Small operators face crackdown on tax…

Small hotel and restaurant owners who pay dividends to share-owning family members to keep their tax bills down are facing a crackdown by the Inland Revenue.

Mark Lee, director of tax services at tax consultancy WJB Chiltern, said the Inland Revenue was reinterpreting section 660a of the Income and Corporation Tax Act 1988 following the 2003 budget.

It will be targeting small businesses where the main earner draws a low salary and pays out the rest of the profits as dividends to a spouse or unmarried partner, who then pays tax at a lower rate.

The Inland Revenue will also challenge partnership businesses where one partner does all the work but the profits are shared between the two.

If successful in its challenge, the Inland Revenue will claim that the half that has been earned by the non-working partner should be taxed as if it has been earned by the working member of the partnership.

In such cases, the earner could face a demand for up to six years of retrospective tax.

David Wood, chief executive of the British Association of Hospitality Accountants, said he imagined such a business structure was "fairly prevalent" among smaller companies.

"It could be immensely damaging to the individual, and thus to the company, and pose a threat to the number and diversity of small operators," he predicted.

Wood added that such a set-up was usually based on a decision to create "an acceptable life and an acceptable profit", rather than to make enormous sums of money.

If successfully challenged, Wood continued, operators might question whether the marginal profits they were making were worthwhile.

By Angela Frewin