House of Lords Backs 'One Man Band' Companies

10 Aug 2007

The House of Lords has issued a landmark ruling which will be greeted with considerable relief by small company owners throughout the land. However, warns Robert Goddard at Batchelors Solicitors, the ruling is not the 'anything goes' judgment it is being portrayed as in some quarters. In the case in point, a company was set up with the husband and wife both subscribing to shares in the company, Arctic Systems Ltd.

Although all of the income of the company was generated by the husband's work, the effect of their arrangements was that the wife, Mrs Jones, received considerable dividends and the tax paid by the Jones family as a whole was reduced by virtue of the fact that her income was taxed at a lower rate of income tax than her husband's.

The question which was in point was whether or not the original transfer of shares (an income producing asset) from Mr Jones to Mrs Jones was effectively a 'settlement' and thus was caught by what is now S660 of the Income and Corporation Taxes Act 1988. This provides that where such a transfer takes place, with the effect that the right to income is transferred from a higher rate taxpayer to one with a lower rate, the income is treated as belonging to the transferor.

For a settlement to exist, there has to be an element of bounty. HM Revenue and Customs argued that Mrs Jones's shares were, in effect, a 'right to income, which had been gifted by her husband. Mr and Mrs Jones held that this was not the case because Mrs Jones had paid for her share when the company was formed and had not been given it as a gift by her husband. The Lords unanimously rejected that defence.

However, Mr and Mrs Jones were successful in claiming that the exemption to the settlement legislation for transfers between husband and wife applied.

The Treasury is now expected to consider revising the law, most likely by removing the exemption for transfers between spouses (which will also apply to civil partners), comments Robert Goddard, 'This is unlikely to be able to be done retrospectively, so a good planning point for traders who are considering incorporating their businesses is to consider forming a company and split the shareholdings sooner rather than later'.

For further information on this or any other business matter, please contact Robert Goddard on 020 8768 7034 or email rgoddard@batchelors.co.uk