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