Primarolo signals Section 660 back tax as Revenue promises February guidance

The Paymaster General, Dawn Primarolo, gave a clear indication that she sees Section 660, the so-called business tax between family and friends, as tax avoidance including earlier years when the tax wasn't paid, sparking fears the Revenue would pursue backdated bills.

She also said that the Revenue would be issuing more guidance on it in February.

LibDem MP Brian Cotter and spokesman on small business issues, raised a number of written questions with the Treasury. The answers will bring little comfort to freelancers in business with their partners who face the uncertainty and what many perceive as unfairness of the latest 'stealth tax'.

Notify small businesses

Brian Cotter began by asking what measures have been used by the Inland Revenue to notify small businesses of their obligations under section 660A of the Income and Corporation Taxes Act 1988; and if he (the Chancellor) will make a statement.

Dawn Primarolo replied: The Inland Revenue's Trusts Settlements and Estates Manual is publicly available and contains some guidance on this. Further detailed guidance (with examples) of the interpretation and application of Section 660A Income and Corporation Taxes Act 1988 was published in Tax Bulletin 64 in April 2003 and was followed by further explanations and examples in November and December 2003. More guidance will be in the February edition of Tax Bulletin.

How much revenue?

Brian Cotter tried to quantify the scale of Section 660. He asked how much revenue has been raised under section 660A of the Income and Corporation Taxes Act 1988 in each of the past six years.

The reply was short. Ms Primarolo said: The information is not available.

Avoid tax

Brian Cotter then asked if the Chancellor of the Exchequer would make a statement on the impact that backdating payments under section 660A of the Income and Corporation Taxes Act 1988 will have on small businesses.

It was in reply to that question that Ms Primarolo alluded to her perception that Section 660 is a tax avoidance measure - now and in the past.

She replied: Section 660A Income and Corporation Taxes Act 1988 applies to individuals. By paying tax under this section for earlier years individuals are simply paying the tax that would have been due if they had not sought to avoid tax.

Inquiries

Brian Cotter tried to find out how many inquiries the Inland Revenue has received from small businesses in regard to section 660A of the Income and Corporation Taxes Act 1988.

Another short reply from Ms Primarolo: The information is not available.

Companies

Brian Cotter tried to establish how many companies have (a) been investigated for possible contraventions of section 660A of the Income and Corporation Taxes Act 1988 and (b) had action taken against them as a result in each year that the Act has been in operation.

Ms Primarolo exploited a loophole in his question: None. Section 660A Income and Corporation Taxes Act 1988 applies to individuals not companies.

Information available

Mr Cotter also asked what recent information has been made available to small businesses about how section 660A of the Income and Corporation Taxes Act 1988 will be applied; and if he (the Chancellor) will make a statement.

Ms Primarolo replied: The Inland Revenue's Trusts Settlements and Estates Manual is publicly available and contains some guidance on this. Further detailed guidance (with examples) of the interpretation and application of Section 660A Income and Corporation Taxes Act 1988 was published in Tax Bulletin 64 in April 2003 and was followed by further explanations and examples in November and December 2003. More guidance will be in the February edition of Tax Bulletin.

Section 660

Section 660 has proved to be a highly controversial interpretation of an old law by the Revenue. It has led to heated exchanges with the professional bodies, but the Revenue and its political masters show no indication of backing down.

The Revenue takes the case of a husband and wife in business together. It claims that, 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 that they are using the dividend route to give the wife/husband income, 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.

In practice this can mean a Revenue demand back-dated for six years for £42,000.