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PKF warning over high-profile tax case

Family-run businesses throughout the region are being warned by leading accountants and business advisers PKF East Anglia not to pin their hopes on a landmark tax ruling involving payment using dividends.

It follows a high-profile case involving Geoff and Diana Jones who, through their jointly owned company Arctic Systems Limited, subscribed for one share each in the company, drew a salary and distributed profits equally as dividends.

Her Majesty's Revenue and Customs had argued that the couple had avoided tax by under-paying Mr Jones' salary while paying more in tax-efficient dividends to both of them - a well-established business model.

Had HMRC won it would have affected hundreds of similarly operated businesses throughout East Anglia.

Although the House of Lords has just ruled in favour of the couple, PKF East Anglia, which has offices in Ipswich, Great Yarmouth and Norwich believes that HMRC will now look for a legislative change to end this common practice.

PKF tax expert Peter Harrup said although the Lords' decision was 'a common sense win for small businessmen and women' he pointed out that it demonstrated, yet again, the Government's failure to put in place a stable tax environment for small business.

'PKF welcomes the Lords' decision but clearly HMRC is not going to let the matter rest there. Its next move is likely to be a push for changes to legislation to prevent all small company owners using what is a long-standing practice to their advantage.

'Unfortunately, while HMRC may increase their tax take, this is likely to make starting a new business less attractive and damage entrepreneurial spirit within the UK.

'There is clearly a justification for reviewing this area of tax but it is impossible to look at it in isolation; it is time for a complete overhaul of the small business tax regime so that there are sufficient incentives for people to take what can be a major gamble while ensuring the state receives a fair level of tax.

'Shut down all the incentives and there's no point taking the risk of starting a new business. A review should cover income tax, corporation tax, National Insurance Contributions and dividends to level the playing field for sole traders and companies.

'Unfortunately, HMRC has previously shied away from this complex task. If it now goes for a quick fix by fiddling with the settlements rules, the root cause of the problem, namely that the tax regime of limited companies and sole traders is a mess, will remain.'

Article by BDO LLP

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