Arctic Systems Section 660 test case set for Special Commissioners

The much-awaited first real test of the Revenue's approach to Section 660 - the small business tax on families and friends - is due before the Special Commissioners in the New Year.

It is the high profile case of Arctic Systems, an IT consulting business run by Geoff Jones and his wife Diana.

The Revenue claims that, although both Mr and Mrs Jones draw salaries from the business and contribute to it in different ways, Mr Jones is the business's fee-earner and therefore the business's profits should be his and that he is using the dividend route to give his wife income, which would otherwise be his.

From that the Revenue concludes that he is avoiding tax because the income from the dividends has been taxed at his wife's basic rate of income tax rather than his higher rate.

In practice what this means for the Joneses is a Revenue demand back-dated for six years for £42,000.

Professional bodies

The Revenue's interpretation of this old 'settlements' legislation has caused uproar among professional bodies and clashes between politicians. The Revenue has recently released revised guidelines but showed little sign of backing down.

It has been generally accepted that the situation will not be clarified until there is a test case. Meanwhile, small family owned businesses have faced the uncertainty that they could be the Revenue's next target.

The case is being supported by the Professional Contractors Group and the legal team will be led by Malcolm Gammie QC, a tax expert and Fellow of the Chartered Institute of Taxation.

Details of the hearing date will be released in the New Year.

In May 2003, I wrote an article for regional newspapers about Section 660, I have reproduced it as a post below 'The Stealth Tax on Family Businesses in Your Area' by way of background.