Revenue 'FUD' tactics on family business

The Inland Revenue is launching pre-emptive strikes on small, family businesses using an existing weapon in a way that was never intended. The result is to use fear, uncertainty and doubt - FUD - tactics in an attempt to raise an extra £1.25 billion in taxes without the need to put forward any new legislation.

One small business: Arctic Systems Ltd which has been attacked under the obscure Section 660a regulation is now facing a tax bill of £42,000 – because a husband and wife shared in the success of their business.

The Revenue will be hoping that by randomly targeting a small number of family businesses, the estimated one million profitable family businesses in the same situation will be so concerned by the threat as to surrender up billions of pounds in extra taxes. If only a fraction decide to pay up, this latest stealth tax could raise an extra £1.25 billion - without any need for impact assessments, legislation or debate in parliament.

Who is affected by S660a?

In summary, if a husband and wife own a company 50:50. Then one party does the majority fee-earning work, while the other party assists in the running of the business. If the main fee-earning partner pays himself or herself a 'lower' salary and shares some of the profits via dividends to both parties – then according to the Revenue, this can be seen as 'diverting income to a family member in a lower tax bracket' – and they can come after you. It sounds improbable and unlikely, – but that is exactly what happened to one small company.

As Geoff Jones of Arctic Systems, who is currently being targeted, has said on an online discussion:

Our company was formed in '92 with a 50:50 share split between me and my wife who is company secretary, does the books etc. She draws a token salary, I a larger one. The shares are ordinary, equal dividends are paid by individual cheque.

The Section 660a tax demand was for the six years PRIOR to IR35 start and was for £42,000, incl. £10+K interest. The total is about £2K higher now

The IR had received returns from me for nine years with no comment about S660a. Neither of my two previous accountants commented either. To my knowledge no professional was aware of the applicability of S660a nor has anyone with ordinary shares been caught by this.

He concludes:

Despite the IR's assertions to the contrary, this clearly IS a new approach and that is OBVIOUS to everyone except them! This is back-door stuff: if they really want to alter taxation for small companies they should have the courage to forge new legislation & test it before parliament and the electorate. The backdating aspect, in particular, is disgraceful

Dawn Primarolo the Paymaster General and the Minister in charge of the Inland Revenue has stated in a reply to an open letter from PCG:

I can assure you the Inland Revenue is not seeking to apply the settlements legislation to all small companies, only those entering into these arrangements to avoid tax. The cases that have been challenged have been those where a, typically higher rate, taxpayer uses a company to divert income to their family members who pay a lower rate of tax

She goes on to say

I can assure you this is not a new policy as you suggest as the Inland Revenue have been applying the legislation in this way for a number of years.

Top tax expert, Anne Redston, speaking on an online discussion forum disagrees:

"One of the worrisome things about this attack is that it appears to contradict earlier advice given by the Inland Revenue to practitioners.

"If the Inland Revenue now wish to take a different approach then it would have been appropriate for them (as a minimum) to inform practitioners and taxpayers before they did so."

What can we do about this?

• If you think you might be affected let your accountant know of this latest threat and ensure he puts a note on your file that you have reviewed this situation and until firm guidance is issued he or she considers that the existing situation would mean you are not liable to any taxes. Ask them for a copy of this note and include it in your FO35 file.
  
  
• Suggest to your Accountant that they join the Accountants SIG on UKTECH which will include briefings from our Tax expert Kevin Miller on this latest threat
• Initial investigations have shown that there could be a work around to this particular threat and we will be drafting details for submission to the FO35 update committee. This will then be sent to each FO35 subscriber.
• Unlike IR35 this attack affects far more people and is much easier to understand. As such it might be possible to get political movement, even though the Government has been forced to take a public position in answering an open letter from the PCG. I have briefed my contacts at the CBI who were not aware of this problem. With regards to getting movement they are at present the only game in town, they sit down to have regular meetings with members of the Cabinet and with such an open goal presented to the opposition resulting from this Revenue tactic it might be possible to get some movement. Do not hold your breath however. My experience from IR35 is that Ms Primarolo does not move an inch once she has committed to print.
• Finally, let any colleagues know of this new threat by using the "email to a friend" facility at the foot of this story

It has taken us four years to defeat IR35 (It is almost 4 years to the day since the first newsletter to the members of the UKTECH newsletter) I hope it does not take another 4 years to defeat Section 660a.