The Inland Revenue (HMRC) have been trying to attack the way in which profits are shared between husband and wife in businesses where only one is the principal earner. Much of the profit is often distributed by way of dividend to both spouses, to save National Insurance costs and to take advantage of the non-earners lower rate of tax.

Arctic Systems case finally decided.

The Inland Revenue (HMRC) had been trying to attack the way in which profits are shared between husband and wife in businesses where only one is the principal earner. Much of the profit is often distributed by way of dividend to both spouses, to save National Insurance costs and to take advantage of the non-earners lower rates of tax.
HMRC had suggested that the dividends in many of these cases should be treated as belonging to, and taxed on, the principal earner. A court case under the name of Arctic Systems, dealing with this matter, had been decided in favour of HMRC.  In December 2005 the Court of Appeal overturned the ruling, confirming that small businesses are entitled to pay salaries and distribute profits in any way they choose to minimise their tax liabilities.
HMRC appealed to The House of Lords, where the case was heard in June 2007.  A unanimous decision of five law lords has now dismissed the appeal, and we can all rest a little easier because of it, not least because it shows that common sense can still prevail.