HMRC loses landmark tax ruling A husband and wife team has beaten the taxman in a landmark ruling that could put a smile on the faces of small business owners throughout the UK. Arctic Systems' long-running legal battle came to an end yesterday, following the House of Lords' decision to reject an appeal from HM Revenue and Customs (HMRC) which had been …
"It is the government's view that individuals involved in these arrangements should pay tax on what is, in substance, their own income and that the legislation should clearly provide for this.
"The government will therefore bring forward proposals for changes to legislation to ensure this is the case."
This sounds just like me and my brothers as children: as soon as I thought I was losing a game, I'd decide to change the rules - I'm eldest brother, it's my game, and you can't win!!!
Why can't they come up with one simple rule and stick to it? Perhaps Everybody and everything pays 30% of income. No allowances, no exceptions, no misunderstanding. Oh, and no tax lawyers :-)
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Totally agree - and I'm a contractor.
Our tax system is totally overcomplicated and HMRC often go to ridiculous lengths to penalise contractors in particular - but these two were taking the p*ss. £7000 and £4000, respectively - that's nuts. The central tenet is supposed to be that you pay yourself a reasonable salary and a reasonable amount of tax...
Of course, if personal tax rates were about the same as company tax rates, we wouldn't need to spend vast sums of tax payers money chasing cheats like these and forcing contractors who are more reasonable to employ expensive accountants just to avoid spending half the year filling out ridiculously over-complicated forms.
Would decimate the accountancy industry, though, I guess...
There are plenty of people setting up IT companies and paying themselves in this way... not just maried couples, but joint ventures.
As the second comment insists, this is a blatent scam in so manay cases. My sister works as an accountant and she knows full well what loopholes people are being exploited, this is just one. But many many companies exist that are setting themselves up like this, and paying themselves through dividends... I reckon that lots of exHMRC people are doing it.... i'd bet my shoes on it...
Everybody and everything pays 30% of income?
Still too many opportunities for dodginess, the accountants/lawyers would find a way of redefining income (as they have done for years, as this case clearly illustrates).
How about: if money moves, the government gets x% of the amount transferred ? Spend a lot, pay a lot. Save a lot, pay a lot. Get lots of income, pay lots of tax. Move lots of money through the City, pay a lot of tax. No money moves, no tax is paid.
This is pretty much how the banks and the financial sector already operate, it's entirely practical technically, but it would put all the tax lawyers and accountants and related City slickers and con-sultants out of business at a stroke. And our elected representatives and their civil servants are largely owned by these folks, so it would never happen, even if it was a good idea.
Unfortunately HMRC wins the day ultimately because they just change the law to stop this from happening in future. Brown will spout off in the budget something about 'tax avoidance' and making sure people pay the 'right' amount of tax and another complicated bit of tax legislation will come into existence.
The only reason people do this is because there is disparity in the taxation rates of companies, individuals, and dividends. Give us a flat rate tax for everything and the incentive to try and beat the system goes away.
This is a loophole which has been exploited for a long time, but these two took it too far.
When I was contracting, I worked through an unberella company. I was paid minimum wage as a salary, the rest as dividends. However, out of those dividends came my expenses (last time, this included fuel, B&B and food, as I was working away from home). This meant I did pay less tax, but within the law, fairly.
This couple should've been taking away at least minimum wage each, which would be approx £10k each. I doubt the tax man wouldve gone after them if they'd done that. Remember, you still have to pay 19% tax on the dividends (after expenses).
I can see this afecting all the contractors out there who use the system propperly. It could end up seriosly damaging anyone who is not on PAYE, and any small businesses, who rely on this system to make things worth while. All because they got greedy!
The basic problem with the Tax system in this country (and most others) is its sheer complexity.
A VAST amount of the money collected by HMRC is spent simply in maintaining HMRC itself as it is overburdened by the many complex tax breaks and loop holes injected into the tax system by the highest earners and their lobyists.
This is fundementally flawed. Govt is not meant to be a jobs program in and of itself, it should be as small as possible in order to fulfill its vital functions.
I seem to remember (and as someone who was born under thatcher I cannot BELIEVE I am advocating a tory policy) that the Concervitives suggested the introduction of a flat tax rate of 22% - http://politics.guardian.co.uk/conservatives2005/story/0,,1571734,00.html
The saving in complexity and management of such a system would wipe off £40billion from the annual tax bill and mean that a fixed start point of between £10-12k could be used for tax (you dont pay tax on the first £12k of your income and pay 22% on everything above that).
This means the super rich loose their tax breaks and pay the same as everyone else. The rich and middle classes still pay more then the poorest in society, but it is done in a fair and effecient way. The poorest in society will largely not pay tax at all (on their income).
This is something I have supported for a long time and would sure as hell vote for...... I supported this idea when I was at the bottom of the wage pile earning £12k or less working on 1st Line helpdesks and call centres and living in places like Moss Side and Gorton. I still support the idea now that I am doing somewhat better and working as a contractor (who has an CRAZY tax bill)..... the difference between this proposal and the current lobby inspired system??
It is fundementally fair.
Let the flame war commence (I'm sure someone wants to have ago.... afterall at no point did I suggest that the iPhone could be used in the tax system some how) >80)
quote
"The government will therefore bring forward proposals for changes to legislation to ensure this is the case. In the meantime, HMRC will apply the law as elucidated by the House of Lords and will be providing guidance in due course."
