Government told 'don't knee-jerk' on S660
The Chartered Institute of Taxation (CIOT) has called on the Government not to produce a 'knee-jerk' reaction in the next Budget if the decision in the recent Section 660 Special Commissioners case goes against it.
The comments from the CIOT form part of CIOT's submission to the Government and Revenue departments summarising the issues the CIOT considers should be included in the 2005 Finance Bill.
The CIOT was among several professional bodies who raised concerns about the Revenue's interpretation of the settlements legislation, Section 660, the so-called married couple's business tax.
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.
The Special Commissioners recently heard the case of Arctic Systems, an IT consultancy set up by Geoff Jones and his wife Diane. This is the first real test of Section 660 and a decision is expected shortly.
The CIOT made reference to this case in its Budget submission. It called on the Government to sweep up any perceived anomalies in the taxation of these businesses as part of the Government's wider review into owner-managed companies (para 5.95 of Red Book), rather than 'knee-jerk' with short-term measures.
The CIOT's submission said:
The application of the settlements legislation to small businesses
We are still concerned that small businesses cannot be certain of their income for self-assessment purposes for 2003/04, and would like to see answers to the questions put to the Revenue team by a consortium of the professional bodies last December.
We realise that the decision in the recent Special Commissioners' case may influence the answers to some of these questions, but there are others which could be addressed now, and all of them will need answers if the case goes to appeal, when we are likely to be beyond the 2003/04 return dates.
We would like to add that, should there be an adverse decision for the Revenue in the recent case, we hope that this will not produce a 'knee-jerk' reaction in Finance Bill 2005. With the announcement of a review of the taxation of owner managed businesses (para 5.95 of the Red Book 2004), we trust that any perceived anomalies in the taxation of such businesses will be swept up in that review rather than by introducing any short-term measures in the meantime. We are preparing a paper following para 5.95 considering the issues in this area, and hope to forward that to the Revenue shortly.