Spring News - 2006
ARTIC SYSTEMS
At last, some good news.
The Court of Appeal has decided unanimously in favour of the taxpayer in this case, reversing two decisions in the High Court and the Special Commissioners.
In this case, HMRC had claimed that Mr Jones should pay tax on the dividends received by his wife, as he was the main generator of the income in the company, which supplied IT consultancy services.
They argued that the arrangement whereby he had allowed his wife to subscribe for shares and then agreed to draw a salary below market rates constituted a 'settlement'. Under anti-avoidance legislation the income arising under such a settlement could be taxed on Mr Jones as the 'settlor' where either her or his wife can benefit.
The Court of Appeal found that a decision to set up a family business in which all parties contribute value and there is no element of bounty cannot be 'an arrangement' supply because a benefit arises in some later year.
Whilst this sensible judgement is good news, the position is not yet completely clear yet, as HMRC have yet to accept defeat in this case, and have applied for leave to appeal to the House of Lords. Therefore while taxpayers affected can be justified in returning their dividends in the normal proportions on their respective Tax returns, it may be sensible to include a further note in the white space of the Return that as this would still be in contravention of current HMRC guidelines.
In addition taxpayers will still need to carefully consider their position where their business circumstances are slightly different to Arctic Systems, such as:
• partnerships
• companies where one spouse plays no or virtually no part in the business
• situations where there are contracts or arrangements in place at the outset for a lower than market salary to be drawn by the income-generating spouse.
From 5 December 2005 any reference to spouse of course also applies to registered Civil Partners.
If you think that you may be affected by these issues please get in touch with us to discuss the various options.
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VAT ON MILEAGE RECLAIMS
Important changes from 1 January 2006: VAT recovery where employers reimburse employees for road fuel
HM Revenue & Customs ('HMRC') has announced that from 1 January 2006 it will be necessary for businesses to hold VAT invoices to support their employees' claims for the reimbursement of road fuel if they wish to recover the VAT on the expense. This will be the case whether all or part of the fuel cost is repaid to the employee, including where reimbursement is made by way of a mileage allowance.
If you adopt the practice of reclaiming VAT on the fuel element of mileage charge we recommend that all employees submitting claims for road fuel in respect of journeys on and after 1 January 2006 must obtain and attach a VAT invoice covering the value of their fuel to their expense claim.
If an individual purchase of fuel does not exceed £250 (including VAT), the VAT invoice can be a 'less detailed VAT invoice'. Such invoices do not require the employer's name to be shown. (Where a reimbursement agreement is in place it appears that it is acceptable to HMRC for all such purchases to be regarded as made on the employer's behalf.)
If employees' claims for road fuel are not supported by a VAT invoice, the VAT on the expense will not be recoverable after 31 December 2005.
There is no change to the arrangements where employees purchase fuel using fuel cards or via an account operated by the employer business.
For more information contact John Cumberlidge.
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Civil Partnerships
19 December 2005
With effect from 5 December 2005, same-sex couples were able to obtain legal recognition of their relationship by registering as civil partners. For may this is a long awaited chance for formalise their long term relationship and obtain the same treatment as heterosexual couples.
However, all couples considering the move need to be aware that there are many significant changes that follow on from making such a commitment. In legal terms, the arrangement is in many ways analogous to marriage - for example, it ends only on death, dissolution or annulment. Unsurprisingly, HM Revenue and Customs have confirmed that registered civil partners will be treated as married couples for tax purposes.
The positive side of this - for example, the extension of the inter-spouse exemptions for Inheritance Tax, Capital Gains Tax and Stamp Duty Land Tax - has been widely welcomed. However, while we would not suggest that tax should be a deciding factor in considering whether to formalise any relationship, those who intend registering under the Civil Partnership Act would be wise to consider the possible downside as well. If appropriate, they should consider re-structuring their financial affairs prior to changing their legal status.
The 'bad-news' includes:
• The extension of the Inheritance Tax and Capital Gains Tax anti-avoidance rules that apply to married couples;
• The extension of the anti-avoidance legislation relating to the transfer of assets abroad;
• For the purposes of Capital Gains Tax, principal private residence relief will apply to only one property owned by a couple (rather than two if unregistered);
• A registered partner will be regarded as an 'associate' when it comes to determining the control of a company. This could be a disaster in connection with employee share schemes or EIS relief;
• They will also become a 'connected person' when it come to Capital Gains Tax.
Those couples who wish to live together without having their relationship formally recognised by the state will continue to face one system in respect of factors such as benefits and tax credits and another for capital taxes and transfers.
If you are contemplating either marriage or the registration of a civil partnership and you have significant personal assets, have created or benefit from a trust arrangement (particularly one with a foreign dimension) or own a sizeable stake in a family business, we strongly advise you to take professional advice first.
For a positive discussion of the potential impact contact us.
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