An Inland Revenue victory in a recent court case has lead to fears that many small, family run businesses could suffer larger tax bills.
Under threat are small companies where one party is responsible for earning, and their spouse has a share of the company.
The court case determined that the taxpayer was deliberately paying himself a salary under the 'market rate' in order to pass a large share of the company's profits to his wife via dividends. The tax authorities imposed anti-avoidance legislation in order to tax the husband on dividends received by his wife. This legislation aims to stop people settling their income on another person who pays tax at a lower rate.
In light of the case, there are a number of situations, which could invite attention from the Inland Revenue. Such situations include:
? A main earner drawing a low salary, thus enhancing company profits from which dividends can be paid to shareholders who are family members
? Dividends being waived so that higher dividends can be paid to shareholders paying lower rates of tax
? The transfer of income from the person making most of the profits of the business to a friend or family member who pays tax at the lowest rates
Advice coming as a result of the case indicates that working directors should consider either paying a realistic salary, or adjusting shareholdings to equate to the contribution of the shareholders.
Husband and wife teams where both partners make a significant contribution to the company should not panic!!
The Inland Revenue has not yet released guidance so watch this space!! | 
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