Services: Trouble and strife with S660A

The Inland Revenue has now reacted to the decision of the special commissioners in the Arctic Systems case, a decision which, if left unchallenged, could cost Britain’s 200,000 small family-owned companies anything up to £1bn. The Revenue has issued a 49-page guide for small firms and their advisers on how it interprets the long-standing settlements legislation.

The Arctic Systems case, of course, centred on the issue of what is acceptable tax planning for husband and wife companies. The specific point at issue was whether dividends paid by the company to the spouse of the principal partner were caught by the law’s curbs on gaining tax advantage by diverting income to another party.

The commissioners ruled that the restrictions imposed by the settlements legislation can apply to a husband and wife company where shares are owned by each partner and all are individually subscribed.

It is widely understood that an arrangement whereby a spouse who contributes comparatively little to a business, yet receives substantial dividends from the company will be deemed to constitute tax avoidance.

Yet in the Arctic Systems case, the spouse was far from being a passive force in the company. As well as being the company secretary, she regularly discussed business matters with her husband (the sole director). She undertook all the book-keeping work, organised the company’s insurance, prepared VAT returns and did the company’s invoicing. She signed off the company’s accounts and discussed with her husband new contracts and contract renewals.

Despite this, the commissioners held that the spouse’s efforts were properly rewarded by a salary, and that the profits of the company, out of which the dividends were paid, were earned as the result of the efforts of the husband, the sole director.

The new Revenue guidance advises that, in cases similar to Arctic Systems and where taxpayers believe the settlements restrictions do not apply, they should include on their self-assessment form an explanation of why they think that the restrictions do not apply. They should also acknowledge, when completing their form, that it has not been prepared in accordance with Revenue guidance on the matter.

Given, though, that an appeal to the courts against the commissioners’ ruling has already been lodged, the matter is unlikely to be finally determined for some time.

Another no less pressing issue, arises out of the recent case. This concerns the way in which the commissioners’ decision was reached. The case was heard by two commissioners. Since the two could not agree, the senior commissioner was forced to use her casting vote to decide the case for the Revenue.

But what is the point in two people sitting in judgement on such an important case if one has the authority to overrule the other? Surely it would be fairer to the taxpayer, and more authoritative for all concerned, if it were possible to reach a majority decision.

John Davies is head of business law at ACCA. Do you or a client have a problem? Email your questions to and we will attempt to get them answered.

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