Screw tightens on family businesses

Family-run businesses could face fresh challenges from Revenue & Customs after a High Court judgment on controversial tax legislation Section 660A handed the department another weapon in its fight against tax avoidance.

In April, High Court judge Mr Justice Park upheld the Revenue’s view that settlement rules should apply to Geoff Jones, owner of IT consultancy Arctic Systems, on dividends from the company paid to his wife.

But in the detailed judgment, published only last week, Park effectively removed an exclusion from the rules that will affect many family-run businesses with very different circumstances to those of Arctic Systems, according to tax experts at accountancy firm PKF.

‘In clarifying the application of the exemption, Mr Justice Park has given Revenue & Customs another tool to attack family companies,’ said Peter Penneycard, national director of tax at PKF. ‘Many families who have relied on the exemption to keep them outside the settlement rules will now face increased tax bills.’

There is an exemption from the settlement rules when one spouse gifts outright an income-producing asset to the other, as long as the asset is more than just a ‘right to income’.

Mr Justice Park clarified the issue by saying that the exemption does not apply where the settlement includes other elements, such as the main earner taking a low salary to save tax through paying dividends.

‘Revenue & Customs is now likely to argue in most family company cases, where shares have been gifted, that there were other elements of an arrangement between spouses, and therefore the settlement rules apply,’ PKF said.

Arctic Systems was faced with a £6,000 tax bill after the Revenue applied the settlements legislation to the company. However, if it had been retrospective, the bill could have reached as high as £42,000.

The Revenue made its original decision on S660A in a test case in September last year. The Revenue then advised that fewer than 30,000 businesses could potentially be examined under the legislation, but that a mere 100 cases were at that time being investigated.

It was at great pains to emphasise that it did not expect that figure to rise ‘much’, although Mr Justice Park’s ruling could change that.

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