A leading business pressure group reacted with dismay to a High Court ruling yesterday in favour of the Inland Revenue which could have serious and expensive consequences for thousands of husband and wife firms.
As a result of the landmark ruling against Arctic Systems, run by Geoff and Diana Jones, there could now be increased challenges from the Revenue and many husband and wife teams could face high - and unexpected - tax bills. The Forum of Private Business's head of research Andy Mowlah said the decision would send shock waves across husband and wife businesses.
" Businesses will be extremely worried about the implications of this decision," he said. "Business owners will now be looking over their shoulder to see if the Inland Revenue are now going to come and knock on their door.
"The concern will be that the Revenue will ask complicated and searching questions about what justifiable contribution the wife or husband has made to the firm.
"If the decision then goes against the firm they could be stung with a backdated tax bill going back up to a six years. This could be a mortal blow to many firms. It must be remembered that a spouse often shares the risk but not the reward of the business."
Mr Mowlah said it was critical the Government took a more pragmatic approach to settlements legislation.
"There is a real lack of clarity about this legislation," he said. "There is no clear idea of what a market salary is, what sufficient working hours are and what an adequate capital contribution is. Moreover is it really worth the Inland Revenue pursuing such businesses for small sums of money and seeking to impose a complex tax regime based on the uncertainties that surround settlements legislation?"
Two years ago, the Joneses, who own an information technology business, Arctic Systems, were told by the Revenue that they owed an extra £42,000 tax on dividends they paid themselves during the previous six years.
The couple had arranged their financial affairs so that both held shares and received similar dividend payments, even though only one, Mr Jones, generated the income.
The Joneses took the Inland Revenue to court and the case was heard by two special tax commissioners early last summer. Just before that, the taxman dropped his claim for backdated tax, but remained adamant that the Joneses had broken the law by paying themselves a low salary and high dividends in order to reduce their joint tax bill.
The tax commissioners were split on the merits of the case, with the presiding commissioner, Judith Powell, using her casting vote in favour of the Inland Revenue. Both sides then filed their arguments at the High Court.
Accountants estimate that hundreds of thousands of husband-and-wife companies could be affected by the ruling in the Jones case, with each facing an additional tax bill on average of £9,000.
The Inland Revenue has rejected these claims, insisting that only up to 30,000 companies could be affected.