CIOT Offers To Help Small Firms Targeted By The Inland Revenue

by Jason Gorringe, Tax-News.com, London

29 July 2003

According to a recent report from the Daily Telegraph, the Chartered Institute of Taxation has pledged its assistance to small firms being targeted by the Inland Revenue for passing dividend income to a non-active spouse to benefit from a lower tax rate.

This is a practice commonly utilised by small husband and wife-run firms. A portion of the company's profits is paid in the form of a dividend to the inactive spouse, usually the wife, who then pays tax on it at a lower rate.

However, by resurrecting legislation dating back to the 1930s, the Revenue has now begun to challenge the way such firms operate, and is investigating each individual's contribution to the earnings of the company, according to the CIOT. In short, if the tax man thinks that you have not, in his eyes, made a sufficient contribution to the earnings of the firm to justify the dividend paid, then he will simply add it on to the income of the person who he thinks has played the more active role.

This has led to many firms' tax bills being re-adjusted, in many cases quite dramatically, as the Revenue can apply the rules retrospectively for a period of up to six years. In a recent case of Geoff and Diana Jones from Pulborough in West Sussex, a re-assessment of their income and tax liability led to the Inland Revenue demanding an extra £42,000 in unpaid taxes.

However, John Whiting of accounting firm PricewaterhouseCoopers suggested to the Telegraph that the Inland Revenue can expect to be challenged on its interpretation of the rules. "They have not by any means got a cast iron case," Whiting observed, adding "there will be grounds to oppose the Revenue's claim."

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