Section 660a is generally considered to be old news right now however it was a hot topic under the old Labour Government who threatening to bring in new ‘Income Shifting’ legislation to make it more difficult for family businesses to split profits between family members in order to gain a tax advantage
Although it is unlikely that George Osborne, the Conservative Chancellor, will seek to revisit the issue any time soon if you are thinking of splitting dividend income with your spouse you should take professional advice and stay up to date with the latest Section 660 / Income Shifting news.
If you’re a highly skilled professional and you are considering going into business with your own Contractor Limited Company Commonwealth Contractors can help. We partner with Chartered Accountants who specialise in contractor accounts and can help to maximise your net contract retention.
To speak to an experienced advisor call Commonwealth Contractors now on 0800 294 4388 or Submit your Details and we will get right back to you!
Section 660a Legislation
Section 660a, is part of the settlement legislation which has existed since the 1920s. Traditionally it was used by the HM Revenue and Customs in matters of settlement of trusts. Settlements occur where a person gives another the right to income but not to underlying capital.
In 1995 Section 660 was updated when the Income Tax and Corporation Taxes Act 1988 (ICTA 1988) was updated to include Sections 660 to Sections 660g.
Not until 2003 did the HM Revenue and Customs begin to take an aggressive stance with Section 660a. They used S660a to look at the distribution of profits in family companies specifically where family members were receiving company profits but were not generating revenue for the company.
The HM Revenue and Customs took the view that this type of income division was artificial as it diverted income from a higher rate taxpayer to a lower rate tax payer in order to avoid taxes. Thus they attempted to use Section 660a to prevent a tax advantage being gained from these settlements i.e. the gift of limited company shares from one person to another to minimise tax on dividend income.
The Spouses Exemption
There is a specific exemption for spouses within Section 660a. The Section does not apply where there is an outright gift of property (i.e. Shares) from one spouse to another. However, this exemption only applies if the gift is not wholly or substantially a right to income, i.e. there must be an underlying capital value to the gift.
The HM Revenue and Customs argued that, in some cases, shares in a family business may be considered solely a right to income. The UK’s professional accounting bodies however argued that the HM Revenue and Customs interpretation was wrong, especially where spouses were involved.
The Arctic Systems Case
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.
If the HMRC had won the 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.
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
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. Fortunately however the Labour Government went on to lose the following General Election so as yet no ‘Income Shifting’ legislation has been introduced.
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