Government small business advice at odds with Revenue's Section 660 line

A Government website is advising small businesses that they can use regular share dividends to 'top up' the remuneration of family members.

The advice on Business Links flies in the face of recent action taken by the Inland Revenue to clamp down on family run businesses who use dividends to remunerate spouses.

The Special Commissioners recently found in favour of the Inland Revenue in the 'landmark' Section 660 case involving IT consultancy Arctic Systems owned by Geoff and Diane Jones.

As a result of this approach by the Revenue, tens of thousands of small businesses could face huge tax bills because they have arranged their businesses in this manner – either on the advice of their accountants – or, as discovered by a member of the UKTECH network, it seems the Government's small business site is also offering this advice.

Government advice

The accountancy bodies and other professional organisations have argued that this is a new – and unfair interpretation – of an old law which was never intended for this purpose.

However, the Inland Revenue and its political masters at the Treasury have countered that there is nothing new in this approach and accountants and others should always have been aware of Section 660, the settlements legislation.

Top ups

The Business Links site is described by the Department of Trade and Industry as 'the Government site for practical business advice and help.'

It advises small businesses that:

If desired, family-members' remuneration can be topped up by other means - through regular share dividends, for example.

Business Links advice

In a section on the website, headed 'Family Run Businesses' the full text is:

Family run businesses

Pay and benefits for family members

Remuneration needn't be a thorny issue. The trick is to have a remuneration strategy which is consistent, fair and open.

Resentment and conflict tend to occur when these three attributes are missing. For example, if family members of staff are paid more than other, non-family employees for no good reason.

Family members who hold shares but who aren't active in the business may also question the remuneration of those who are.

Develop a remuneration strategy

• An individual's pay should be based on their value rather than their personal need. Look at what the market rate is for the job.
  
• Post-retirement remuneration plans should be agreed before they come into play.
  
• Family members shouldn't be lured into the business with inflated salaries. Likewise, they shouldn't need to endure unreasonably small salaries to prove their loyalty.
  
• Benefits, bonuses and incentives should be based on set criteria.
  
• Unreasonably high salaries and phantom jobs shouldn't be used to transfer tax-deductible wealth to family members.
  
• Non-family employees doing the same work as family members should receive the same remuneration.
  
• If desired, family-members' remuneration can be topped up by other means - through regular share dividends, for example.

It's important that your remuneration policy is seen to be fair. Write it down, be open about it and review it regularly.