First real test of Section 660 begins

The first real test of Section 660 - the so-called business tax between family and friends - is due to start before the Special Commissioners today (June 14, 2004).

The case involves Arctic Systems, an IT consultancy set up by Geoff Jones and his wife Diane. The Inland 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.

Kevin Miller, UKTECH's tax expert, is following events at the Commissioners and will be reporting on the proceeding on UKTECH during the next few days. (www.UKTECH)

Section 660

Section 660 is a highly controversial interpretation of an old law by the Revenue, which has been widely condemned by the professional bodies. But, to date, the Revenue and the Government have shown no indication of backing down. This case is the first real test of the Revenue's approach.

The Revenue is trying to claim that in the case of a husband and wife in business, 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 by paying dividends according to shareholding split means that money goes to the 'non-fee-earner', 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.

Because the Revenue is applying this retrospectively, the tax demand can be back-dated for six years, amounting to £42,000 - which is what has happened in the Arctic case.

The legal team for Arctic 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.