Experts disappointed at new Revenue guidance

The professional bodies and leading practitioners have expressed disappointment at the new Inland Revenue guidance on the Section 660 affecting married couple's businesses, published on 18 November.

This legislation particularly affects small husband and wife businesses and was the subject of a recent test case (Arctic Systems: Geoff and Diane Jones). Although the Revenue won this case, the decision itself was the subject of some controversy as the two Commissioners disagreed with each other on virtually every case including the final outcome.

Some experts have argued that the decision is questionable, as the senior Commissioner's vote overruled that of her colleague. Nevertheless, the Revenue has used this case as part of its new guidance, without reference to the split decision. Also, Special Commissioners' decisions, while providing guidance on specific cases, do not set over-riding precedents. It is likely that the Arctic case will be appealed.

In the meantime, the professionals are unhappy with the latest Revenue guidance, which has failed to deal with the grey areas and still leaves small businesses and their advisers facing an uncertain tax position.

'Sun burnt zebra' - CIOT

John Beattie, President of the Chartered Institute of Taxation (CIOT), said: "The professional bodies have been requesting further and better guidance from the Inland Revenue on key issues for over a year. The ‘new’ guide to the settlements legislation, published last week, consists almost entirely of repackaged earlier comments and does not address the key areas of uncertainty which we have repeatedly highlighted.

"We have read it from cover to cover, but it deals only with the black and white and not with the important grey areas, which remain just as murky as before. After all this time, we hoped for more than a sunburnt zebra."

Disappointing - Ernst & Young

Kevin Miller of accountants Ernst & Young said: "The document is disappointing. It is long on pages and short on new information, being mainly a reworking of earlier guidance and examples. The only new content relates to:

• whether changing circumstances can affect whether there is a settlement or not - and the answer to this question is far from clear
  
• the impact of the Jones v Garnett decision - where the Revenue fails to acknowledge that the Commissioners were divided on the key issues,
  
• what is meant by a market salary - the Revenue appear to be saying that an arm's length approach is required, validated in a similar way to transfer pricing for companies; and
  
• advice on using the white space in the self assessment returns, if the tax payer disagrees with the Revenue's view.

"The decision in Jones v Garnett has not made the issues any easier to understand and apply and this guidance will be of marginal additional help to taxpayers or their advisers."

Uncertainty and confusion - Qdos

Linda Eales of Qdos Consulting said: "It should be noted that the guidance is only 'an expression of the views and practice of the Inland Revenue'.

"The worrying factor is that if you do not agree with their interpretation you have to point it out to them on your self-assessment tax return, which will lead to an Inland Revenue investigation.

"The Inland Revenue has given examples of where they consider the legislation to apply or not to apply.

"They have compared their Example 11 to the Jones case, which in my opinion it is not reflective of all the relevant facts of the case. No conclusion should be made from a special commissioners decision as such cases do not set a precedence, especially if the decision itself is flawed.

"In my opinion the guide will still lead to uncertainty and confusion amongst practitioner's and the humble taxpayer."

100,000s of small businesses at risk - ICAEW

The tax representative bodies have issued joint guidance to their members about how to cope with this complex area. Amongst the advice they offer is a recommendation that taxpayers who are potentially affected by the new rules protect themselves against the possibility of a future attack on their business structure by the Inland Revenue and submit detailed information with their tax returns, including copies of articles of association and a summary of how the business operates.

Speaking on behalf of the ICAEW, the Chairman of the Tax Faculty, Mark Lee, said: "It is a great shame that we feel compelled to recommend that this level of additional paperwork be submitted. Without suitable assurance from the Inland Revenue on key issues we believe it is important that taxpayers can obtain some comfort that back tax claims will not be made up to six years in the future. We are also disappointed that this approach is likely to militate against the ability to e-file in these types of cases.

"We have made every effort to obtain clarification from the Revenue as to which of the hundreds of thousands of small businesses are at risk of attack.

"All such taxpayers deserve protection from subsequent ‘discovery’ assessments in connection with the settlements legislation. Understandably our members cannot wait any longer for guidance on such matters. They want to help their clients file their tax returns well before the 31 January deadline."