What will the Taxman do now to Attack Small Companies?

Newsletter issue - August 07.

The Taxman is a bad loser, and after a big defeat like Arctic Systems it is quite likely the tax law will be changed. In fact the Treasury has already announced that they will be looking to change the law to prevent people splitting income between themselves in an unfair way. However, the Treasury spokesperson has also said that they do not want to disturb commercial arrangements.

What should you do now?

Don't Panic. The House of Lords decision stands until the law is changed, and if any change is made it probably won't come into effect until April 2008. Anyway you have little to worry about if you and your spouse/civil partner are both actively involved in running the business, in other words the ownership split of the business is a commercial arrangement.
If you and your spouse/civil partner own all the shares in your limited company, examples of precautions to take to help ensure that your arrangements are water tight and commercial include...
- You should both be appointed as directors of the company. This means you are both responsible for the running of the company so collectively make important decisions, such as how much dividend to pay, or which contracts to take on. Record all these decisions so you can prove to the Taxman that you are both actively involved in the key business decisions.
- Make sure you and your spouse/civil partner both hold ordinary shares in the company whose rights are not restricted in any way.
- Follow the correct procedure when paying dividends to ensure they can't be reclassified as loans. The directors need to check there are enough profits in the company to pay the dividend, suggest an amount to pay, then the shareholders can vote on whether to pay it out. Dividend vouchers should be prepared and given to the shareholders when the dividend is paid.
If you want to bring your spouse/civil partner into the business as a shareholder, so you can divide profits between you, come and discuss the matter with us first. However we recommend you should think through the following points...
- Will giving away some of the dividend income actually save tax? If your spouse/ civil partner already has enough income to cover most of their basic rate tax band, there is unlikely to be much tax saving.
- Think about what may happen to the business should you divorce or separate.