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Small, family-owned businesses won a significant reprieve when the Court of Appeal overturned an earlier High Court decision that could have cost them hundreds of millions of pounds in backdated tax.

But the government on Thursday night was considering legal changes in response to the ruling. Revenue & Customs said: “We will act as soon as possible to ensure the settlements legislation will be applied to the small number of companies who are unfairly exploiting the system to avoid paying their fair share of tax.”

The legal dispute centred on a small information technology business, Arctic Systems, owned by Geoff Jones and his wife, Diana – which had, in effect, become a test-case for the tax treatment of a corporate structure used by thousands of other husband-and-wife businesses.

Both a specialist tax tribunal and a High Court judge had accepted the tax authorities’ argument that Arctic’s set-up amounted to an “arrangement” under the so-called settlement provisions in the 1988 Taxes Act.

Accordingly, income from dividends received by the non-earning or low-earning spouse had to be taxed at the same rate as the main earner’s income.

For the Joneses alone, this meant a retrospective tax bill of £42,000, while hundreds of millions of pounds were likely to be at stake overall.

he Revenue estimated that about 30,000 businesses were affected, each with a disputed tax bill of up to £8,000 in any year. In some cases, it could have demanded extra tax for previous years, as far back as six years ago.

But on Thursday, three Court of Appeal judges overruled that decision by allowing the Joneses’ appeal and also suggested the Revenue was pushing out the boundaries of the tax rules.

Copyright The Financial Times Limited 2019. All rights reserved.

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