Mary Dejevsky: Family businesses don't deserve persecution by tax

The Joneses prevailed against the Revenue – to the delight of small firms everywhere

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When the Chancellor stands up in the Commons tomorrow to deliver his first full-dress Budget speech, I will be watching for one item in particular: any change in the tax regime for family businesses. This is not because it affects me directly – it doesn't – but because the way in which governments treat the family is a gauge of their broader principles and motives. It signals whether they see themselves working with the grain of society, or – foolishly and counterproductively – against it.

Religious sects and totalitarian states have always had one thing in common. They regard the family as subversive. This is why they devote such efforts to infiltrating the family circle and trying to exercise control even beyond the front door. It is also why communist states used to set such store by child "heroes" who could be persuaded to inform on their parents. The family represents a rival centre, which must be made to cede in the competition for the loyalty of an individual citizen.

Over its 11 years in power, Britain's Labour government has set itself apart from most governments of industrialised countries, by treating families for tax purposes as no more than the sum of their parts.

Husbands, wives, civil partners and cohabitees are taxed as single people. We are each responsible for our own tax affairs as individuals; personal tax allowances can no longer be transferred to a spouse or partner. It is in everyone's interests to do enough paid work to "earn" at least as much as the personal allowance, otherwise the tax-free element is wasted.

The tax system no longer provides any financial advantage to marriage. You can argue about this to and fro. Couple households with a single earner – by choice or necessity – are penalised by it. But you can also argue that in this day and age, where there is something approaching equality between the sexes, tax status should attach to the individual. Anything else smacks of old-fashioned patriarchy.

Now, however, it appears that the Government intends to extend the principle of separate taxation to family businesses. This is the result of a long-running court case in which Her Majesty's Revenue and Customs (HMRC) tried to sue a married couple, Geoff and Diana Jones, for back taxes it claimed they owed as joint owners of an IT consultancy company called Arctic Systems.

The Arctic Systems case now has near legendary status in small-business circles, with the Joneses celebrated as something akin to have-a-go heroes. It goes back to 2001, when the Revenue ruled that the Joneses had acted wrongly in apportioning their company profits in such a way as to minimise the company's overall tax liability. The Revenue's case was that each partner was required to report income, and pay tax, in direct proportion to the contribution he or she had made.

The logical conclusion to be drawn from the Revenue's case was that there is, in fact, no such thing as a joint family enterprise, only an individual's quantifiable and recorded contribution to it. The Joneses, not surprisingly, disagreed, and risked their savings to contest the case. Last summer it reached the House of Lords, where the Joneses prevailed against the Goliath of the Revenue – to the delight and relief of small family firms everywhere.

While the Joneses' particular ordeal was over, however, the Revenue was determined to fight on. Having lost in the highest court, HMRC lobbied for the rules to be rewritten in such a way as to put future Mr and Mrs Joneses incontrovertibly in the wrong. In so doing, they called into question the whole ethos of a family business, where the work, the rewards – and the liabilities – are pooled, and the lines of individual contributions are blurred. Even a day before this year's Budget, it is not certain that the Chancellor will, in fact, sanction the changes that HMRC clearly hankers after.

The first draft was reportedly sent back as unworkable. If it does, though, it is hard to see how small family businesses – and that includes the ubiquitous corner shop, as well as new consultancies – can survive in the form in which they have evolved. At a time when ministers are lionising entrepreneurship more than ever, such a move against a tried and tested business formula would seem perverse in the extreme.

The significance of the case against Arctic Systems, however, does not stop here. It is yet another example of the muddle this Government has created by trying to run the tax and benefits systems on different principles. While ministers insist that, for tax purposes, there should be no such thing as the family, the unit that determines most state benefits remains the household.

This is why some two-parent families find themselves comparatively worse off than single parents. It is why the tax-credits system is such a mess. And it is why the Revenue, in its quest for non-existent consistency, was unable to thwart the Joneses. Tomorrow, the Chancellor should accept that the family firm is older than New Labour's ideology, and leave the Joneses and their ilk sufficient flexibility to carry on.

m.dejevsky@independent.co.uk

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