What is S660a?
Section 660a of the Income and Corporation taxes Act 1988, also known
as the "settlements legislation", is a little-known tax rule
under which the Inland Revenue has recently attacked a number of PCG members.
The Revenue has argued that, under the settlements legislation, dividend
income received by a non-fee-earning wife should be taxed as her husbands
income, resulting in tax bills, backdated over 6 years, of up to £40,000.
For a full explanation of S660a, see our
technical briefing, by Ernst and Young tax expert Anne Redston.
Why is Section 660a in the news?
The settlements legislation is not new, it has been in existence since
the 1930s, though the regulations changed in 1988, and again in 1995.
The generally accepted position has been that it would not apply to a
husband and wife owning ordinary shares in a family business. However
over the last few years the Revenue has begun to adopt a different interpretation,
and has started issuing back-dated tax demands. PCG has recently begun
to highlight this issue, and as a result there have been a number of articles
in the national press, and specialist tax journals.
Am I at risk under Section 660a?
The recent application of S660 to the circumstances of PCG members is
in dispute, and is not supported by a single case at the tax commissioners.
So when the smoke clears, maybe no one will be at risk. But, based on
recent investigations, the Revenue believes S660a may apply if:
- Your spouse owns ordinary shares in your company;
- The amounts of money you and your spouse bring in to the company
are not in proportion to the number of shares you own. (eg if your wife
owns 50% of the shares, but earns less than 50% of the fees);
- You ever pay dividends.
The PCG and accountax have developed an online self assessment risk assessment
tool to help you assess your position. Click here
to out find more about this service.
Additional risk factors would be if you have ever transferred
shares between you, or if the company has negligible capital assets.
Any kind of company could be affected, it would not have to be a service
company, and this has nothing to do with your IR35 status.
Should I Panic?
If you think the above describes your own situation, there is no need
to panic. The number of investigations is currently low. We are seeing
only two PCG members per year investigated under S660, and the Revenue
says there have historically only been 50 cases per year in the UK.
Despite the fact that potentially hundreds of thousands of small businesses
could be affected, it is unlikely that the Revenue has the resources to
launch a widespread attack, and although it is very possible that the
numbers will grow from the current levels, we have no reason to believe
the numbers are increasing.
The Revenue is issuing tax bills back-dated over 6 years, plus interest,
which can result in a very large bill. However there is often an agreed
settlement for a fraction of that amount. It may be because the cost of
paying up is usually less than the cost of going to the tax commissioners
(£2-3,000) that no case has yet been tested.
What should I do if I am investigated?
If you get a query from the Revenue relating to a spouses shareholding,
especially in conjunction with questions about how much work the spouse
does, be aware this may be the beginning of a Section 660a investigation.
Use the PCG Tax
helpline immediately to contact Abbey Tax for advice.
A letter from the Revenue expressing dissatisfaction or indicating a further
investigation will be an insured event under the PCG Tax Investigation
Insurance (which you have free with your membership), and you will be
fully covered for the costs of a S660a investigation, as for any other
aspect of your taxes. (Remember, however, that the PCG TII insurance covers
investigation costs, but not any tax or penalties you may ultimately be
found liable for).
What is PCG doing?
PCG believes this application of S660a is legally wrong and quite unjustified.
PCG has made representations at a senior level in the Revenue, and has
written
to the Paymaster General and to other Government departments about
our concerns.
PCG is also supporting members under S660a investigation, and is preparing
to take a case to the Special Commissioners. No PCG member has settled
a S660 case since we became involved.
We hope that either the Government will instruct the Revenue to desist
with this misguided approach, or that a success at the tax commissioners
will put a stop to it.
What else can I do?
If you think your business may be affected by Section 660, you can:
- Write to your MP. Make the letter relevant to your own circumstances.
Explain what contribution your spouse makes to the business (whether
doing the books, taking legal responsibility as a director or company
secretary) and why they have every right to their share in the company.
You may also like to use the points in PCG's
letter to the Paymaster General or enclose a copy.
- Discuss your arrangements with your accountant. Peter
Vaines' article suggests there may be ways to avoid S660a attacks
in future.
- Keep up with developments on the PCG news pages, and forum.
News: http://www.pcg.org.uk/LatestNews/index.html
Forum: http://www.pcg.org.uk/threads
|