HMRC have suffered another setback in their campaign against what they consider to be unjustified tax avoidance in family-owned companies. The First-Tier tribunal found against HMRC relating to an assessment against Mr Patmore of nearly £20'000 of tax on dividends paid to Mrs Patmore from their jointly-owned company. The dividends were immediately credited to Mr Patmore to set against outstanding purchase payments for the company.
While situations varied in individual companies and the amounts and types of shares issued to each party differed, the tribunal judge cited a precedent set in the Arctic Systems case that courts should take "a broad and realistic view" of such arrangements but was of the opinion that in this case HMRC had not done so. The judge ruled that "the tax assessments on Mr Patmore cannot stand".
An HMRC spokesman said the department is considering the judgment carefully before deciding on any further course of action. Such action may depend on the reviews of the taxation of small businesses to be conducted by the new Office for Tax Simplicification who will certainly be examining cases such as these and the uncertainty they cause.
In the meantime, it will be as important as ever for small companies to take the advice of experienced tax professionals when planning income distribution to shareholders.