As the furore over the tax measure continues to intensify, it has emerged that Arctic Systems, a small IT consultancy facing a £42,000 retrospective tax bill, will be the first to mount a legal challenge to the Inland Revenue.
The company’s owner Geoff Jones faces bankruptcy unless he can reverse the tax demand.
The news followed an unprecedented meeting last week between the Revenue and accountancy bodies determined to see its position change.
Jones is being supported by Qdos Consulting, one of the main tax advisers to the Professional Contractors Group, which is dealing with a dozen cases similar to Arctic Systems’.
Denis Mansbridge, senior tax consultant at Qdos, said: ‘We have had counsel opinion. The Revenue seems to have a very blinkered approach – it hasn’t really addressed the right to income situation.’
He added that it was believed Arctic Systems ‘chances were very good’.
The S660 tax rules seek to deal with shares and dividends earned by the spouse of a small company owner. Controversy blew up last April when the Revenue issued guidance that gave a much harsher interpretation of the rule.
Qdos has been in contact with PCG members who have been rushing to seek advice after being in contact with the Revenue regarding S660.
Anne Redston, tax partner at Big Four firm Ernst & Young, said she was ‘optimistic’ about the court challenge and that she ‘believed they would win’. Redston added that, if the Revenue loses the case, it ‘will have to review its interpretation’ and revert to using it only in extreme cases.
Howard Flight, shadow chief secretary to the Treasury, has taken up the battle on behalf of Jones, his constituent. ‘As you will be aware, the profession and the professional bodies regard the Jones case as potentially an important “test case”,’ he wrote in a letter to Revenue chairman, Sir Nick Montagu, sent last week.
Hundreds of thousands of companies are structured in the same way as Arctic Systems.
A spokeswoman for the Revenue said it could not comment on whether it would have to change its interpretation of the legislation should a court case be lost because it is a matter for ministers.
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