Dawn warns nothing new in family business tax
The Section 660 legislation, the business tax between family and friends, has been around for nearly 70 years, according to Paymaster General, Dawn Primarolo.
A freelancer from the UKTECH network raised the matter with his MP, who, in turn, wrote to the Paymaster General on behalf of his constituent. In reply, Ms Primarolo poured cold water on claims that this is a new measure. Her indication that freelancers and their professional advisers should have been aware of this will raise concerns that the Inland Revenue will be looking to extract maximum tax-take and look at retrospective claims, as has been evidenced by its current approach to some existing cases.
It also raises concerns that the Revenue will claim that although many freelancers established their businesses in this way following best advice at the time, professionals should have been aware of the existence of the settlements legislation.
However, this flies in the face of the fact that the Inland Revenue felt it necessary to issue new guidance in its April 2003 Tax Bulletin to explain its current approach.
The upshot of this is that, once again, freelancers are left facing an uncertain tax regime, not just in dealing with their current and future situation, but are unsure of their past liabilities if they are in business with family members or close friends.
Letter
The text of the letter from Paymaster General, Dawn Primarolo MP, reads:
Thank you for your letter of May 7 on behalf of your constituent, Mr X, about the settlements legislation.
The settlements legislation (of which Section 660A-G Income and Corporation Taxes Act 1988 are part) is a long standing piece of legislation dating back to 1936. Nothing new was introduced in 1985: the existing legislation was simply rewritten. It prevents avoidance of tax by, for example, a tax payer with a higher rate of tax, transferring income to someone connected to them, such as a spouse, who is liable at a lower rate. The Inland Revenue is not seeking to apply the Settlements legislation to all small companies, only those entering into these arrangements to avoid tax. The cases that have been challenged by the Inland Revenue have been those where a typically higher rate tax-payer uses a company to divert income to their family members, who pay a lower rate of tax.
I can assure you that this is not a new policy nor a change of policy as has been suggested - the Inland Revenue has been applying the legislation in this way for a number of years. One of the purposes of publishing the guidance in Tax Bulletin was to enable people to judge whether or not the settlements legislation was likely to apply to them. If they consider it does apply they can put matters right without Inland Revenue intervention.
Mr X is quite right to say that the Inland Revenue can, if they find that insufficient tax has been paid, go back six years. I cannot, of course, comment on the advice given to Mr X: that is a matter between him and his professional advisers. If the Revenue do find (or if a person voluntarily discloses) that tax has been under paid then naturally that person is obliged to pay the correct amount to put themselves in the same position as someone who has not avoided tax. I hope that this clarifies the situation for Mr X.
Yours,
Dawn Primarolo MP
Paymaster General