Section 660 - what’s it all about?

The s660 rules (or settlements legislation) have been around for over 70 years. The original rules stop you giving your income or assets to someone else, in an effort to reduce your overall tax bill. This is called a “settlement”, and the aim of the legislation is to stop people settling their income on another person who pays tax at a lower rate.

For Contractors running their own Limited Company, the Contractor may, for example, own an equal number of shares with their spouse, with the Contractor being the main fee-earner and the other responsible for relatively little or no fee income. By paying out the profits by way of dividend, income earned by the Contractor can be partly received and taxed on the other resulting in an overall saving on tax since there will be two lots of personal allowance and basic rate tax band to use up. This is currently a very common scenario with thousands of husband and wife companies using what had always been deemed acceptable tax planning.

The last few years has seen uncertainty and confusion surrounding the taxation of family businesses with the case of Arctic Systems Ltd (Geoff and Diana Jones). The Revenue’s argument was that if the wifes income comes mainly from the husband’s work, then he has given her, a right to his income i.e. the dividends that she gets on her shares in the Company, and therefore this should fall under S660 as a settlement.

Arctic Systems initially lost their case and their High Court appeal, and then in a third hearing, the Court of Appeal found in favour of the Jones’, prompting HMRC to take the case to the House of Lords. In this final hearing the House of Lords roundly rejected the appeal by HMRC.

The Governments almost immediate response to this verdict was to announce plans to bring forward ‘income splitting’ legislation to nullify the tax advantages that had been gained by the Jones’ and thousands of others, but crucially this could not be retrospective.

The Government published draft legislation in December 2007, which “focused specifically on income shifting arrangements that make use of companies or partnerships to gain a tax advantage.” This draft legislation stated the new rules would not apply if there was a “genuine commercial arrangement” and HMRC believes tax reduction was “not the main or one of the main purposes” of the arrangement.

Otherwise the rules, will apply where one person ‘shifts’ trade or business income to another, with the effect being that less income tax is paid. Under the legislation, taxpayers must detail how much income they have ‘foregone’ by making a comparison with how the business would have operated, had all their work been done independently on a fully commercial basis.

However, the implementation of this legislation have been delayed, and there is no sign of it being implemented within the next budget in 2010, leaving the way open for Husband and Wife Companies to continue to reduce the tax burden on their family.

ICS Accounting Limited is an Accountancy Company with many years experience, you can find out more about the services that they offer by clicking here http://www.icsaccounting.co.uk or email them (JavaScript must be enabled to view this email address) to contact one of their advisors directly.

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