Date set for Section 660 test

The first real test of the Revenue's approach to Section 660 - the so-called tax on small business owned by family and friends - will be before the Special Commissioners on June 14, 2004.

The case is that of an IT consulting business, Arctic Systems run by Geoff Jones and his wife Diana. The Revenue is trying to apply 'the settlements legislation' covering the last six years, which, if they succeed, could leave Mr and Mrs Jones facing a tax bill of about £42,000 - and could have wide implications for thousands of family-owned businesses.

Section 660

Section 660 has proved to be a highly controversial interpretation of an old law by the Revenue. It has led to heated exchanges with the professional bodies, but the Revenue and the Government have shown no indication of backing down.

The Revenue takes the case of a husband and wife in business together. It claims that, even if a couple draw salaries from the business and contribute to it in different ways, one party is the business's fee-earner and therefore the business's profits should be his or hers and that they are using the dividend route to give the wife/husband income, which would otherwise be the main fee-earner's.

From that, the Revenue concludes that this is 'avoiding tax' because the income from the dividends has been taxed at partner's basic rate of income tax rather than the fee-earner's higher rate.

In practice this can mean a Revenue demand back-dated for six years for £42,000 - which is what has happened in the Arctic case.

The case was originally expected to go to the Special Commissioners earlier in the year. The legal team will be led by Malcolm Gammie QC, a tax expert and Fellow of the Chartered Institute of Taxation, and the case is being supported by the Professional Contractors Group.

Resource centre

UKTECH has followed the Section 660 issue closely and has a free information resource centre, available by clicking here: www.UKTECH/section660