Don't panic: tax ruling won't strike most family-run firms

A High Court ruling against a married couple who disputed their small business's tax bill will not affect most family-run firms, a leading firm of accountants said yesterday. Stephen Herring, tax partner at BDO Stoy Hayward, said claims that thousands of businesses would face higher tax bills following the case were exaggerated.

"This does not mean that the many thousands of family-run firms across the UK should panic," Herring said. "We consider that very few family companies should be affected as a result of this High Court decision, provided the Revenue & Customs is consistent and only applies the ruling in extreme cases."

Geoff and Diana Jones took the Revenue & Customs to court over the way their IT consultancy, Arctic Systems, was being taxed. But on Wednesday the High Court upheld the Revenue's claim that Mr Jones had unfairly transferred some of his income - paid as share dividends - to Mrs Jones in order for the couple to benefit from her lower tax status.

Small-business specialists initially claimed the ruling could result in higher tax bills for more than 200,000 small businesses. They warned that many husband-and-wife firms had set up their businesses in such a way as to minimise their overall tax bills.

Herring added: "It was understandable why the Revenue chose to take action. We believe it was not so much the sharing of the tax liabilities that prompted the investigation, but the fact that Mr Jones severely limited his income by accepting a greatly reduced salary compared to typical industry remuneration to enable increased dividends to be shared with his spouse."

BDO Stoy Hayward also dismissed suggestions that the case would lead to a big increase in the number of firms facing Revenue investigations. It said a probe was most likely where one spouse was receiving a salary much higher or much lower than the pay that would normally be expected for a particular job.

However, the Forum of Private Business said the case was a major blow to small companies. Andy Mowlah, the group's head of research, said: "Business owners will now be looking over their shoulders to see if the Revenue is now going to come and start knocking on their door."