Labour is hell bent on destroying this country's IT industry, and this greed is causing more and more of what is one of the UK's major industry's to be outsourced offshore. First they, with the help of the unions, and incompetent management killed of manufacturing. Now to buy their votes they are taxing IT and contractors out the country. Big thank you Tony and Gordon. Job well done!
The Taxman has always been a bad loser. Even 25 years ago the Revenue people were trying to get hold of some of my (and others) money and lost a case in the House of Lords on the matter. So they changed the rules which, fortunately for me, only affected new arrangements, not existing ones. That was when Maggie was encouraging industry to invest more in training, only for the tax people to try and extract it from the students.
There's not as much difference as some here appear to think. On £100k earnings the business will pay 19% corp tax and dividends are then (quite logically) treated as 'basic rate tax paid'. If you're fortunate enough to be in the higher rate bracket, you'll pay an extra 17% on these dividends.
So I reckon the saving is only a few grand on £100k, which will just about cover the additional costs of registering as a company. Of course, there are many differences, such as the way expenses are treated, but for most contractors, this won't amount to a huge sum.
A few years back, our resident financial genius Mr Broon, introduced a £10k threshold for corp tax to encourage people to set up small businesses. The result was lots of sole traders incorporating to take advantage of this (whoever could have guessed?), so the allowance has now been removed.
The fact remains that people are allowed to set up limited companies, and then the shareholders are paid dividend out of the taxed profits of the companies, pro rata with the shares. The shareholders pay personal tax on the dividend so received.
No question of not paying tax, the issue in this case was whether the Revenue was allowed to "deem" that the husband as fee-earner for the company should pay tax on his wife's divis as well as his own, an issue if his income, so adjusted, went into the 40% tax band.
If they hadn't been married this matter wouldn't have arisen in the first place, so the Revenue's interpretation was effectively discriminating against married couples in business together, with unequal income streams arising from their work.
But if spouse A goes on the road to clients, and spouse B is the back-office person, that's bound to happen.
So despite them having an equal interest in the Co, the Revenue was saying "you bring in more than her, hence we want to tax you as if you earned all the company profit".
Somehow, if the boot was on the other foot, I can't see the Revenue buying an argument like that !
A former Canadian minister of finance pointed out that having a single rate of income tax would do almost nothing to simplify the country's income tax system. The complexities lie in the definition of income, not the rate at which it's taxed. (Canada has only three personal income tax brackets, plus a surtax at high income levels.)
I suspect the same is true of the income tax in the UK, the US, and most other countries.
Writing as someone who spent years in the bowels of the property tax administration, I will add an observation of my own: trying to influence behavior by offering tax exemptions, favorable or punitive tax rates, etc in special cases is a Truly Bad Idea. Tinkering with any tax system in that way ultimately does nothing but impede its primary function, the raising of revenue in an even-handed way.
Moreover, many such incentives and disincentives simply don't work because the tax amount is insignificant in comparison with profits to be made.
A further objection to using the tax system to encourage certain behaviors is that the true costs are off the books. No one keeps track of the tax revenue foregone by exemptions, penatlies, favorable tax rates, etc.
But of course when you try to simplify, say, the definition of income, cries of outrage will arise from those who have been getting away with murder under the existing complications. And few politicians have the will to resist cries of "it's UNFAIR."
Sorry - I can't agree with many of the comments above. I'm a contractor who splits divis with my partner exactly as these two did. My net retention rate is 81% - I pay myself a salary af 10K / annum and we divi the rest up. I get the benefits of an increased take home pay in return for taking the risks - like being completely unable to protect my mortgage payments, having no sick or holiday pay and working under contracts where my 'client' can terminate my company as a service provider with little or no notice at all.
People who aren't prepared to take these risks themselves are always the first to bitch when they work out what we're taking home - but they still won't cross over and do the same thing themselves.. It's exactly the same on my motorbike - the car drivers stuck in the traffic jams can't stand the fact that I can keep moving - but they're not prepared to get out of their nice warm safe car and ride in cumbersome leathers in the p!ssing rain.
Don't moan about people getting a bigger return on more than you're prepared to put in!
Very strange , if the HMRC could assemble a complete Tax Audit team , to assess the annual corporate filings from say the Big 4 UK Banks , rather than the usual rubber stamping of all the corporate documents as they have been doing since time immemorial , and accepting all the minimal taxes paid by these organizations at face value , the returns would have been far more impressive then the amount of money they wasted on this case!
Remember these are the self same wankers that allowed a certain English family of Lords to avoid all taxes , since the incorporation of the very first personal income tax laws for the last two centuries or so without penalty !
The creation of a Corporate or Company Tax Audit Team is long over due , but undoubtedly , it is easier for Big Brother The Tax Man with a big stick to chase the man in the street because they do not have access to expensive first class legal experts to defend them against unjust evil oppression !
Still even the winners will be stuck with out of pocket expenses in fighting this case to it's bitter end!
Sadly multi-national corporate tax avoidance schemes are now running in epidemic proportions throughout this world of ours and as usual the man in the street is stuck with their unpaid bills and left with even higher extra higher taxes to compensate!
These people aren't really taking the p!ss they are well within their rights to pay themselves any wage they want as its their company. As for divvying up the income in a tax efficient manner who can blame them?
I and many others do the same, The tax system is set to hit you hard when you just start getting your company going and hit VAT registration etc, people have to do their best to take home as much as they can within the law and anyone who says they wouldn't do the same is a saint or a lier.
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