In a move so far unseen, the Revenue is now targeting much larger companies under a rule which allowed company directors to save tax by paying a dividend to their spouses.
The new development has caused consternation among accountants, tax experts and businessmen because of the likelihood of fresh tax bills instead of tax savings.
One accountant is already reporting a client facing an extra bill for £38,000 because of Revenue action and has concerns that other clients will suffer a similar fate.
The development has emerged in the ongoing saga involving the interpretation of controversial tax rule S660A. Previously, one-man-band companies would save on tax by issuing shares to a spouse and then paying a dividend.
The Revenue has already begun reclaiming tax going back six years in some cases.
Though the Revenue has recently targeted one man bands under the rule it has now focused on businesses using ‘management companies’ set up to run a group of small enterprises – an arrangement common among SMEs. If a spouse holds a share, and receives a dividend from the management company, the Revenue is now looking to recoup the tax.
John Whiting, tax partner at Big Four firm Pricewaterhouse-Coopers and tax spokesman for the Chartered Institute of Taxation, said: ‘This seems a surprising and worrying extension of the Revenue’s Section 660 attack which is already causing concerns.’
The Professional Contractors Group, a long-time campaigner against what it sees as unfair tax rules affecting small businesses, said the management companies are used for ‘simplicity’ and not tax avoidance. ‘They can’t claim they are closing a tax loophole,’ said PCG director Gareth Williams.
Peter Mitchell, chairman of the Society of Professional Accountants, – formally the Small Practitioners Association – said he had offered advice to set up management companies but only ever for the sake of simplicity.
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