You should be familiar with the Arctic Systems case (Jones v Garnett) from previous JSA newsletters and media coverage. In a nutshell, Geoff Jones provided his services as an IT consultant through his own limited company, Arctic Systems. He gave 50% of the shares to his wife, took a small salary and claimed expenses, and shared out the remaining profit as dividends to himself and his wife.
HMRC contested this and tried to assess Geoff on all the dividends. If they had won, Geoff would have had to pay higher rate tax on the amounts paid to his wife. HMRC took the case all the way to the House of Lords where the taxpayer was victorious. It was found that:
- The arrangement was regarded as a “settlement” for tax purposes.
- The shares gifted were ordinary shares and therefore did not comprise merely “a right to income”
- Because the settlement was between husband and wife, that the exemption contained in the Taxes Act was applicable to this gift
As a result the Jones’s were able to “split” their dividends so that with careful tax planning they would not pay higher rate income.
What does this mean to you?
There is a precursor to the following advice, which is that in order to benefit from drawing dividends, you must pass the IR35 tests - that is the nature of the work you do must be akin to that of a self employed person under a ‘contract for service’. If you are not sure about your IR35 status then please contact us directly for advice and a contract review, if appropriate.
Firstly, the judgement above only applies if your circumstances are the same as the Jones. Particularly:
- You provide your services through a limited company
- You are married! Expert opinion is that this judgement will only apply to a husband and wife couple.
- The company has ordinary shares that are gifted by one spouse to the other.
Secondly, immediately following the Lords’ judgement, HMRC indicated that they would introduce legislation to counter this. It was not made clear at the time when legislation would be introduced or take effect, but in the PBR on 9th October the Chancellor confirmed the introduction of legislation to take effect from 6th April 2008.
Accordingly, there is an opportunity to arrange your shareholding between now and then and to take dividends by 5th April 2008 and reduce your tax bill by taking advantage of your spouse’s basic rate tax band and personal allowances (which total £39,825 for the 2007/8 tax year). If your spouse’s income is less than that amount, then you have an opportunity in this tax year only to “shift” part of your income to them and save the higher rate tax on that amount.
However, there are a couple of very important caveats for you to consider here.
- Until the draft legislative changes are released there is no way of knowing what the situation will be after 5th April 2008. For example there is no information available at this time to confirm whether shares owned by a non-fee earning spouse should be transferred back in the new tax year, or whether indeed dividends paid on shares gifted before 5th April will still be eligible to receive dividends and continue to be taxed separately.
- Re-allocating shares is taking advantage of a situation and may well draw the attention of HMRC to your affairs. Whilst there is nothing artificial or illegal about gifting shares in this manner, HMRC may take this as an opportunity or a trigger to look further into your circumstances.
Please note that this type of tax planning advice is not part of JSA’s standard fee arrangement with you and will be subject to separate additional charges for advice given and work carried out.
If you are interested in receiving further guidance and advice on your own circumstances please contact us directly on clientsupport@jsagroup.co.uk
Professional advice should be obtained before acting on any information contained herein and therefore no responsibility can be accepted for loss occasioned to any person as a result of action taken or refrained from in consequence of the contents hereof.