Section 660a and Income Shifting

In July 2007 the HM Revenue and Customs lost its 4 year ‘Section 660a’ test case against Arctic Systems Limited in which it attempted to prevent contractors from distributing dividend income to members of their family who worked in the business. Any contractor celebrations however were short lived as the very next day the HM Revenue and Customs announced plans to change the law to prevent what it considers Income Shifting.

With the new legislation the Government will attempt to challenge contractors arranging their tax affairs to shift part of their income to another person who is subject to a lower rate of taxation. Any new ‘Income Shifting’ legislation is expected to take effect from the 2009/2010 tax year.

If you’re a freelance contractor call Commonwealth Contractors now on0800 294 4388 to discuss your contracting options, including umbrella company solutions and going into business with your own limited company. To find out how we can help call now on 0800 294 4388 or Submit your details and we will get right back to you.

The Arctic Systems Case

If the HM Revenue and Customs had won its Section 660a test case there would have been profound repercussions for thousands of freelance contractors running their own Limited Company Consultancy. Contractors may have been forced to pay thousands of pounds of back dated tax, possibly leading to financial ruin. Fortunately however after numerous appeals the House of Lords ruled in their favour of Arctic Systems Limited.

For those unaware Arctic Systems Limited was an IT consultancy jointly owned Mr & Mrs Jones, (husband and wife). Mr Jones was the sole director while Mrs Jones was the company secretary. The company provided consultancy services which were carried out only by Mr Jones while Mrs Jones performed company secretarial and administrative duties. There were no other business activities in the company. Both Mr and Mrs Jones were paid modest salaries but were also paid more substantial dividends. These dividends were paid equally to Mr and Mrs Jones.

The Special Commissioners decided that the dividend income paid to the Mrs Jones should be treated as the income of Mr Jones under ICTA 1988 s660A. For more information on ICTA 1988 s660a see ‘Section 660 Background’.

The outcome of the Section 660a case hinged on the fact that Mrs Jones held Ordinary Shares (giving both income and capital participation) in the Limited Company, rather than preference shares or other kinds of share capital. This meant the HM Revenue and Customs were unable to claim that Mrs Jones’s share of company income could not be treated as dividend income.

To find out about Umbrella Company solutions and going into business a Limited Company call now on 0800 294 4388 or submit your details and we will get right back to you

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