You may be aware of the tax case of Jones v Garnett - without doubt the most extensively reported tax case in recent years having widespread implications for husband and wife companies.
Mr & Mrs Jones each had one share in Arctic Systems. Mr Jones was the sole director and Mrs Jones company secretary and they drew small salaries of £7,000 and £4,000 respectively leaving large profits which were paid in dividends and thus shared half and half. Crucially, however, the revenue earning work was carried out by Mr Jones exclusively.
HMRC argued that Mr Jones had made a gift of income to his wife by arranging their affairs in this way and that this was caught by anti-avoidance legislation dealing with settlements. If successful, HMRC could treat the dividends received by Mrs Jones as assessable on Mr Jones and consequently tax them at the higher rate of 40% instead of 22%.
The Special Commissioners found for HMRC (on a casting vote) as did the High Court but, on 15 December 2005, the Court of Appeal held that the anti-avoidance legislation on which HMRC sought to rely did not apply to Mr & Mrs Jones.
In March HMRC were granted leave to appeal to the House of Lords against this decision. It will be some months before the appeal is heard and a judgement is expected towards the end of the year. So watch this space!