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The Inland Revenue is using
complex tax avoidance legislation to attack
a small number of family companies that pay
dividends to a director's non-working spouse.
The policy has provoked outrage, not least because
it leaves individual taxpayers uncertain about
what is acceptable and what should be declared
on their tax returns.
The type of company being investigated has husband
and wife shareholders, little capital introduced
into the company and a low asset value. The
work in the business is carried out wholly or
mainly by one spouse, usually the husband. Profits
are then paid out partly as salary and partly
as dividends, as a result of which the wife
receives some income.
In such a case, the Inland Revenue may argue
that the income results from the husband's work
and will aim to tax him on all or some of it.
The outcome is usually that the wife's dividends
become liable to higher rate tax. It seems to
make no difference whether both spouses subscribed
for the shares at the outset or whether the
shares were transferred as a gift.
One way directors might be
able to protect themselves from attack is by
reducing the proportion of profits drawn as
dividends. If the director draws a commercial
salary, the Inland Revenue cannot attack the
distribution of further profits as dividends
to all shareholders.
However the payment of a commercial salary increases
the liability to national insurance contributions.
Another move that might help could be to reduce
the proportion of shares held by the wife, so
limiting the dividends paid to her.
Whether the Inland Revenue is on firm legal
ground is open to challenge, but in the meantime
it might be as well to exercise caution, because
the tax involved could be substantial over a
long period.
Contact us if you think you might be caught
in the Inland Revenue's net.
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