by ANDREW LEVY – More by this author »
Last updated at 20:01pm on 25th July 2007

A couple who run a small business won a legal victory yesterday that could cost the taxman £1billion a year.

Information technology consultant Geoff Jones and his wife Diana have fought a six-year court battle to claw back a levy on “dividend”payments.

Their success struck a blow for around 300,000 small firms and could have major repercussions.

The couple won such widespread support for their case that donations flooded in to help them fight the Revenue’s “married couple’s business tax”.

The dispute between HM Revenue and Customs and Arctic Systems, an IT consultancy in Pulborough, West Sussex, set up by Mr and Mrs Jones, broke out in 1992.

The couple each owned a 50 per cent share and the dispute centred on a £25,767 dividend payment made to 53-year-old Mrs Jones during 1999-2000.

stealth tax coupleVictory: Diana and Geoff Jones

As company secretary, she was responsible for the managerial and administrative side of the business while Mr Jones was the sole director and fee-earner.

Because she was a lower-rate taxpayer, the payment to her was a tax-efficient way of taking money from the company.

But the Revenue insisted that dividend income received by a non fee-earning spouse should be taxed at the same level as the main feeearner, who typically pays 40 per cent.

Its lawyers argued that 50-year-old Mr Jones was taking an inadequate salary from the business, leaving “excessive reserves” which were then paid as dividends to Mrs Jones.

The couple were horrified to learn after an investigation that they were being billed for £42,000 in backdated tax over a six-year period. They lodged an appeal, but their case was rejected by the Special Commissioners in 2004 and again at the High Court the following year.

But the fight went on and in December 2005 the Court of Appeal ruled unanimously that they were not in the wrong.

Importantly, the judges said a wife’s role in her husband’s business should be recognised. The Revenue then took the case to the House of Lords – where it was rebuffed yesterday in a unanimous decision by five Law Lords.

Last night, the couple said they are “absolutely delighted” by the result.

“In my view this was just another stealth tax,” said Mr Jones.

“But if we had not had financial support to fight this case, which has dragged on for a preposterous six years, we would have had to cave in and the taxman would have won.

“Today’s ruling shows the system works. We have been vindicated.”

After the judgment, Bill Knox of the Federation of Small Businesses, described the Revenue’s conduct as “utterly shameful”.

“Hounding hard-working small business owners in this way sullies the good name of the Revenue,” he said.

“The family tax arrangement that the Joneses had in place has been around for years and for the Revenue to suddenly decide to clamp down without warning was totally unjustified.”

Paula Tallon, of leading tax adviser Chiltern, said family businesses already out of pocket after this year’s Budget would breathe “a big sigh of relief”.

The Revenue is “considering details” of the ruling, but an appeal to European courts is not an option as this is not a Europe-wide issue.