Tax bodies renew Section 660A challenge

Back in September we saw seven professional bodies join together in an unprecedented move to flag their deep concerns about the way in which the Inland Revenue was interpreting the anti tax avoidance settlement legislation Section 660A in the context of small family businesses.

On 7 November I reported that the Inland Revenue had responded to these concerns by, in effect, telling the bodies that their understanding of the legislation was incorrect and that the Revenue would not modify their approach. For further details see here:

Professional Bodies Deep Concern

The professional bodies have now responded with a new press release in which they again challenge the Revenue’s stance.

In their press release they challenge the Revenue’s view that only 30,000 businesses are likely to be affected by the Revenue’s interpretation of Section 660A. They consider that many more businesses are likely to be affected noting that over 500,000 new companies have been formed since the date the Revenue used to determine their figure of 30,000.

However, even if the Revenue’s figure is correct the bodies point out that 30,000 “is too high a number of businesses to be faced with uncertainty.”

Mark Lee, Chairman of the highly respected Tax Faculty of the Institute of Chartered Accountants in England and Wales is quoted as saying “This is another stealth tax. The Revenue did not publish their interpretation of this legislation until 2001, and then only in a technical manual rarely read even by tax specialists. Nevertheless, they are applying their view for at least the last six years, which means many small businesses could face backdated and unexpected tax bills.”

Tim Ambrose, President of the equally prestigious Chartered Institute of Taxation, raises an interesting issue of human rights when he says “we believe that the Revenue have a legal and moral obligation to inform taxpayers of how the legislation is going to be applied. Their current approach is arguably a breach of human rights.”

The professional bodies have suggested a more pragmatic approach - that taxpayers should normally self-assess on the basis that they are not within these rules, unless the opposite is clearly the case. They suggest that the Revenue could challenge this self-assessment within the normal time limits, but the onus would be on them to prove their case. This approach would fit better with self assessment. In effect they are saying that it is up to the Revenue to challenge businesses within 12 months of submitting their self assessed tax returns or to leave them alone.

John Walker, Policy Chairman of the FSB highlights the potentially adverse effect of the Revenue’s approach on the economy, saying “We are particularly worried that small businesses, which are the engine room of the economy, are being distracted by this unfair tax at a time when they should be concentrating on the market recovery”

To illustrate the problem the press release cites the following example:

“1. Example of why this issue matters

Here is a short example of the type of situations affected by the Revenue’s guidance:

Jack and Jill are a married couple who decide to form Hill Limited to exploit Jack’s skills in developing new pharmaceutical remedies. The couple own the shares in Hill Ltd equally; the net income of the company is £100,000, derived from Jack’s activities. Jill does some work for the company, such as taking phone calls, making bookings and generally supporting Jack.

Jack is paid a salary of £50,000 and Jill is unpaid despite her general advice and assistance; the net profit after tax of (say) £40,000 is then used to pay the two owners dividends of £20,000 each. Following Example 3 in the Revenue’s guidance, Jill’s £20,000 dividends are vulnerable to being recharacterised as Jack’s income and taxed at his higher rate of income tax. If Jack and Jill are tackled by the Revenue after six years of similar figures, an unexpected tax bill of some £30,000 could result, plus interest and possibly penalties.”

The next steps

It seems unlikely that the Revenue are now going to take any steps that might be seen as backing down, notwithstanding the fact that it is most unusual for the leading tax professional bodies to unite so publicly in condemning the Revenue’s approach to a piece of legislation as being wrong in principle.

Hence we will have to wait until the first test cases come to the Special Commissioners to see which side of the debate they side with.

The full text of the press release is available here:

Press Release