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The Revenue has adopted what is widely acknowledged by the professionals as an unfair approach to an old piece of legislation. It is now using the 'settlements' legislation, Section 660, to tax dividends paid to a spouse as if it was the earnings of the 'main' fee-earner in the business.
Over and above this, they are applying it retrospectively with small businesses, who have often been operating this way for years on the advice of their accountants and others, with tax bills of up to £42,000.
The number of Section 660 investigations hasn't been substantial to date although that is little compensation to those businesses who have been targeted. Here one director of a business who has been targeted by a Section 660 enquiry tells of his experiences. (The names have been changed).
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Our Business Ltd
"Our Business Ltd" was established 1991 as a small finance company/asset finance broker. There are three directors and one full time staff member and one part time book keeper/admin assistant.
Our wives act and have always acted as our "skivvies" ... the personal nature of the services we provide and our small numbers tend to mean we are a 365 days a year "24/7" operation. If a customer wants you ... you have to be available .. whether its evening, weekend or with the "blasted " mobile phone even on holiday!
Inevitably our wives have to provide the backup and support necessary (passing messages, emails etc etc) when we are not just at hand. And, in keeping with many small businesses, our wives provide the physical and emotional backup to enable us to attend to the demands of such a competitive marketplace. Not for the likes of us the civil service joys of ..... paid holidays, pensions, sick pay ... we only earn what we earn each month, each month starts from nothing. No contracts, no guaranteed salary ... no business = no pay!!
In 1995, following discussion with our accountants in relation to pay/reward for our wives, we created additional Ordinary shares on which we have paid dividends ever since. Nothing has ever been raised by the Revenue .. then totally out of the blue last July we all received enquiry letters relating to our 01/02 tax returns.
Since then we have had numerous exchanges with them, culminating a couple of weeks ago in a statement advising us that we would be hearing "very soon" as to how they intend to proceed. Our accountants feel that they are awaiting some precedent decisions ... Arctic comes to mind as an obvious one that is pending.
There is however one major distinction between us and a typical "service" scenario : we have customers. Currently we have over 4,000 live or completed customer agreements built up over the 13 years we have traded. In 2001 looking to move more aggressively into our own lending, we were made an offer to buy the shares for some £883K. The offer valued our wives shares then at £58,800. For commercial reasons we did not proceed at that time but our customers remain and it was principally our customers that the purchasers were interested in acquiring. Nobody in their "right mind" would believe that a purchaser would offer £900K for three guys ability to generate future business!!
It was part of our intention when our wives were given shares for them to enjoy and benefit (hopefully) from the increasing value of the business .... that objective appeared to have been achieved.
I wrote to our local MP and copied him with all correspondence, he has promised to take matters forward. I was very relieved to discover from your website that it does appear that the Tories are prima facie offering a sympathetic view. I am extremely conscious that only an idiot could not attribute this attack to a political directive. The Chancellor is clearly in the usual Labour financial mess and small business is a "soft" target with limited means to defend itself.
Here at 'Our Business' we do see this matter as two very distinct and separate issues :
- The dividend policy we employ .. can/should we now continue following Tax Bulletin 64?
- Reassessment of previous years.
We do not have a problem with being told that a past policy is no longer acceptable practice, and that failure to comply will result in investigation and potential attack. A taxpayer is then given opportunity to review policy and practice with their advisors.
We are not by nature inclined to be confrontational and there is no question that following such communication we would considered future practice very carefully. No such opportunity has been provided, first guidance was only provided in April 2003. It is utterly "unreal" to suggest that there is no coincidence between Tax Bulletin 64 and our enquiry letters some few weeks later!
In the early exchanges no mention was made of reassessments ... we simply received notices demanding £40K in early December. They were followed within a month by threatening letters from the Revenues receivables and recoveries department .. despite the fact that our Accountants had issued appeals against the reassessments! Never was there a clearer example of "BIG BROTHER" trying to force its will by sheer coercion and fear.
Such experience is very frightening and staggeringly outrageous from a Government body. Such actions are clearly contrary to the Revenues own self assessment guidelines published in 1996 but all attempts to reason/explain our viewpoint have essentially been ignored or blatantly "steamrolled" by the compliance officer.
We unfortunately do not have recourse to insurance and in a commercially poor climate our resources are no longer what they were and legal costs will become a potential problem. It has already cost a significant sum in the last six months whilst accountants have been going back and forth with Revenue compliance.
This again is presumably Revenue strategy to engage us in protracted costs and so wear us down .. a strategy that from our reading of the "Accountancy/Tax bodies response to Tax Bulletin 64 is very successful. The Revenue "win" many cases that would not be judged in their favour in court as defendants simply cave in due to cost pressure or fear of consequences of losing. What chance has an individual against the machinery of Government?
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More information and protection
Shout99 has a Section 660 information resource: www.shout99.com/section660
Section 660 and IR35 are covered by Shout99's Freelancers Outside IR35 system. It gives advice on how to arrange your business and provides representation from Qdos in the event of a Section660 or IR35 dispute with the Revenue. It costs £104.50 a year. For more information or to buy immediate cover, see www.shout99.com/fo35
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Susie Hughes © Shout99.com 2004
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