TaxAdministrationThe last word on family matters?

The last word on family matters?

Last week, the Inland Revenue published new guidance on settlements legislation, section 660, the so-called husband and wife tax, in a move it clearly hopes will put the issue to bed.

High-ranking Revenue officials are quietly seething about the amount of noise that the legislation, and in particular a recent test case involving a small IT company called Arctic Systems, has created.

In September, Geoff and Diana Jones, owners of Arctic, came in front of Revenue special commissioners, to contest a £6,000 bill – reduced from £42,000 – they had been handed.

They lost, although the Joneses, backed by the Professional Contractor’s Group, confirmed their intention to appeal the decision last week.

But according to the Revenue, few small businesses have anything to worry about. It claims that a maximum of 30,000 businesses could be affected – and by this the Revenue means looking at their files, rather than launching an investigation.

Currently, there are a mere 100 section 660 cases. On top of this, the Revenue refuses to see Arctic Systems’ as a ‘test case’. It says it is clear about the 70-year-old legislation and what it means.

Unfortunately, nobody else seems to be. Even the special commissioners who ruled on the Arctic case were divided, with one backing the Revenue and one backing the taxpayer.

Recently published Revenue guidance is an attempt to finally lay out who will and who won’t be affected by the legislation. And the Revenue believes it has a simple test that will help businesses figure out whether or not they should be worried.

‘Take a step back and consider, “if I was making these arrangements with an independent third party would I be paying them these wages or dividends, or sharing my partnership profits in this way?” If the answer is no, then the legislation probably applies,’ states the guidance.

BDO Stoy Hayward agrees with the Revenue, when it says that the legislation will not affect a great number of businesses. Stephen Herring, a tax partner at the top-10 firm, says that ‘relatively few family companies will be affected and the Revenue’s stance has not in fact changed’. This, it seems, is a relatively isolated belief.

The Professional Contractors’ Group issued a statement to express its ‘frustration’ with the Revenue guidance. ‘This guide fails to address key elements of the vagueness surrounding this measure and does little to mitigate the uncertainty for small family business owners,’ said PCG chairman Simon Juden.

Rather than the 30,000 businesses that could be affected, the PCG puts the figure at closer to 200,000.

The PCG has even gone as far as to develop what they call ‘Sara’, or self-assessment risk analysis. Sara is an online tool that freelancers can use to assess their risk of being attacked by the Revenue under Section 660.

The guidance should allow taxpayers to do that themselves, however. It includes examples of when the legislation would apply, allowing business owners a sneak preview of the minds of Revenue inspectors.

Revenue officials say that the legislation, contrary to what some commentators claim, has not been reinterpreted. They say the introduction of individual taxation in 1990 moved the goalposts and meant that more businesses would use family members to leak profits out of a company without paying the right tax.

‘The settlements legislation is anti-avoidance legislation intended to prevent an individual from gaining a tax advantage by making arrangements which divert his or her income to another person who is liable at a lower rate of tax or is not liable to income tax,’ the guidance says.

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