for the businessman or businesswoman running the business and nobody else.
In the past, that has also been the opinion of most cases brought against businesses by the Inland Revenue and they have generally lost their attempts to stop businesses from paying related parties what they like in the way of salaries, dividends or shares of profits.
The recent case (Arctic Systems) was won by the Inland Revenue only by the chairwomen of the board of Commissioners who heard this case exercising her casting vote. In other words, there was by no means a unanimous view on the subject by the commissioners, As a result, the decision is being appealed and the outcome is not yet decided.
In the past, that has also been the opinion of most cases brought against businesses by the Inland Revenue and they have generally lost their attempts to stop businesses from paying related parties what they like in the way of salaries, dividends or shares of profits.
The recent case (Arctic Systems) was won by the Inland Revenue only by the chairwomen of the board of Commissioners who heard this case exercising her casting vote. In other words, there was by no means a unanimous view on the subject by the commissioners, As a result, the decision is being appealed and the outcome is not yet decided.
That is, in a way, what dividends are all about. They should only be paid when a company has sufficient profits built up in its reserves. Thr achievement of these profit levels would, in effect, be the target you are talking about. If a company pays dividends to shareholders when there are insufficient reserves - that is actually illegal and contarvenes the provisions of the Companies Act. The Inland Revenue also levy a "penalty tax" (called Section 419 tax) on such illegal dividends/distributions.
The Inland Revenue's current "attack" on husband/wife dividend/salary payments is notthing to do with new rules and regulations. All the Inland Revenue are doing is looking more closely at whether the "spouse" has sufficient involvement in the company - i.e. whether as a director/employee or as an investor/shareholder - to warrant the level of dividend/salary they received in the year.
>> Edited by Eric Mc on Wednesday 24th November 08:25
The Inland Revenue's current "attack" on husband/wife dividend/salary payments is notthing to do with new rules and regulations. All the Inland Revenue are doing is looking more closely at whether the "spouse" has sufficient involvement in the company - i.e. whether as a director/employee or as an investor/shareholder - to warrant the level of dividend/salary they received in the year.
>> Edited by Eric Mc on Wednesday 24th November 08:25
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