Reply from Dawn Primarolo
UKTECH has received a copy of the response to Mark Prisk MP, Shadow Financial Secretary; from Dawn Primarolo MP, Paymaster General; concerning Section 660
From Paymaster General, Dawn Primarolo MP
To Mark Prisk MP
Received 22 April 2003
Thank you for your letter of 2 April about Section 660A Income and Corporation Taxes Act 1988 (the settlements legislation). You are concerned that there has been a change in policy and think the way the legislation is now being applied is different to the way the Inland Revenue has said it applies.
First let me reassure you there is neither a new policy nor any change in policy in the application of the settlements legislation. The Inland Revenue has been applying the legislation in this way for a number of years.
The settlements legislation is intended to prevent an individual from gaining a tax advantage by making arrangements which divert his or her income to another person who is liable at a lower rate or is not liable to income tax. The Inland Revenue does not apply the settlements legislation to all small companies, only those entering into these arrangements to avoid tax. This legislation is applied in a small number of cases.
There has been no change to the spouse exemption. This has never been a complete exemption, as it has never applied if the Gift does not carry the right to the whole of the income or the property transferred is wholly or substantially a right to income.
Guidance is already available but following a request from the Chartered Institute of Taxation the Inland Revenue will be publishing further guidance (with examples) on this subject in "Tax Bulletin" which will help to clarify the position further and give examples of its application. "Tax Bulletin" can be seen on the Inland Revenue website
The above letter from PMG was in response to a letter sent on 2 April by Mark Prisk MP
Mark Prisk
Attn: Dawn Primarolo MP
Paymaster General
2 April 2003
Ref: s.660, Income & Corporation Taxes Act
I have received a series of representations about a change in the way the Inland Revenue taxes small companies, run by married partners. I understand the Revenue has in some cases re-defined a wife's dividend income from a small limited company, as being that of her husband.
The Professional Contractors Group, UKTECH, and several independent consultants, including my own constituent Mr. XYZ, have expressed grave concern about these changes and the way in which they have been introduced.
Having reviewed several of the cases and the representations made by these leading trade bodies, it would seem to me that these changes could affect millions of family businesses. The problem is compounded by the retrospective way in which the Revenue is now applying this legislation. I understand that in one case a couple are facing a tax demand for £42,000, stretching back over six years.
Why is the law now being applied differently and in contradiction to advice previously provided by the Inland Revenue? Equally, why has no guidance been issued prior to these changes being introduced? Is this not a breach of Code of Practice 10 and the Revenue's Code on Consultation?
Does the Government not recognise that this legal reinterpretation undermines its efforts to encourage incorporation for small businesses, given that the vast majority of enterprises involve husband and wife?
Further, can you explain why a wife's dividend income should now be treated as being that of her husband? The exemption for transfer between spouses is established clearly in law and if this new approach is pursued it could represent an unwelcome retreat from the principle of the independent tax treatment of women.
After the Government's imposition of IR35, this new interpretation of s660 is yet again seen by many small firms as an attack on enterprise. I do hope that you will be able to explain these changes and why you have decided to support them.
Mark Prisk MP
Shadow Financial Secretary to the Treasury